Softpanorama

May the source be with you, but remember the KISS principle ;-)
Contents Bulletin Scripting in shell and Perl Network troubleshooting History Humor

Neoclassical Pseudo Theories and Crooked and Bought Economists as Fifth Column of Financial Oligarchy

There is no economics, only political economy, stupid

News Casino Capitalism Recommended Links Neoliberalism as Trotskyism for the rich Number racket Efficient Market Hypothesis Economism and abuse of economic theory in American politics
Supply Side or Trickle down economics Invisible Hand Hypothesys Twelve apostles of deregulation Monetarism fiasco Financial Sector Induced Systemic Instability of Economy Samuelson's bastard Keynesianism Greenspan as the Chairman of Financial Politburo
Libertarian Philosophy Elite [Dominance] Theory And the Revolt of the Elite The Iron Law of Oligarchy Audacious Oligarchy and "Democracy for Winners" Ayn Rand and her Objectivism Cult Neoliberal Brainwashing -- Journalism in the Service of the Powerful Few The Deep State
Free Market Fundamentalism Friedman --founder of Chicago school of deification of market Lawrence Summers Corruption of Regulators Glass-Steagall repeal Rational expectations scam Free Markets Newspeak
In Goldman Sachs we trust: classic example of regulatory capture by financial system hackers Mathiness GDP as a false measure of a country economic output Introduction to Lysenkoism Republican Economic Policy Think Tanks Enablers  Small government smoke screen
Hyman Minsky John Kenneth Galbraith  Bookshelf History of Casino Capitalism Casino Capitalism Dictionary :-) Humor Etc
Is it really necessary for every economist to be brain-dead apologist for the rich and powerful and predatory, in every damn breath?

Bruce Wilder in comments to Clash of Autonomy and Interdependence

Smith briskly takes a sledgehammer to any number of plaster saints cluttering up the edifice of modern economics:

"assumptions that are patently ridiculous: that individuals are rational and utility-maximizing (which has become such a slippery notion as to be meaningless), that buyers and sellers have perfect information, that there are no transaction costs, that capital flows freely"

And then...papers with cooked figures, economists oblivious to speculative factors driving oil prices, travesty versions of Keynes's ideas that airbrush out its most characteristic features in the name of mathematical tractability.

And then...any number of grand-sounding theoretical constructs: the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model, the Black-Scholes option model, Value at Risk, CAPM, the Gaussian copula, that only work under blatantly unrealistic assumptions that go by high falutin' names - equilibrium, ergodicity, and so on.

The outcome of this pseudo-scientific botching is an imposing corpus of pretentious quackery that somehow elevates unregulated "free markets" into the sole mechanism for distribution of the spoils of economic activity. We are supposed to believe that by some alchemical process, maximum indulgence of human greed results in maximum prosperity for all. That's unfair to alchemy: compared with the threadbare scientific underpinnings of this economic dogma, alchemy is a model of rigor.

How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism

How many others are being paid for punditry? Or has the culture of corruption spread so far that the question is, Who isn't?

PAUL KRUGMAN, NYT, December 19, 2005

"MIT and Wharton and University of Chicago created the financial engineering instruments which, like Samson and Delilah, blinded every CEO. They didn't realize the kind of leverage they were doing and they didn't understand when they were really creating a real profit or a fictitious one."

Paul Samuelson


Introduction

When you see this "neoclassical" gallery of expensive intellectual prostitutes (sorry, respectable priests of a dominant religion) that pretend to be professors of economics in various prominent universities, it is difficult not to say "It's political economy stupid". Those lackeys of ruling elite are just handing microphone bought by financial oligarchy.  Here is am Amazon.com review of  ECONned How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism eBook Yves Smith that  states this position well:

kievite:
Neoclassical economics as a universal door opener for financial oligarchy

There are many good reviews of the book published already and I don't want to repeat them. But I think there is one aspect of the book that was not well covered in the published reviews and which I think is tremendously important and makes the book a class of its own: the use of neoclassical economics as a universal door opener for financial oligarchy. I hope that the term "econned" will became a new word in English language.

Neoclassical economics has become the modern religion with its own priests, sacred texts and a scheme of salvation. It was a successful attempt to legitimize the unlimited rule of financial oligarchy by using quasi-mathematical, oversimplified and detached for reality models. The net result is a new brand of theology, which proved to be pretty powerful in influencing people and capturing governments("cognitive regulatory capture"). Like Marxism, neoclassical economics is a triumph of ideology over science. It was much more profitable though: those who were the most successful in driving this Trojan horse into the gates were remunerated on the level of Wall Street traders.

