Tuesday, June 30, 2009

Michael Parenti on the DPRK: “Sanity” at the Brink

The following article by Michael Parenti is from www.michaelparenti.org

North Korea: “Sanity” at the Brink

Nations that chart a self-defining course, seeking to use their land, labor, natural resources, and markets as they see fit, free from the smothering embrace of the US corporate global order, frequently become a target of defamation. Their leaders often have their moral sanity called into question by US officials and US media, as has been the case at one time or another with Castro, Noriega, Ortega, Qaddafi, Aristide, Milosevic, Saddam Hussein, Hugo Chavez, and others.

So it comes as no surprise that the rulers of the Democratic People’s Republic of Korea (DPRK or North Korea) have been routinely described as mentally unbalanced by our policymakers and pundits. Senior Defense Department officials refer to the DPRK as a country “not of this planet,” led by “dysfunctional” autocrats. One government official, quoted in the New York Times, wondered aloud “if they are really totally crazy.” The New Yorker magazine called them “balmy,” and late-night TV host David Letterman got into the act by labeling Kim Jong-il a “madman maniac.”

To be sure, there are things about the DPRK that one might wonder about, including its dynastic leadership system, its highly dictatorial one-party rule, and the chaos that seems implanted in the heart of its “planned” economy.

But in its much advertised effort to become a nuclear power, North Korea is actually displaying more sanity than first meets the eye. The Pyongyang leadership seems to know something about US global policy that our own policymakers and pundits have overlooked. In a word, the United States has never attacked or invaded any nation that has a nuclear arsenal.

The countries directly battered by US military actions in recent decades (Grenada, Panama, Iraq, Libya, Somalia, Yugoslavia, Afghanistan, then again Iraq), along with numerous other states that have been threatened at one time or another for being “anti-American” or “anti-West” (Iran, Cuba, South Yemen, Venezuela, Syria, North Korea, and others) have one thing in common: not one of them has wielded a nuclear deterrence—until now.

Let us provide a little background. Put aside the entire Korean War (1950-53) in which US aerial power destroyed most of the DPRK’s infrastructure and tens of thousands of its civilians. Consider more recent events. In the jingoist tide that followed the September 11, 2001 attacks on the World Trade Center and the Pentagon, President George W. Bush claimed the right to initiate any military action against any “terrorist” nation, organization, or individual of his choosing. Such a claim to arbitrary power–in violation of international law, the UN charter, and the US Constitution–transformed the president into something of an absolute monarch who could exercise life and death power over any quarter of the Earth. Needless to say, numerous nations–the DPRK among them—were considerably discomforted by the US president’s elevation to King of the Planet.

It was only in 2008 that President Bush finally removed North Korea from a list of states that allegedly sponsor terrorism. But there remains another more devilishly disquieting hit list that Pyongyang recalls. In December 2001, two months after 9/11, Vice President Dick Cheney referred chillingly to “forty or fifty countries” that might need military disciplining. A month later in his 2002 State of the Union message, President Bush pruned the list down to three especially dangerous culprits: Iraq, Iran, and North Korea, who, he said, composed an “axis of evil.”

It was a curious lumping together of three nations that had little in common. In Iraq the leadership was secular, in Iran it was a near Islamic theocracy. And far from being allies, the two countries were serious enemies. Meanwhile the DPRK, had no historical, cultural, or geographical links to either Iraq or Iran. But it could witness what was happening.

The first to get hit was Iraq, nation #1 on the short list of accused evil doers. Before the Gulf War of 1990-91 and the subsequent decade of sanctions, Iraq had the highest standard of living in the Middle East. But years of war, sanctions, and occupation reduced the country to shambles, its infrastructure shattered and much of its population drenched in blood and misery.

Were it not that Iraq has proven to be such a costly venture, the United States long ago would have been moving against Iran, #2 on the axis-of-evil hit list. As we might expect, Iranian president Mahmoud Amadinijad has been diagnosed in the US media as “dangerously unstable.” The Pentagon has announced that thousands of key sites in Iran have been mapped and targeted for aerial attack. All sorts of threats have been directed against Tehran for having pursued an enriched uranium program–which every nation in the world has a right to do. And on a recent Sunday TV program, Secretary of State Hillary Clinton warned that the United States might undertake a “first strike” against Iran to prevent its nuclear weapons development.

Rather than passively await its fate sitting in Washington’s crosshairs, nation #3 on the US hit list is trying to pack a deterrence. The DPRK’s attempt at self-defense is characterized in US official circles and US media as wild aggression. Secretary Clinton warned that the United States would not be “blackmailed by North Korea.” Defense Secretary Robert Gates fulminated, “We will not stand idly by as North Korea builds the capability to wreak destruction on any target in Asia–or on us.” The DPRK’s nuclear program, Gates warns, is a “harbinger of a dark future.”

President Obama condemned North Korea’s “belligerent provocative behavior” as posing a “grave threat.” In June 2009, the UN Security Council unanimously passed a US-sponsored resolution ratcheting up the financial, trade, and military sanctions against the DPRK, a nation already hard hit by sanctions. In response to the Security Council’s action, Kim Jong il’s government announced it would no longer “even think about giving up its nuclear weapons” and would enlarge its efforts to produce more of them.

In his earlier Cairo speech Obama stated, “No single nation should pick and choose which nation holds nuclear weapons.” But that is exactly what the United States is trying to do in regard to a benighted North Korea–and Iran. Physicist and political writer Manuel Garcia, Jr., observes that Washington’s policy “is to encourage other nations to abide by the terms of the Nuclear Non-Proliferation Treaty–and renounce nuclear weapons–while exempting itself.” Others must disarm so that Washington may more easily rule over them, Garcia concludes.

US leaders still refuse to give any guarantee that they will not try to topple Pyongyang’s communist government. There is talk of putting the DPRK back on the list of state sponsors of terrorism, though Secretary Clinton admits that evidence is wanting to support such a designation.

From its lonely and precarious perch the North cannot help feeling vulnerable. Consider the intimidating military threat it faces. The DPRK’s outdated and ill-equipped army is no match for the conventional forces of the United States, South Korea, and Japan. The United States maintains a large attack base in South Korea. As Paul Sack reminds us in a recent correspondence to the New York Times, at least once a year the US military conducts joint exercises with South Korean forces, practicing a land invasion of the DPRK. The US Air Force maintains a “nuclear umbrella” over South Korea with nuclear arsenals in Okinawa, Guam, and Hawaii. Japan not only says it can produce nuclear bombs within a year, it seems increasingly willing to do so. And the newly installed leadership in South Korea is showing itself to be anything but friendly toward Pyongyang.

The DPRK’s nuclear arsenal is a two-edged sword. It can deter attack or invite attack. It may cause US officials to think twice before cinching a tighter knot around the North, or it may cause them to move aggressively toward a confrontation that no one really wants.

After years of encirclement and repeated rebuffs from Washington, years of threat, isolation, and demonization, the Pyongyang leaders are convinced that the best way to resist superpower attack and domination is by developing a nuclear arsenal. It does not really sound so crazy. As already mentioned, the United States does not invade countries that are armed with long-range nuclear missiles (at least not thus far).

Having been pushed to the brink for so long, the North Koreans are now taking a gamble, upping the ante, pursuing an arguably “sane” deterrence policy in the otherwise insane world configured by an overweening and voracious empire.

Sharp contraction for UK economy

Weaker construction activity has hit the economy

The UK economy contracted 2.4% in the first quarter of 2009, a decline not exceeded in 51 years, according to the latest official data.