Economics is essentially a political science. And politics is about perception. Neo-classical economics is all about manipulating the perception in such a way as to untie hands of banking elite to plunder the country (and get some cramps from the table for themselves). Yves contributed to our understanding how "These F#@king Guys" as Jon Steward defined them, economics professors from Chicago, Harvard, Columbia, Princeton and some other places warmed by flow of money from banks for specific services provided managed to serve as a fifth column helping Wall Street to plunder the country. The rhetorical question that a special counsel to the U.S. Army, Joseph Welch, asked Senator McCarthy: "Have you no sense of decency?" applies.

The main effect of neoclassical economics is elevating unregulated ( "free" in neoclassic economics speak) markets into the key mechanism for distribution of the results of economic activity with banks as all-powerful middlemen and sedating any opposition with pseudo-mathematical mumbo-jumbo. Complexity was used as a powerful smoke screen to conceal greed and incompetence. As a result financial giants were able to loot almost all sectors of economics with impunity and without any remorse, not unlike the brutal conquerors in Middle Ages.

The key to the success of this nationwide looting is that people should be brainwashed/indoctrinated to believe that by some alchemical process, maximum level of greed results in maximum prosperity for all. Collapse of the USSR helped in this respect driving the message home: look how the alternative ended, when in reality the USSR was a neo-feudal society. But the exquisite irony here is that Bolsheviks-style ideological brainwashing was applied very successfully to the large part of the US population (especially student population) using neo-classical economics instead of Marxism (which by-and-large was also a pseudo-religious economic theory with slightly different priests and the plan of salvation ;-). The application of badly constructed mathematical models proved to be a powerful tool for distorting reality in a certain, desirable for financial elite direction. One of the many definitions of Ponzi Scheme is "transfer liabilities to unwilling others." The use of detached from reality mathematical models fits this definition pretty well.

The key idea here is that neoclassical economists are not and never have been scientists: much like Marxist economists they always were just high priests of a dangerous cult -- neoliberalism -- and they are more then eager to stretch the truth for the benefit of the sect (and indirectly to their own benefit). All-in-all this is not unlike Lysenkoism: state support was and still is here, it is just working more subtly via ostracism, without open repressions. Look at Shiller story on p.9.

I think that one of lasting insights provided by Econned is the demonstration how the US society was taken hostage by the ideological views of the neoclassical economic school that has dominated the field at least for 30 or may be even 50 years. And that this ideological coup d'état was initiated and financed by banking establishment who was a puppeteer behind the curtain. This is not unlike the capture of Russia by Bolsheviks supported by German intelligence services (and Bolshevics rule lasted slightly longer -- 65 years). Bolsheviks were just adherents of similar wrapped in the mantle of economic theory religious cult, abeit more dangerous and destructive for the people of Russia then neoclassical economics is for the people of the USA. Quoting Marx we can say "History repeats itself, first as tragedy, second as farce".

That also means that there is no easy way out of the current situation. Ideologies are sticky and can lead to the collapse of society rather then peaceful evolution.

So it's no surprise that there is a strong evidence that neo-classical economics is not a science, it's a political ideology of financial oligarchy masquerading as science. Or a religious cult, if you wish.

So it's no surprise that there is a strong evidence that neo-classical economics is not a science, it's a political ideology of financial oligarchy masquerading as science. Or a religious cult, if you wish.

The cult which served as a Trojan horse for bankers to grab power and wealth by robbing fellow Americans. In a way this is a classic story of a parasite killing the host. The powers that be in academia put their imprimatur on economic ‘theory,’ select and indoctrinate its high priests to teach it, and with a host of media players grinding out arguments pro and con this and that, provide legitimacy sufficient for cover of bankers objectives. Which control the disposition and annuity streams of pension fund assets and related financial services. In his new documentary Inside Job, filmmaker Charles Ferguson provides strong evidence of a systematic mass corruption of economic profession (Yahoo! Finance):

Ferguson points to 20 years of deregulation, rampant greed (a la Gordon Gekko) and cronyism. This cronyism is in large part due to a revolving door between not only Wall Street and Washington, but also the incestuous relationship between Wall Street, Washington and academia.