The decline was more severe than the earlier estimate of a 1.9% fall, and worse than analyst expectations.

The Office for National Statistics (ONS) blamed the sharp revision primarily on weaker output in the construction and manufacturing sectors.

It also said the recession started earlier than first thought last year.

The scale of revision comes as a real shock, and highlights the extreme weakness of the economy in the early months of the year

The ONS now says the recession began during the second quarter of 2008 rather than during July to September, so that the recession has now been running for a whole year.

The ONS said economic output shrank 4.9% during the first quarter of 2009 compared with the first quarter of 2008, the biggest year-on-year fall on record.

The figures will make it more difficult for the Treasury to reach its forecast of a 3.5% decline in the UK economy for the year, made in the April Budget.

But the Chief Secretary to the Treasury, Liam Byrne, said it would not be revising its forecast.

"There have been some tentative signs that the fall in output is moderating and I remain confident but cautious about the prospects for the economy," he added.

Lower incomes

January to March's quarterly 2.4% decline has not been exceeded since the second quarter of 1958, when the economy shrank by 2.6%. Analysts had only expected a 2.1% fall this time.

However, the decline was equalled by figures from the first quarter of 1974 and the third quarter of 1979, which also saw contractions of 2.4%.

Construction output decreased between January and March by 6.9%, while the service sector contracted by 1.6% - led by the banking and financial industries, which saw output slip 2.5%.

Quarterly manufacturing output fell by 5.5%.

Meanwhile, real household disposable income fell by 2.4%, while the savings rate dropped from 4% to 3%.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said the figures were much worse than expected.

"We had expected a downward revision to GDP, given the plunge in construction output since the last quarter, but the scale of revision comes as a real shock, and highlights the extreme weakness of the economy in the early months of the year," he said.

Fellow analyst, Ross Walker, economist at RBS Financial Markets, said the latest figures were "disappointing".

"We knew about the construction revisions in advance and the fall wasn't quite as big as the ONS had indicated," said Mr Walker. "But we've got a much bigger fall in services output."

Getting better?

Shadow chancellor George Osborne said the GDP figures showed that the recession had "been longer and deeper than we had thought".

"This also means that in the future, unemployment will be higher and Labour's debt crisis will be even worse," he said.

If you thought that any recovery was resting on shaky foundations, you will see plenty of support for that view in today's news

Meanwhile, Liberal Democrat Treasury spokesman Vince Cable said the figures put more pressure on the public finances.

"Rather than making promises on public spending that nobody believes, the Government must start taking tough choices on whether it is going to cut spending or raise taxes to bring the economy out of the red," he said.

Despite the economy's big downward revision for the first quarter of 2009, the expectation is that the official figures for April to June will be nowhere near as bad when the first estimates are published at the end of July.

Earlier this month, the ONS said industrial production rose in April, its first month-on-month climb since February of last year.

A growing number of reports from business organisations such as the CBI have also predicted that the worst of the recession is over.

The CBI said earlier this month that the economy was now stabilising, and would begin a "slow and gradual" recovery from early next year.

Separately, a key service sector survey reported a growth in business in May for the first time since April 2008.

The PMI service index from the Chartered Institute of Purchasing and Supply rose to 51.7 in May, up from 48.7 in April, with a measure above 50 indicating growth.

Martin Weale, director of the National Institute for Economic and Social Research, whose organisation estimates GDP on a monthly basis, recently told the BBC that he expected second quarter GDP to be flat.

Monday, June 29, 2009

North Korean economy sees growth

Analysts expect sanctions over nuclear tests will dent North Korea's economy

North Korea's economy expanded in 2008, thanks to high agricultural yields after contracting for two years in a row, South Korea's central bank says.

Last year the North Korean economy grew 3.7% compared to a year earlier, after shrinking by 2.3% in 2007 and by 1.1% in 2006.

The central bank said "temporary" factors, such as good weather, had helped boost agricultural production.

Despite the growth, the size of the economy is a fraction of South Korea's.

Agricultural production rose nearly 11% in 2008 compared with 2007. And coal, iron ore and other mineral production grew 2.3% for the year.

A deal agreed in 2007 gave North Korea 1 million tons of fuel oil and other benefits from the US and other nations, in exchange for disabling its nuclear facilities.

However in May 2009 North Korea walked out of international talks aimed at ending its nuclear activities, and the country carried out its second underground nuclear test.

As a result, the UN Security Council extended sanctions against North Korea.

Analysts expect such sanctions will squeeze North Korea's economy again.

South Korea's central bank releases yearly estimate of North Korea's economic growth, but North Korea does not release official economic data.

Saturday, June 27, 2009

Japan attacks Citigroup standards

Citigroup was hit hard by the crisis and is partly owned by the US government
Japan has punished US bank Citigroup for what it called lax policies to protect against money laundering.

The Financial Services Agency (FSA) ordered Citigroup to suspend sale promotions for one month at the 35 branches of its Japanese retail bank.

The Japanese regulator previously shut down Citigroup's private banking business in the country in 2004 for the same reasons.

Citigroup is in the process of selling some of its Japanese units.

Previous trouble

The FSA said the lack of compliance showed Citigroup executives "lack an understanding of the rules applied in Japan".

It said the bank had not developed proper systems to detect "suspicious transactions", such as money laundering.

"We are determined to take necessary measures on the issues," Citigroup Japan said in a statement, and apologised to its clients for the suspension.

The regulator's previous investigation of Citigroup in 2004 resulted in former chief Charles "Chuck" Prince flying to Japan to make a public apology in the form of a public bow.

While Citigroup will not be allowed to advertise its products, customers can still buy products from Citigroup Japan.

The ban applies from 15 July to 14 August.

Citigroup agreed last month to sell its Japanese brokerage and investment banking assets to Sumitomo Mitsui Financial Group for about $5.9bn, and wants to get rid of Nikko Asset Management as well.

Friday, June 26, 2009

China's central bank has reiterated its call for a new reserve currency to replace the US dollar.

The dollar has been the world's reserve currency for decades

China's central bank has reiterated its call for a new reserve currency to replace the US dollar.

The report from the People's Bank of China (PBOC) said a "super-sovereign" currency should take its place.

Central bank chief Zhou Xiaochuan has loudly led calls for the dollar to be replaced during the financial crisis.

The bank report called for more regulation of the countries that issue currencies that underpin the global financial system.

"An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," the Chinese central bank said.

The dollar fell after the report was released. The US currency dropped 1% against the euro to $1.4088, and declined 0.8% versus the British pound to $1.6848.


Mr Zhou caused a stir earlier this year when he said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.


Foreign currency held by a government or a central bank Used to pay foreign debt obligations or influence exchange rates The dollar is viewed as the world's reserve currency as the vast majority of reserves are held in the US currency Smaller amounts are held in euros, pounds and yen

Dollar poses dilemma for China

The PBOC said in the report that not only should the world adopt the SDR, but that the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves.

"To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the PBOC report said.

It also issued some veiled criticism of the US policies, saying that one of the major issues was that it was difficult to balance the needs of domestic politics with the requirements of being the world's reserve currency.

"The economic development model of debt-based consumption is most difficult to sustain," the PBOC said.

Russian President Dmitry Medvedev recently joined Mr Zhou in saying it was time to consider an alternative benchmark currency for international debt.

But Russian finance minister Alexei Kudrin then said "it's too early to speak of an alternative".

Wednesday, June 24, 2009

Latvia is 'saved from bankruptcy'

Latvia's prime minister must make cuts to receive loans from the EU
Latvia's prime minister says that he has saved the country from bankruptcy.