The conflicts of interest that arise when academics take on roles outside of education are largely unspoken, but a very big problem. “The academic economics discipline has been very heavily penetrated by the financial services industry,” Ferguson tells Aaron in the accompanying clip. “Many prominent academics now actually make the majority of their money from the financial services industry, not from teaching or research. [This fact] has definitely compromised the research work and the policy advice that we get from academia.”

... ... ...

Feguson is astonished by the lack of regulation demanding financial disclosure of all academics and is now pushing for it. “At a minimum, federal law should require public disclosure of all outside income that is in any way related to professors’ publishing and policy advocacy,” he writes. “It may be desirable to go even further, and to limit the total size of outside income that potentially generates conflicts of interest.”

The dismantling of economic schools that favor financial oligarchy interests over real research (and prosecuting academic criminals -- many prominent professors in Chicago, Harvard, Columbia and other prominent members of neo-classical economic church) require a new funding model. As neoliberalism itself, the neoclassical economy is very sticky. Chances for success of any reform in the current environment are slim to non existent.

Here is one apt quote from Zero Hedge discussion of Gonzalo Lira article On The Identity Of The False Religion Behind The Mask Of Economic Science zero hedge

"They analyze data for Christ sakes"

Just like Mishkin analyzed Iceland for $120k? a huge proportion in US [are] on Fed payroll, or beneficiaries of corporate thinktank cash; they are coverup lipstick and makeup; hacks for hire.

Like truth-trashing mortgage pushers, credit raters, CDO CDS market manipulators and bribe-fueled fraud enablers of all stripes -- they do it for the dough -- and because everybody else is doing it.

It's now a common understanding that "These F#@king Guys" as Jon Steward defined them, professors  of neoclassical economics from Chicago, Harvard and some other places are warmed by flow of money from financial services industries for specific services provided managed to serve as a fifth column helping financial oligarchy to destroy the country. This role of neo-classical economists as the fifth column of financial oligarchy is an interesting research topic. Just don't expect any grants for it ;-).

As Reinhold Niebuhr aptly noted in his classic Moral Man and Immoral Society
Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.

I would like to stress it again: they are not and never have been scientists: they are just high priests of dangerous cult -- neoliberalism -- and they are more then eager to stretch the truth for the sect (and that means their own) benefits. Fifth column of financial oligarchy. All-in-all this is not unlike Lysenkoism: at some point state support became obvious as financial oligarchy gained significant share of government power (as Glass-Steagall repeal signified). It is just more subtle working via ostracism and flow of funding, without open repressions. See also Politicization of science and The Republican War on Science

Like Russia with Bolsheviks, the US society was taken hostage by the ideological views of the Chicago economic school that has dominated the field for approximately 50 years ( as minimum over 30 years). Actually the situation not unlike the situation with Lysenkoism is the USSR. It's pretty notable that the USA suffered 30 years of this farce, actually approximately the same amount of time the USSR scientific community suffered from Lysenkoism (1934-1965)

Rules of disclosure of sources of financing for economic research are non-existent


"Over the past 30 years, the economics profession—in economics departments, and in business, public policy, and law schools—has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy.

The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money."

Peter Dormat noticed amazing similarity between medical researchers taking money from drug companies and economists. In case of medical researchers widespread corruption can at least be partially kept in check by rules of disclosure. Universities are being called out for their failure to disclose to public agencies the other, private grants researchers are pulling in. This is not perfect policing as the universities themselves get a cut of the proceeds, so that the conflict of interest exists but at least this is theirs too.

But there is no corresponding policy for economics. So for them there are not even rules to be broken. And this is not a bug, this is  feature.  In a sense corruption is officially institualized and expected in economics. Being a paid shill is the typical career of many professional economists. Some foundations require an acknowledgment in the published research they support, but that's all about “thank you”, not disclaimer about the level of influence of those who pay for the music exert on the selection of the tune. Any disclosure of other, privately-interested funding sources by economists is strictly voluntary, and in practice seldom occurs. Trade researchers can be funded by foreign governments or business associations and so on and so forth.

In this atmosphere pseudo-theories have currency and are attractive to economists who want to enrich themselves. That situation is rarely reflected in mainstream press. For example, there some superficial critiques of neo-classical economics as a new form of Lysenkoism (it enjoyed the support of the state) but MSM usually frame the meltdown of neo-classical economic theory something like "To all you corrupt jerks out there: shake off the old camouflage as it became too visible and find a new way misleading the masses...". At the same time it's a real shocker, what a bunch of toxic theories and ideologies starting from Reagan have done to the US economy.

That suggests that neo-economics such as Milton Friedman (and lower level patsies like Eugene Fama ) were just paid propagandists of a superficial, uninformed, and simplistic view of the world that was convenient to the ruling elite. While this is somewhat simplistic explanation, it's by-and-large true and that was one of the factors led the USA very close to the cliff... Most of their theories is not only just nonsense for any trained Ph.D level mathematician or computer scientist, they look like nonsense to any person with a college degree, who looks at them with a fresh, unprejudiced mind. There are several economic myths, popularized by well paid propagandists over the last thirty years, that are falling hard in the recent series of financial crises: the efficient market hypothesis, the inherent benefits of globalization from the natural equilibrium of national competitive advantages, and the infallibility of unfettered greed as a ideal method of managing and organizing human social behavior and maximizing national production.

I would suggest that and economic theory has a strong political-economic dimension. The cult of markets, ideological subservience and manipulation, etc. certainly are part of neo-classical economics that was influenced by underling political agenda this pseudo-theory promotes. As pdavidsonutk wrote: July 16, 2009 16:14

Keynes noted that "classical theorists resemble Euclidean geometers in a non Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight --as the only remedy for the unfortunate collisions. Yet in truth there is no remedy except to throw over the axiom of parallels to work out a non-Euclidean geometry. SOMETHING SIMILAR IS REQUIRED IN ECONOMICS TODAY. " [Emphasis added]

As I pointed out in my 2007 book JOHN MAYNARD KEYNES (Mentioned in this ECONOMIST article as a biography "of the master") Keynes threw over three classical axioms: (1) the neutral money axiom (2) the gross substitution axiom, and (3) the ergodic axiom.

The latter is most important for understanding why modern macroeconomics is dwelling in an Euclidean economics world rather than the non-Euclidean economics Keynes set forth.

The Ergodic axiom asserts that the future is merely the statistical shadow of the past so that if one develops a probability distribution using historical data, the same probability distribution will govern all future events till the end of time!! Thus in this Euclidean economics there is no uncertainty about the future only probabilistic risk that can reduce the future to actuarial certainty! In such a world rational people and firms know (with actuarial certainty) their intertemporal budget constrains and optimize -- so that there can never be an loan defaults, insolvencies, or bankruptcies.

Keynes argued that important economic decisions involved nonergodic processes, so that the future could NOT be forecasted on the basis of past statistical probability results -- and therefore certain human institutions had to be develop0ed as part of the law of contracts to permit people to make crucial decisions regarding a future that they "knew" they could not know and still sleep at night. When the future seems very uncertain, then rational people in a nonergodic world would decide not to make any decisions to commit their real resources -- but instead save via liquid assets so they could make decisions another day when the future seemed to them less uncertain.

All this is developed and the policy implications derived in my JOHN MAYNARD KEYNES (2007) book. Furthermore this nonergodic model is applied to the current financial and economic crisis and its solution in my 2009 book THE KEYNES SOLUTION: THE PATH TO GLOBAL PROSPERITY (Palgrave/Macmillan) where I tell the reader what Keynes would have written regarding today's domestic crisis in each nation and its international aspects.

Paul Davidson ghaliban wrote:

July 16, 2009 15:34

I think you could have written a shorter article to make your point about the dismal state of economics theory and practice, and saved space to think more imaginatively about ways to reform.

A bit like biology, economics must become econology - a study of real economic systems. It must give up its physics-envy. This on its own will lead its practitioners closer to the truth.

Like biological systems, economic systems are complex, and often exhibit emergent properties that cannot be predicted from the analysis of component parts. The best way to deal with this is (as in biology) to start with the basic organizational unit of analysis - the individual, and then study how the individual makes economic decisions in larger and larger groups (family/community), and how groups take economic decisions within larger and larger forms of economic organization. From this, econologists should determine whether there are any enduring patterns in how aggregate economic decisions are taken. If there are no easily discernable patterns, and aggregate decisions cannot be predicted from a knowledge of individual decision-making preferences, then the theory must rely (as it does in biology) on computer simulations with the economy replicated in as much detail as possible to limit the scope for modeling error. This path will illuminate the "physiology" of different economies.

A second area of development must look into "anatomy" - the connections between actors within the financial system, the connections between economic actors within the real economy, and the connections between the real and financial economies. What are the precise links demand and supply links between these groups, and how does money really flow through the economic system? A finer knowledge of economic anatomy will make it easier to produce better computer simulations of the economy, which will make it a bit easier to study economic physiology.