Valdis Dombrovskis told public radio that the decision late on Thursday to cut 500m lats ($1bn; £607m) from the budget was "very difficult".

But the cuts were needed for the country to receive the next instalment of its European Union bail-out loans.

The country agreed a 7.5bn euro ($10.5bn; £6.4bn) loan package in December, but must cut the budget deficit to receive the loans.

"The signals we have been getting from the European Commission are positive," he said.

The five-party coalition government agreed to a series of measures with unions and employers.

The cuts will include reducing old age pensions by 10% and cutting public sector salaries by 20%, but they decided against increasing income taxes.

Parliament will vote on the changes next week.

Latvia's currency is pegged to the euro, but the recession has hit Latvia so badly that many analysts believe it will have to devalue the lat.

Latvia's central bank has been intervening to support the currency this week.

UK economy 'set to shrink faster'

By Steve Schifferes
Economics reporter, BBC News

The UK economy is still showing signs of weakness

The Organisation for Economic Cooperation and Development (OECD) has revised down its forecast for the UK economy in 2009.

It warns that the UK is in "a sharp recession" with output set to contract by 4.3% in 2009, worse than its previous forecast of a 3.7% fall.

The OECD predicts zero growth in the UK economy in 2010 and says the UK budget deficit will hit 14% of GDP next year.

Its UK forecasts are worse than those the Treasury made during the Budget.

However, a number of independent economic forecasters, including the National Institute for Social and Economic Research, have suggested that the recession is bottoming out in the UK.

On average, independent forecasts are projecting the UK economy to contract by 3.7% in 2009, close to the chancellor's forecast of -3.5%.

Borrowing worries

The OECD is particularly concerned about the size of the UK's budget deficit, saying that the "public finances have deteriorated sharply... curtailing the possibilities for additional fiscal stimulus".


UK 2009 -4.3%; 2010 0.0%

USA 2009 -2.8%; 2010 0.9%

Eurozone 2009 -4.8%; 2010 0.0%

Japan 2009 -6.8%; 2010 0.7%

OECD 2009 -4.1%; 2010 0.7%

World 2009 -2.2%; 2010 2.3%

Source: OECD Economic Outlook

It says the UK is one of four countries (the others are the Irish Republic, Spain and the US) where government borrowing will be above 10% of GDP in 2010.

The OECD warns that in the UK, rising public sector deficits will need to be reined in as recovery takes hold, and urges the government to develop a "concrete and comprehensive plan" to ensure debt is on a declining path.

It estimates that even if the UK reduces government borrowing by 1% of GDP per year for the next seven years, it will still have a gross debt-to-GDP ratio of 125% by 2017, one of the largest in the OECD.

Political row

The OECD comments have already sparked a political row.

The shadow chancellor, George Osborne, said: "The OECD figures show just how deep Labour's debt crisis is.

It looks like the worst scenario has been avoided


"The projected record budget deficit is worse than the Treasury forecast, the worst in the developed world and double what it was when Dennis Healey had to go to the IMF."

But for the government, the Chief Secretary to the Treasury, Liam Byrne, said: "Britain had the space to fight back hard against the global downturn because we had lower debt than most G7 countries before the crisis broke.

"If we invest now we can stop the recession cutting long and deep."

For the Liberal Democrats, Treasury spokesman Vince Cable said: "There is no doubt that the UK economy has been one of the worst hit.

"What is particularly worrying is that the government seems to have no coherent plan to get the British economy back on course and the Budget back into balance."

World recovery

Overall, the OECD is slightly more optimistic about the world economy, saying the world recession was "nearing the bottom" after a sharp decline in the six months to March.

It says rich nations' economies will shrink by 4.1% this year, compared with a forecast of -4.3% in March.

This is the first time for two years the OECD has revised upwards its overall economic forecasts

And Japan and Germany, which have been hit hard by the collapse of world trade, are expected to decline more sharply than the UK.

However, the OECD, which represents the 30 richest industrialised countries, has detected signs of stronger growth, particularly in the US and China, than previously thought.

The OECD adds that recovery is likely to be "weak and fragile" for some time, with rich country growth of just 0.7% next year, compared with its previous forecast of a contraction of 0.1%.

Signs of hope

"It looks like the worst scenario has been avoided," the OECD said.

"Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy."

The OECD says that not only have its growth projections been revised, but the risks that things might be worse than expected are lower.

It says financial conditions might improve more quickly that it has assumed, although there is still a risk of an adverse reaction in bond markets to the high levels of government debt.

Thursday, June 18, 2009

World Bank raises China forecast

World Bank raises China forecast
By Michael Bristow
BBC News, Beijing

Despite the bright outlook, many migrant workers do not have jobs
The World Bank has raised its forecast for growth in China this year from 6.5% to 7.2% amid signs that the economy is doing better than expected.

Bank analysts say the government's four trillion yuan ($585bn, £358bn) stimulus package has helped the economy.

But it says the country's exports are still down, as the rest of the world struggles with the global recession.

The World Bank believes the global economy, excluding China, will shrink by about 3% this year.

"Developments in the real economy [in China] have been somewhat better than expected three months ago," says a report published by the bank.

'No meaningful increase'

It predicted in March that the Chinese economy would grow by 6.5% in 2009, several percentage points down on last year's growth.

But the government stimulus package, and increased bank lending, has protected the economy from the worst effects of the global recession, leading the bank to raise its growth forecast.

"Growth in China should remain respectable this year and next, although it is too early to say a robust, sustained recovery is on the way," said Ardo Hansson, the bank's leading economist in China.

But it is not all good news. China's export sector has been one of the hardest hit parts of the economy and has still not recovered.

This has led to millions of migrant workers - farmers who leave their villages to find work in China's factories - losing their jobs.

"We have not had a meaningful increase in exports since last year's plunge," said World Bank economist Louis Kuijis, speaking at a press briefing to launch the bank's latest China predictions.

Some migrant workers who lost their jobs late last year told the BBC they had still not been able to find new jobs.

Tuesday, June 9, 2009

How to break a currency peg

Lex: How to break a currency peg, Financial Times, June 8, 2009
Posted by John Casey, FT on Jun 08 2009

The conventional wisdom is that Latvia, like all countries with pegged exchange rates, cannot devalue. If it did, the cost of its foreign currency borrowings would rocket; private borrowers would go bankrupt. Yet Latvia clearly also cannot continue as is. The central bank is burning
rapidly though reserves to defend the euro peg. Meanwhile, the economy is shrinking at a 20 per cent rate. Democracies, it is said, cannot tolerate such deflation – although Argentina’s economy shrank by 67 per cent before abandoning its peg.

There may, however, be a way out of the impasse. Latvian consumers have borrowed about €17bn in euros, equivalent to 90 per cent of gross domestic product. Assume this was switched into Lats, as research boutique Gavekal notes is allowed under law. Then say the Lat devalued by 40 per cent. Swedish banks, Latvia’s biggest lenders, would suffer an immediate loss of €7bn. On the other hand, they could lose as much if there was no devaluation. Bad loans usually reach 35 per cent of total loans in emerging markets crises, Citigroup estimates. The Latvian government could also compensate the banks with bonds worth, say, half the loss. As Latvian public debt is only 20 per cent of GDP, Riga could afford this. The European Union could help with bond guarantees.