"Markets uber alles" or more correctly "Financial oligarchy uber alles"

In her interview What Exactly Is Neoliberalism  Wendy Brown advanced some Professor Wolin ideas to a new level and provide explanation why "neoclassical crooks" like Professor  Frederic Mishkin (of Financial Stability in Iceland fame) still rule the economics departments of the USA. They are instrumental in giving legitimacy to the neoliberal rule favoured by the financial oligarchy:

"... I treat neoliberalism as a governing rationality through which everything is "economized" and in a very specific way: human beings become market actors and nothing but, every field of activity is seen as a market, and every entity (whether public or private, whether person, business, or state) is governed as a firm. Importantly, this is not simply a matter of extending commodification and monetization everywhere-that's the old Marxist depiction of capital's transformation of everyday life. Neoliberalism construes even non-wealth generating spheres-such as learning, dating, or exercising-in market terms, submits them to market metrics, and governs them with market techniques and practices. Above all, it casts people as human capital who must constantly tend to their own present and future value. ..."

"... The most common criticisms of neoliberalism, regarded solely as economic policy rather than as the broader phenomenon of a governing rationality, are that it generates and legitimates extreme inequalities of wealth and life conditions; that it leads to increasingly precarious and disposable populations; that it produces an unprecedented intimacy between capital (especially finance capital) and states, and thus permits domination of political life by capital; that it generates crass and even unethical commercialization of things rightly protected from markets, for example, babies, human organs, or endangered species or wilderness; that it privatizes public goods and thus eliminates shared and egalitarian access to them; and that it subjects states, societies, and individuals to the volatility and havoc of unregulated financial markets. ..."

"... with the neoliberal revolution that homo politicus is finally vanquished as a fundamental feature of being human and of democracy. Democracy requires that citizens be modestly oriented toward self-rule, not simply value enhancement, and that we understand our freedom as resting in such self-rule, not simply in market conduct. When this dimension of being human is extinguished, it takes with it the necessary energies, practices, and culture of democracy, as well as its very intelligibility. ..."

"... For most Marxists, neoliberalism emerges in the 1970s in response to capitalism's falling rate of profit; the shift of global economic gravity to OPEC, Asia, and other sites outside the West; and the dilution of class power generated by unions, redistributive welfare states, large and lazy corporations, and the expectations generated by educated democracies. From this perspective, neoliberalism is simply capitalism on steroids: a state and IMF-backed consolidation of class power aimed at releasing capital from regulatory and national constraints, and defanging all forms of popular solidarities, especially labor. ..."

"... The grains of truth in this analysis don't get at the fundamental transformation of social, cultural, and individual life brought about by neoliberal reason. They don't get at the ways that public institutions and services have not merely been outsourced but thoroughly recast as private goods for individual investment or consumption. And they don't get at the wholesale remaking of workplaces, schools, social life, and individuals. For that story, one has to track the dissemination of neoliberal economization through neoliberalism as a governing form of reason, not just a power grab by capital. There are many vehicles of this dissemination -- law, culture, and above all, the novel political-administrative form we have come to call governance. It is through governance practices that business models and metrics come to irrigate every crevice of society, circulating from investment banks to schools, from corporations to universities, from public agencies to the individual. It is through the replacement of democratic terms of law, participation, and justice with idioms of benchmarks, objectives, and buy-ins that governance dismantles democratic life while appearing only to instill it with "best practices." ..."

"... Progressives generally disparage Citizens United for having flooded the American electoral process with corporate money on the basis of tortured First Amendment reasoning that treats corporations as persons. However, a careful reading of the majority decision also reveals precisely the thoroughgoing economization of the terms and practices of democracy we have been talking about. In the majority opinion, electoral campaigns are cast as "political marketplaces," just as ideas are cast as freely circulating in a market where the only potential interference arises from restrictions on producers and consumers of ideas-who may speak and who may listen or judge. Thus, Justice Kennedy's insistence on the fundamental neoliberal principle that these marketplaces should be unregulated paves the way for overturning a century of campaign finance law aimed at modestly restricting the power of money in politics. Moreover, in the decision, political speech itself is rendered as a kind of capital right, functioning largely to advance the position of its bearer, whether that bearer is human capital, corporate capital, or finance capital. This understanding of political speech replaces the idea of democratic political speech as a vital (if potentially monopolizable and corruptible) medium for public deliberation and persuasion. ..."