The result would be a faster recovery. Fewer bad loans means banks could lose less money than if the crisis ground on. Latvians would meanwhile share the burden through higher taxes. One snag is if such a scheme tempted others to follow. Countries with pegged exchange rates, such as Estonia or Bulgaria, are possible copycats. But, in extremis, it might also interest countries painfully deflating within the eurozone. Irish sovereign debt, for example, was downgraded again on Monday because of its banks’ fast deteriorating assets.

Thursday, June 4, 2009

Lessons from Labours first Economic Crisis

Picture Ramsay MacDonald

By Steve Schifferes
Economics reporter, BBC News

PM Ramsay MacDonald left Labour to form a National Government

A dour Scottish Prime Minister. A moderate Labour government that had taken power after years in the wilderness by distancing itself from the trade unions. A world economic crisis that challenged the economic orthodoxy endorsed by that government.

But this is not the current crisis - rather, it is a description of the Labour government that took power exactly 80 years ago, in 1929, just before the Wall Street crash that ushered in the Great Depression.

At a conference in Cambridge, held at Anglia Ruskin University, leading Labour historians examined the record of the first Labour government to face an economic crisis, and the lessons it might hold for the present day.

Shortly after they took office, unemployment began rising sharply, putting the pound and the government budget under pressure.

When international bankers demanded that the Labour government cut civil servant wages and unemployment benefits in 1931 to save the pound, the Labour cabinet split - and the Prime Minister, Ramsay MacDonald, left the Labour Party and formed a national government with the Conservatives which won a huge electoral victory.

The Labour Party was reduced from 287 to around 50 MPs.

But Britain was forced to leave the gold standard anyway and devalue the pound.

This "myth of betrayal", in the words of Labour historian David Howell, of York University, led the Labour Party to turn to a rigid socialist vision which left it in the electoral wilderness for a decade - until its fortunes were revived as part of the wartime coalition during World War II.

In thrall to the City

The National Government attacked Labour policies as socialist
One of the most striking parallels between the events 80 years ago and the current situation is how much the Labour Party fell under the spell of the bankers, according to Professor Howell.

The Labour Chancellor in 1929 was Philip Snowden, an advocate of economic orthodoxy who believed in free trade, a balanced budget, and Britain staying on the gold standard with the pound fixed at a high rate to the dollar.

His views were closely aligned with those in the City and the Bank of England, who believed that these policies were vital in maintaining Britain's role in the world.

In the current crisis, the Labour Party has also been accused of being too close to the City, backing deregulation and ignoring the dangers of excessive and risky lending.

The current Labour government also believed that the key to Britain's prosperity was the health of the financial sector.

However, its policy response to the crisis has been different, with the current chancellor accepting that a soaring budget deficit is the only way out of the crisis, while the pound has been allowed to fall sharply on international currency markets.

But the huge banking bail-out, in contrast to the lesser support offered for the manufacturing sector, has also given critics the impression that Labour is still more concerned with saving the banking system than jobs in industry.

No Alternative?

Civil servants marched against the proposed wage cuts in 1931
One of the fiercest historical debates has been whether there was a real alternative to Labour's orthodox approach in 1929.

Robert Skidelsky, in his influential book "Politicians and Slump", suggested that the proposals by Oswald Mosley, then a junior Labour minister but later the leader of the British Fascists, constituted a real Keynesian alternative.

But according to Professor Daniel Ritschel of the University of Maryland, the Mosley proposals were not based on Keynes' later vision of government deficit spending, but were a version of earlier Labour proposals for raising workers' wages through increased credit availability and greater co-operation among industrialists in restricting output.

As such, they bear some relationship to the current debate about whether expansion of credit, both for housing and businesses, should take priority in any moves towards encouraging the recovery.

The role of the trade unions

In 1926 the TUC called a General Strike to protect miners' wages
One of the biggest differences between the past and the present, however, is the role of the trade unions.

The unions in the 1920s had just gone through a bitter battle with employers that had led to a General Strike over miners' wages in 1926.

They had a difficult relationship with Ramsay MacDonald who had disapproved of that strike.

Labour's 1929 Manifesto, Labour and the Nation, had tried to appeal to middle class voters.

But in 1931, it was the general council of the TUC that provided the backbone to the Labour cabinet's resistance to the proposed cuts when it told a joint meeting it could not accept the plan to cut wages.

Historically, as Professor Howell points out, the falling out between the unions and the Labour Party has been a key part of the political difficulties faced by Labour during an economic crisis - such as in the "Winter of Discontent" in 1979.

Indeed, he argued that this might be the first economic crisis where the unions were not seen to be bringing down a Labour government - the reforms carried out by Mrs Thatcher but endorsed by New Labour had robbed them of much of their power and influence.

A Different Party

The Labour Cabinet was split over the need for deep cuts
Another big difference between 1931 and today is the make-up of the Parliamentary Labour Party.

In 1929 most Labour MPs were trade unionists with close links to their local constituencies.

According to journalist and historian Robert Taylor, they were very different from the class of "professional politicians" of the current Parliament, who have served most of their working lives in paid political and lobbying jobs.

Because they were closer to their roots, they were responsive to the worries of the unemployed and the calls for trade union solidarity.

They were not ready to desert the party to join a National government.

Mr Taylor argues that the current expenses crisis demonstrates that MPs are now much more out of touch with local feelings.

But in the 1930s the Labour leaders who deserted the party were also accused to being too close to the trappings of power, enjoying their time in court.

Both the political and economic outcome of the current crisis is still unclear.

But if history is any judge, they are likely to be painful for the Labour Party.

Throughly Modern Marx

Tuesday, June 2, 2009

Visit Democracy and Class Struggle TV


A critical look at market socialism by Paul Cockshott

Advocates of the market compare it to a system of voting which makes the consumer `sovereign.' This it does, but as the consumers and the people are two different groups.

Consumers are those with money. Only those who already possess something can have their wants satisfied. The unemployed, with only their unwanted labor to offer, have no votes in this system.

If, however, we first assume a highly egalitarian income distribution this objection to the market would not apply. So long as the market is restricted to consumer goods, there is no reason why it should be incompatible with socialism.

The basic principle of a socialist market in consumer goods can be stated quite simply. All consumer goods are marked with their labor values, i.e. the total amount of social labor which is required to produce them. But aside from this, the actual prices (in labor tokens) of consumer goods will be set, so far as possible, at market-clearing levels. Market-clearing prices are prices which balance the supply of goods (previously decided upon when the plan is formulated) and the demand. By definition, these prices avoid manifest shortages and surpluses. The appearance of a shortage (excess demand) will result in a rise in price which will cause consumers to reduce their consumption of the good in question. The available supply will then go to those who are willing to pay the most. The appearance of a surplus will result in a fall in price, encouraging consumers to increase their demands for the item.

Suppose a radio requires 10 hours of labor. It will then be marked with a labor value of 10 hours, but if an excess demand emerges, the price will be raised so as to eliminate the excess demand. Suppose this price happens to be 12 labor tokens. The radio then has a price to labor-value ratio of 1.2. Planners (or their computers) record this ratio for each consumer good. The ratio will vary from product to product, sometimes around 1.0, sometimes above (if the product is in strong demand), and sometimes below (if the product is relatively unpopular). The planners then follow this rule: Increase the target output of goods with a ratio in excess of 1.0, and reduce it for those with a ratio less than 1.0.

The point is that these ratios provide a measure of the effectiveness of social labor in meeting consumers' needs (production of `use-value,' in Marx's terminology) across the different industries. If a product has a ratio of market-clearing price to labor-value above 1.0, this indicates that people are willing to spend more labor tokens on the item (i.e. work more hours to acquire it) than the labor time required to produce it. But this in turn indicates that the labor devoted to producing this product is of above-average `social effectiveness.' Conversely, if the market-clearing price falls below the labor-value, that tells us that consumers do not `value' the product at its full value: labor devoted to this good is of below-average effectiveness. Parity, or a ratio of 1.0, is an equilibrium condition: in this case consumers `value' the product, in terms of their own labor time, at just what it costs society to produce it. This means that the objective of socialist retail markets should be to run at break even level, making neither a profit nor a loss; the goods being sold off cheap compensate for those sold at a premium.

There are therefore two mechanisms whereby the citizens of a socialist commonwealth can determine the allocation of their combined labor time. At one level, they vote periodically on the allocation of their labor between broadly-defined uses such as consumer goods, investment in means of production, and the health service. At another level, they `vote' on the allocation of labor within the consumer goods sector via the spending of their labor tokens.

Payment in labor tokens

It was a common assumption of nineteenth-century socialism that people should be paid in labor tokens. We encounter the idea in various forms in Owen, Marx, Lassalle, Rodbertus and Proudhon. Debate centred on whether or not this implied a fully planned economy. The Critique of the Gotha Programme[marx1970mnp] contains a particularly clear account of the idea: `[T]he individual producer gets back from society-after the deductions-exactly what he has given to it. What he has given it is his individual quantum of labour. For instance, the social working day consists of the sum of the individual hours of work. The individual labour time of the individual producer thus constitutes his contribution to the social working day, his share of it. Society gives him a certificate stating that he has done such and such an amount of work (after the labour done for the comunal fund has been deducted), and with this certificate he can withdraw from the social supply of means of consumption as much as costs an equivalent amount of labour. The same amount of labour he has given to society in one form, he receives back in another' .

With the enthusiasm of a pioneer, Owen tried to introduce the principle into England via voluntary co-operatives. Later socialists concluded that Owen's goal would be attainable only with the complete replacement of the capitalist economy.

Whilst Marx was very complimentary about Owen, he was critical of the schemes of Proudhon and Rodbertus. It is worth considering the Marxian critique of 'labour money' schemes; for there may appear to be a tension between the latter critique and Marx's own proposals. Indeed, the 'critique of labour money' is open to a (mis)reading which takes it as critical of any attempt to depart from the market system, towards a direct calculus of labour time. This reading has been made by writers as far apart as Karl Kautsky and Terence Hutchison.

The basic object of Marx and Engels's critique might be described as a naive socialist' appropriation of the Ricardian theory of value. If only, the reformers argue, we could impose the condition that all commodities really exchange according to the labour embodied in them, then surely exploitation would be ruled out. Hence the schemes, from John Gray in England, through a long list of English 'Ricardian socialists', to Proudhon in France, to Rodbertus in Germany, for enforcing exchange in accordance with labour values. Marx criticizes Proudhon's scheme in his Poverty of philosophy ([marx1975pp] ), and deals with John Gray in his Contribution to the critique of political economy [Marx1859], while Engels tackles Rodbertus's variant in his 1884 Preface to the first German edition of The povertv of philosophy. Between Marx in 1847 and Engels in 1884 we find a consistent line of attack on such proposals. From the standpoint of Marx and Engels, such schemes, however, honourable the intentions of their propagators, represent a Utopian and indeed reactionary attempt to turn back the clock to a word of ,simple commodity production' and exchange between independent producers owning their own means of production. The labour-money utopians failed to recognize two vital points. First, capitalist exploitation occurs through the exchange of commodities in accordance with their labour values (with the value of the special commodity labour-power determined by the labour content of the workers' means of subsistence). Secondly, although labour content governs the long-run equilibrium exchange ratios of commodities under capitalism, the mechanism whereby production is continually adjusted in line with changing demand, and in the light of changing technologies, under the market system, relies on the divergence of market prices from their long-run equilibrium values. Such divergences generate differential rates of profit, which in turn guide capital into branches of production where supply is inadequate, and push capital out of branches where supply is excessive, in the classic Smith/Ricardo manner. If such divergence is ruled out by fiat, and the signalling mechanism of market prices is hence disabled, there will be chaos, with shortages and surpluses of specific commodities arising everywhere.

One point which emerges repeatedly in the Marxian critique is this: according to the labour theory of value, it is socially necessary labour time which governs equilibrium prices, and not just 'raw' labour content. But in commodity-producing society, what is socially necessary labour emerges only through market competition. Labour is first of all 'private' (carried out in independent workshops and enterprises), and it is validated or constituted as social only through commodity exchange. The social necessity of labour has two dimensions. First of all, we are referred to the technical conditions of production and the physical productivity of labour. Inefficient or lazy producers, or those using outmoded technology, will fail to realize a market price in line with their actual labour input, but only with the lesser amount which is defined as 'necessary'. Secondly, there is a sense in which the social necessity of labour is relative to the prevailing structure of demand. If a certain commodity is overproduced relative to demand, it will fail to realize a price in line with its labour value - even if it is produced with average or better technical efficiency. The proponents of labour money want to shortcircuit this process, to act as if all labour were immediately social. The effects within commodity-producing society cannot but be disastrous.

Now the lesson which Marx and Engels read to the labour-money socialists, concerning the beauties of the supply/demand mechanism under capitalism and the foolishness of the arbitrary fixing of prices in line with actual labour content, are obviously rather pleasing to the critics of socialism. It appears that Kautsky also read the critique of labour money as casting doubt on the Marxian objective of direct calculation in terms of labour content, so that by the 1920s the figure widely regarded as the authoritative guardian of the Marxian legacy in the west had effectively abandoned this central tenet of classical Marxism. From the account of the critique of labour money we have given, the limits of that critique should be apparent. What Marx and Engels are rejecting is the notion of fixing prices according to actual labour content in the context of a commodity-producing economy where production is private. In an economy where the means of production are under communal control, on the other hand, labour does become 'directly social', in the sense that it is subordinated to a preestablished central plan. Here the calculation of the labour content of goods is an important element in the planning process. And here the reshuffling of resources in line with changing social needs and priorities does not proceed via the response of profit-seeking firms to divergences between market prices and long-run equilibrium values, so the critique of labour money is simply irrelevant. This is the context for Marx's suggestion for the distribution of consumer goods through labour tokens.

The significance of labor tokens is that they establish the obligation on all to work by abolishing unearned incomes; they make the economic relations between people transparently obvious; and they are egalitarian, ensuring that all labor is counted as equal. It is the last point that ensured that they were never adopted under the bureaucratic state socialisms of the twentieth century. What ruler or manager was willing to see his work as equal to that of a mere laborer?

Labor tokens are payment for work done

The difference between a labor-token system and the hire of labor-power can be shown via some contemporary illustrations.

Suppose you engage a self-employed plumber to fix the toilet. The plumber will judge how long it will take and quote on that basis. On completion of the job you pay the plumber for parts and labor. You do not purchase his ability to work for a day, you pay for the actual work done. If he does not finish the job he does not get paid-it was up to him to judge how long it would take. Self-employed, he has an incentive to get his estimates right.

Suppose, on the other hand, you call out a repairman employed by a service company to fix the heating. You are likely to be charged for time actually taken. The service company need have no control over how hard or efficiently the repairman works, as the system of charging means that it can never lose. The company purchases his labor-power at $10 per hour and sells it on to you at $40. In this case you are being re-sold labor-power, not the labor actually performed.

Finally, suppose that you took out a maintainance contract for $80 per annum. The service company is now selling you the promise of work actually done, labor, and has the responsibility and incentive to ensure that the work is done efficiently and to time.

Payment in labor tokens implies payment for work actually done as in cases 1 and 3. When Owen proposed such payment for artisans, this was unproblematic. Proof of work done was provided by the product delivered to the `labor exchange.' In a modern economy it implies either a system of piecework, or detailed work study to arrive at estimates of time required under conditions of average skill to perform a task.

General argument against market socialism

Above sumarises the arguments about the role of the market under socialism that we presented in [cockshott93a]. Towards a New Socialism was written in the late 80s when ideas of market socialism were comming to the fore under Gorbachov in the USSR. The book was in a way a polemic against market socialism. Whilst it recognised a necessary role for a consumer goods market, it took strong issue with any generalisation of the market to labour and capital goods. The argument was that advances in information technology allowed an efficient planning system to be constructed which could replace the market in the allocation of means of production, whilst socialist concerns for equity should prohibit a market for labour. We took this stand because we believed that the idea of market socialism was fundamentally corrosive. It would undermine such socialist achievements as had been built up during the 20th century and would legitimate a transition to capitalism. Subsequent events validated this intuition.

In this section we present general arguments against market socialism before going on to look at specific Western market socialist writers.

It has long been noted by socialists that economies based on simple commodity production tend to give rise to capitalism. Lenin wrote : "small production engenders capitalism and the bourgeoisie continuously, daily, hourly, spontaneously, and on a mass scale"[lenin1999lwc], a view he probably formed from his extensive sociological research on the Russian agrarian economy[lenin1967dcr]. This view led orthodox communists to oppose the extension of market relations[stalin1939fl, chunchiao1975ear, sayers1980fpa], even if these did not initially involve explotative labour contracts. The suspicion was that some people would get rich and others poorer if market relations were extended, and that over time these differences would solidify into a new class hierarchy.

Market economies are fundamentally chaotic. The incomes of individual economic agents, be these people, firms or cooperatives are subject to constant random variation. A seller of commodities will have good and bad months, good years and bad years. This random process means that even if there is initially no buying and selling of labour power income inequalities must arise.

In a market economy, hundreds of thousands of firms and individuals interact, buying and selling goods and services. This is similar to a gas in which very large numbers of molecules interact, bouncing off one another. Physics speaks of such systems as having a 'high degree of freedom', by which it means that the movements of all individual molecules are 'free' or random. But despite the individual molecules being free to move, we can still say things about them in the aggregate. We can say what their average speed will be ( their temperature ) and what their likely distributions in space will be.

The branch of physics which studies this is statistical mechanics or thermodynamics. Instead of making deterministic statements, it deals with probabilities and averages, but it still comes up with fundamental laws, the laws of thermodynamics, which have been found to govern the behaviour of our universe.

When the methods of statistical mechanics are applied to the capitalist economy[wright2005sac, wright2imm, farjoun], the predictions it make coincide almost exactly with the labour theory of value as set out in volume 1 of Marx's Capital[marx1]. Statistical mechanics showed that the selling prices of goods would vary in proportion to their labour content just as Marx had assumed. Because the market is chaotic, individual prices would not be exactly equal to labour values, but they would cluster very closely around labour values. Whilst in Capital I the labour theory of value is just taken as an empirically valid rule of thumb. Marx knew it was right, but did not say why. Here at last was a sound scientific theory explaining it.

It is the job of science to uncover causal mechanisms. Once it has done this it can make predictions which can be tested. If two competing theories make different predictions about reality, we can by observation determine which theory is right. This is the normal scientific method.

Farjoun and Machover's theory made certain predictions which went directly against the predictions made by critics of Marx such as Samuelson. In particular their theory predicts that industries with a high labour to capital ratio will be more profitable. Conventional economics predicts that there will be no such systematic difference between the profit rates in different industries. When put to the test it turned out that Farjoun and Machover were right. Industries with a high labour to capital ratio are more profitable[cockshott2003]. But this is exactly what we should expect if the source of profit was the exploitation of labour rather than capital. Their theory made predictions which not only turned out to be empirically spot on, but at the same time verified Marx's theory of the exploitation of the worker.

The next big advance was made by the phsyicist Yakovenko, who showed[dragulescu, cockshott:cee] that money in a market economy played the same role as energy in physics. Just as energy is conserved in collisions between molecules, so money is conserved in the acts of buying and selling. So far so obvious!

What was not obvious was what this implies. Yakovenko showed that the laws of thermodynamics then imply that the distribution of money between people will follow the same form as the distribution of energy between molecules in a gas : the so called Gibbs-Boltzmann distribution. This sounds very scientific, but what does it actually mean?

What the Gibbs-Boltzmann distribution of money says is that a few people with end up with a lot of money and a lot of people with end up with very little money. It says that the distribution of money will be very uneven, just as we see in capitalist society. In fact Yakovenko showed that the distribution of wealth in the USA fits the Gibbs-Boltzman distribution pretty closely.

There is a tendancy to think that rich people owe their wealth to intelligence or effort, but physics tells us no. Given a market economy, then the laws of chance mean that a lot of money will end up in the hands of a few people.

In fact when we look at the USA we find that the distribution of wealth is even more uneven that we would expect from the Gibbs-Boltzmann law. If the Gibbs Boltzman law held, there would be millionaires but no billionaires. Why the disparity?

Yakovenkos original equations represented an economy that is rather like what Marx called simple commodity production. It assumed only buying and selling. More recent work by Yakovenko and Wright[dragulescu02a, wright2005sac], has shown that if you modify these equations to allow either the earning of interest on money, or the hiring of wage labour, then the equations predict a polarisation of the population into two groups. The great bulk of the population, the working class and petty bourgeois, follow a Gibbs-Boltzmann income distribution. But there is a second class, those whose income derives from capital, whose wealth with follow a different law, what is called a power-law. Again, look in detail at the distribution of wealth in and you provide exactly the distribution predicted by Yakovenko's theory. This, says Yakovenko, proves that Marx was right when he said that modern society was comprised of two distinct and opposed classes : capitalists and workers.

What conclusions can we draw from this with respect to market socialism?

The first point is that as soon as you have a set of private agents, be they individuals, firms or cooperatives engaging in monetary trade, the laws of thermodynamics mean that the maximal entropy ( most probable ) distribution of money between the agents will be very uneven. Since, as Adam Smith said, money is the power too command the labour of others, this uneven distribution of money translates into an uneven distribution of social power. Those agents with more money are in a position to hire other agents under contractual terms favourable to the hirers. As soon as this happens the process of differentiation of income accelerates, and you move from the Gibbs Boltzman to the even more unequal power-law distribution of income characteristic of capitalist society.

This is a prediction that arises from simulation models of economies, but if we look at a real examples of a socialist economy taking the market socialist path - China under Deng, we see in reality the sort of income inequalities the models predict.

It may be argued that in China the introduction of market relations went much further than is advocated by some market socialists. That may well be true, but this sort of process acquires its own dynamic:

My own work, inspired by the reform experience, contributed additional arguments for refuting the Lange-theory. It seems to be highly improbable to generate the strong cost-minimizing or profit-maximizing incentive, taken as granted in the world of Lange's theory, in a public firm under a soft budget constraint regime.

It is impossible to couple an arbitrarily chosen ownership structure and an also arbitrarily chosen set of coordination mechanisms. There is close affinity between certain ownership forms and certain coordination mechanisms. Decentralized market and private ownership belong together. A further important counter-argument comes from the political and ideological sphere. The smooth functioning of the market depends on the "climate". It requires a market-friendly environment. If the politicians ruling a country are sworn enemies of genuine decentralization, the market will be banned to the black and grey area of the economy and cannot become the fundamental coordinator and integrator.) [kornai200]

The converse of this is that if we want to stop a highly undequal distribution of income, we either have to remove the mechanism that generates it, or do work to reduce the entropy of the system. Marx's proposal for abolishing money and instituting labour accounts which do not circulate, do not function as money, removes the underlying random process which generates inequality. The Swedish model works to reduce entropy through redistributive taxes. It has to constantly work against the tendancy of the market economy to generate a high degree of inequality, and can at most partially mitigate this inequality.

2 An evaluation of Yunker

In a series of articles ( for instance [yunker1979mea, yunker1988npm]) Yunker has made out the case for a form of market socialism. In these articles his main concern has been to defend market socialism against the criticisms of neo-classical economists who may be favourable to a capitalist economy. Since readers may not be familiar with his ideas we will give a brief summary of his proposals and his defence of them, before going on to make a critical assessment of them.

Yunker envisages what he calls a profit oriented model of socialism. The economy would be run, as now, by companies whose legal status would be largely unchanged. The companies will be able to engage in the full range of commercial transactions currently engaged in by US firms. These firms would employ people under the same sort of labour contracts as a present, and attempt to maximise their profits. Firms would be allowed to own shares in or make loans to each other as at present. The only limitation on capitalist activity would be that beneficial ownership of shares could not be vested in individuals. Instead, all shares not held or managed by other companies would be vested with a public body which he terms the Bureau of Public Ownership (BPO). The BPO would be obliged to maximise the return on the capital that it held. Capital income would then be distributed by the BPO to all employees in the economy as a percentage supplement to their wage incomes.

It is evident that the form of socialism advocated by Yunker is very similar to capitalism. Whether it should be termed socialism or state owned capitalism is a moot point, but Yunker's intention is evidently to deflect much of the criticism that capitalist inclined economists level at socialism by saying : look, socialism could be pretty much like the capitalism you know and love, so your criticisms of socialism are mostly ill founded.

Yunker devotes considerable attention to the problem of incentives for socialist managers as compared to private capitalists. An owner manager gains the full benefit from any increase in profit which would not be the case for a salaried manager under market socialist conditions. Yunker points out that in practice most lareg firms today are already run by salaried managers so that in some ways the situation would be no different. The issue then becomes whether the fund managers of the BPO would pursue the efficient use of capital as well as private shareholders do?

Again one of his responses is to say that already a large portion of shares are held by institutional investors who pay salaries and bonuses to fund managers, so the situation is again not dissimilar.

He has done empirical studies of the effort that private shareholders have to expend to influence the rate of return that they get on their capital [yunker1974iai], from which he concludes that they needed only to spend 9 hours a month in order to get close to the maximal rate of return on their capital. He therefore concludes that the BPO could be expected to earn close to the maximal rate of return with only a relatively small effort of fund management.

He goes on to construct a relatively elaborate theoretical economic model which purports to help us understand the relationship between return on capital and the effort put in by managers, and concludes from this that efficient management could be obtained at much lower levels of incentives than are typical for CEOs in American companies.

2.1 Assessment

Yunker's work has to be assessed from the standpoint of the ideological milieu in which it is embedded, for its theoretical and scientific cogency and finally in terms of its social and political implications.

2.1.1 Ideological

The ideological context of his writing is very clearly that of mainstream academic economics in the USA. The economics profession in the USA is probably as hostile to socialism as that of any other country. This means that Yunker swims against a tide of hostility to any form of socialism, and exists within a universe of discourse that is quite quite different from that of Marxian socialists. He could have opted out of the milieu of neo-classical economics and formulated an external critique of capitalism, but he has chosen instead the path of internal critique. He uses the familiar conceptual apparatus of his opponents and the familiar institutions of American capitalism to make his case for socialism. In a sense this is to be expected. Spontaneously developed socialist critiques of the existing order can be expected to start out from the dominant economic ideas of the day. Owenite and Marxian socialism built themselves on a critical appraisal of classical British political economy, so it is not surprising that a modern socialism, arising in the USA builds itself on the conceptual framework of the dominant neo-classical economics. The advantage of this approach is that Yunker's socialism may be harder for neoclassicals to simply dismiss than Marxian socialism. The disadvantage is that his approach is unlikely to appeal so much to grass-roots activists, because it seems to offer a society that is only slightly different from today's. Even a cursory examination of current activist web discussion of socialism, as opposed to discussion in academic journals, shows that Yunker's vision has generated much less interest than the more radical vision of Michael Albert[albert1991pep] for example.

2.1.2 Theoretical

But ideological reception is not everything. One also has to asses the scientific status of his arguments. From our standpoint as Marxian socialists, we would want to know why Yunker chooses to reject planning as part of socialism. Support for planning as opposed to market competition has been the prevalent position among socialists, so one would expect that Yunker would devote some energy to justifying his rejection of it. On the contrary in [yunker1988npm] he contents himself with a single sentence:

Among Western economists, it is virtually axiomatic that the “market capitalist” economy of the United States is highly efficient relative to the “planned socialist” economy of the Soviet Union. ([yunker1988npm], page 71)

He then goes on to assume that this belief is justified and build all his further arguments on this assumption. His formulation is revealing in many ways. Firstly his use of the term “Western economists”. By saying this he can not just have meant economists who lived to the west of the Iron Curtain, since there existed at the time he was writing, a small, but still real, fraction of Marxian economists in Western countries. These economists would not have taken it as axiomatic that market capitalism was more efficient than planned socialism. By Western economists he meant those economists, wherever they lived, who adhered to the neo-liberal Washington Consensus. It was a reference to, and affirmation of ideological allegiance rather than geography that he was making.

The next revealing thing is his use of the word axiomatic. One has to ask why he thinks axioms are relevant to an empirical study like economics?

The place for axioms is in formal theories such as set theory, number theory or predicate logic. Axioms and laws of inference provide a means by which it is possible for the validity of some, but not all, propositions within such a theory to be evaluated. Given a set of axioms and rules of inference it is possible to use a deterministic procedure to divide propositions into those that are provably true, those that are provably false, and those for which no deterministic answer can be obtained. People constructing formal theories are at liberty to select axioms, and by selecting different axioms different formal theories arise, the most famous historical example probably being the alternative axiomatisation of geometry by Riemann in 1854.

Yunker's reference to “virtually axiomatic” reveals the bias that neo-classical economists have towards treating economics as a formal system rather than an empirical science. Neoclassical economics proceeds by a discourse of proof from axioms rather than by the contrasting method of the empirical sciences : hypothesis, experimental or observational tests, modification of hypothesis. Biology does not proceed in an axiomatic fashion, why should economics?

Is it not possible that the axiomatic approach says something about the social role of neoclassical economic theory?

Couldn't it be the case that the function of the theory is to prove certain political propositions -- that all is for the best in best of all possible worlds?

But then there is the adjective : virtually. It is “virtually axiomatic” that market capitalism is superior to planned socialism. Why the qualification?

Because neoclassical economists have not been able to prove the superiority of market economy to planned economy from their prior set of axioms. On the contrary, for the century since Barone [barone1908imd], it has been evident that the axioms of neo-classical economics could be used to show that planned socialism was just as efficient as market capitalism. So it becomes necessary for “Western economists” to add a final “virtual axiom”; to assume what they want to prove in the first place.

Yunker seems to have felt uneasy about disposing of hitherto existing socialism in one sentence, so he adds a footnote to the work of Bergson[bergson1978pas] who is claimed to have empirically validated this virtual axiom. We have a critical look at Bergson's work in section [sec:Appendix-on-Bergson]. But Bergson's work uses data from the 1960s and 1970s. It claimed to show that the Soviet economy was less efficient in its use of resources than the US one. Such comparisons are bedeviled by the difficulty of compensating for factors other than the social system that distinguish the two countries: stage of industrialisation, available level of technology, level of technical culture in the workforce, differences in national cultures etc. But such debates from the 70s are now history. We have the results of a controlled experiment in Russia to go on. From 1989 the Russian government took the advice of American economist who took it as virtually axiomatic that replacing the planned economy with a free market would result in an enormous improvement in economic efficiency. Had these economist been right, were it the case that the main thing holding back the Russian economy was the constraints imposed by central planning, then we should have expected a Russia to have experienced a leap in prosperity and economic growth post 1989. In fact the effect was completely the opposite. The institution of a market economy led to a catastrophic decline in overall economic output, (table [tab:Decline-of-Russian] ).

We are not saying that the Soviet planning system, or its system of economic calculation and valuation were adequate. We argue in TNS that considerable inefficiencies arose from the under-valuation of labour in the USSR; that planning was based on aggregate rather than detailed targets; that it failed to make effective use of modern computer and telecoms technology; that consumer goods prices often diverged excessively from labour values. But our response, writing in 1989, was not to advocate market oriented reforms, which we considered would have catastrophic consequences for the working classes of the USSR. Instead we advocated a modernised, technologically sophisticated, and democratic model of planning. We think, in retrospect, that our scepticism about the market socialist reforms then being advocated in the USSR have turned out to be well founded. In contrast the 1990s seem to have passed Yunker's by. He seems to have nothing to say about the signal failure of Gorbachov's market socialist trajectory. He still holds to a rejection of planning based on little more than US cold war prejudices.

One of the key points of Yunker's arguments concerns the role of management unders socialism and capitalism. He is concerned to show that salaried employees of the BPO would be as effective in the efficient management of publicly held capital assets as current fund managers or individual capitalists are with privately held funds. His concern here is with efficient use of capital as a key component of overall efficiency. He takes return on capital employed to be the key indicator of economic efficiency, and argues that if socialist industry were to be oriented towards this, it would be as efficient as current capitalist industry, whilst allowing for greater equity.

There are several theoretical questions to be addressed here:

1. What is meant by the management of capital?

2. Could a single agency like the BPO operate in a manner analogous to multiple private fund managers?

3. Is profit really a good indication of capital efficiency?

4. Is the return on capital determined by the effort of capital managers or by quite other factors?

In Yunker's empirical study of capital management[yunker1974iai] he focused on individual 'investors'. But these were investors only in a very limited sense. They did not engage in the direct purchase of plant or equipment, instead they bought and sold financial assets. They were what used to be called rentiers, people whose wealth consisted in paper titles to future income streams. Management of capital, understood this way, is a much simpler task than efficient management of real capital assets and real capitalist production processes. But it is the latter which affects the productivity of a real economy. The former does affect the income of an individual rentier, but in a zero sum game. When a Mr A sells a low performing stock and buys a high performing one, he gains, but only at the expense of a Mr B who bought the low performing stock, and a Ms C who sold him the high performing stock. Contrast this with the task of organising the production of the A380 super jumbo jet. This requires the efficient coordination of a huge number of distinct labour processes, spread accross multiple nations and using a vast variety of capital equipment. Efficient execution of this sort of management directly affects aggregate welfare. It determines the timeliness of delivery of the jets. I determines their reliability and safety. Such management decisions influence their fuel consumption, etc. So there are two quite different sorts of capital management involved here, one of which has purely selfish implications, the other has social implications.

In the sort of economy that Yunker advocates, with only one ultimate owner, the BPO, the private rentier type of capital management would be irrelevant. The state is the ultimate owner of all shares and can not affect its income by portfolio adjustments. So Yunker's empirical studies are irrelevant to the issue he is addressing.

He might object that whilst buying and selling existing stock may be a zero sum game, the same can not be said about new issues of stock. Here, a consequence of stock purchase is the funding of real capital investment, and judgements by the market as to whether or not to fund such stock issues, have a real effect on future production. It is in this context that we have to ask : could a single agency like the BPO operate in a manner analogous to multiple private fund managers?


The BPO as the only ultimate shareholder will have a synoptic view of the investment plans of all firms in the economy. Since the investment plans of one firm will affect other firms, the BPO must take this into account. Knowing the planned investments of all airlines for example, and knowing the best projections available to these firms for the growth of the airtravel market, it will be in a position to judge if the overall investment plans are excessive. It will thus be subject to none of the 'animal spirits' that motivate private investors during a bull market. A system of capital investment funded by a BPO will be much less likely to engender the bubbles which have time and again caused disastrous waste of real capital in the US economy, from the railway bubble of the late 19th century to the real-estate bubble that collapsed so dramatically in 2008. Many would judge this a good thing. But note that in the process, the BPO will have to act more and more like GOSPLAN.

If it is to make sound investment judgements, it will have to construct increasingly sophisticated econometric input-output models of the whole US economy. Only then will it be in a position to assess whether or not a particular investment in new stock issues is likely to give a good overall return. In will, in other words, have to plan.

Social and political implications of Yunker's model

Given the position of the USA in the world economic and political system, and given the absence of any significant socialdemocratic workers movement there, discussion of American Socialism has a slightly artificial air. However, it is not inconcievable that during the course of the 21st century this will change. The USA has moved from being the world's greatest creditor to its greatest debtor. In China it is faced for the first time with an industrial rival with the population resources to potentially overtake it. At the time of writing (March 2009) it is entering what looks like being its worst recession in three generations. All of these factors could lead to a serious socialist or social democratic movement taking root in the USA over the next quarter century. But would the ideology put forward by Yunker's be a plausible basis for such a movement?

We believe not.

Yunker's proposals are to timid to inspire a new generation of working class organisers. Although his ideas would, if somehow put into practice, mean some improvement in the income of workers, they would leave most of the structure of society unchanged. The very top stratum of capitalists would be removed, but the rest of the class structure would remain. The managerial and professional classes would retain their position vis a vis the working class. Workers would be employed by the same companies, managed in the same way but with the sole difference that the state would be the ultimate shareholder. Bcause his proposals do nothing to narrow income differentials arising from wages and salaries, because they provide no guarantee of full employment, they would be seen as having little to offer to the working class. They might perhaps win a certain middle class following, but in the ideological struggles that would take place within a growing working class socialist movement, they would be displaced by more radical doctrines.

One has to realise that for socialism to become 'on the agenda' in the USA will presuppose

1. A political movement at least comparable to classical German or Swedish social democracy, or the large communist movements of the post WWII period,

2. A major war resulting either

(a) in a defeat, comparable to those suffered by France in 1870, Russia 1917 or Germany 1918/45

(b) a pyrrhic victory that could only be won after years of national sacrifice, in which the social democratic movement avanced its position like Britain in 1945.

In these circumstances, different socialist doctrines, memes to borrow Dawkin's term, will contend for extended reproduction. The laws of evolution will favour those best suited to the new political and economic environment. Yunker's doctrines have been tailored to a particular evolutionary niche on the margins of American economic orthodoxy, in a climate of US world domination. It seems unlikely that they will sucessfully reproduce themselves in a working class movement in a defeated or declining USA.

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