"... My point was that democracy is really reduced to a whisper in the Euro-Atlantic nations today. Even Alan Greenspan says that elections don't much matter much because, "thanks to globalization . . . the world is governed by market forces," not elected representatives. ..."

 


Top Visited
Switchboard
Latest
Past week
Past month

NEWS CONTENTS

Old News ;-)

I find an attempt to elevate academic finance and economics to sciences by using the word "scientism" to be bizarre. Finance models like CAPM, Black-Scholes and VAR all rest on assumptions that are demonstrably false, such as rational investors and continuous markets.

May 11, 2012 at 1-40 pm

[Dec 14, 2017] Tech Giants Trying to Use WTO to Colonize Emerging Economies

Notable quotes:
"... The initiative described in this article reminds me of how the World Bank pushed hard for emerging economies to develop capital markets, for the greater good of America's investment bankers. ..."
"... By Burcu Kilic, an expert on legal, economic and political issues. Originally published at openDemocracy ..."
"... Today, the big tech race is for data extractivism from those yet to be 'connected' in the world – tech companies will use all their power to achieve a global regime in which small nations cannot regulate either data extraction or localisation. ..."
"... One suspects big money will be thrown at this by the leading tech giants. ..."
"... Out of idle curiosity, how could you accurately deduce my country of origin from my name? ..."
Dec 14, 2017 | www.nakedcapitalism.com

December 14, 2017 by Yves Smith Yves here. Notice that Costa Rica is served up as an example in this article. Way back in 1997, American Express had designated Costa Rica as one of the countries it identified as sufficiently high income so as to be a target for a local currency card offered via a franchise agreement with a domestic institution (often but not always a bank). 20 years later, the Switzerland of Central America still has limited Internet connectivity, yet is precisely the sort of place that tech titans like Google would like to dominate.

The initiative described in this article reminds me of how the World Bank pushed hard for emerging economies to develop capital markets, for the greater good of America's investment bankers.

By Burcu Kilic, an expert on legal, economic and political issues. Originally published at openDemocracy

Today, the big tech race is for data extractivism from those yet to be 'connected' in the world – tech companies will use all their power to achieve a global regime in which small nations cannot regulate either data extraction or localisation.

n a few weeks' time, trade ministers from 164 countries will gather in Buenos Aires for the 11th World Trade Organization (WTO) Ministerial Conference (MC11). US President Donald Trump in November issued fresh accusations of unfair treatment towards the US by WTO members , making it virtually impossible for trade ministers to leave the table with any agreement in substantial areas.

To avoid a 'failure ministerial," some countries see the solution as pushing governments to open a mandate to start conversations that might lead to a negotiation on binding rules for e-commerce and a declaration of the gathering as the "digital ministerial". Argentina's MC11 chair, Susana Malcorra, is actively pushing for member states to embrace e-commerce at the WTO, claiming that it is necessary to " bridge the gap between the haves and have-nots ".

It is not very clear what kind of gaps Malcorra is trying to bridge. It surely isn't the "connectivity gap" or "digital divide" that is growing between developed and developing countries, seriously impeding digital learning and knowledge in developing countries. In fact, half of humanity is not even connected to the internet, let alone positioned to develop competitive markets or bargain at a multilateral level. Negotiating binding e-commerce rules at the WTO would only widen that gap.

Dangerously, the "South Vision" of digital trade in the global trade arena is being shaped by a recent alliance of governments and well-known tech-sector lobbyists, in a group called 'Friends of E-Commerce for Development' (FED), including Argentina, Chile, Colombia, Costa Rica, Kenya, Mexico, Nigeria, Pakistan, Sri Lanka, Uruguay, and, most recently, China. FED claims that e-commerce is a tool to drive growth, narrow the digital divide, and generate digital solutions for developing and least developed countries.

However, none of the countries in the group (apart from China) is leading or even remotely ready to be in a position to negotiate and push for binding rules on digital trade that will be favorable to them, as their economies are still far away from the technology revolution. For instance, it is perplexing that one of the most fervent defenders of FED's position is Costa Rica. The country's economy is based on the export of bananas, coffee, tropical fruits, and low-tech medical instruments, and almost half of its population is offline . Most of the countries in FED are far from being powerful enough to shift negotiations in favor of small players.

U.S.-based tech giants and Chinese Alibaba – so-called GAFA-A – dominate, by far, the future of the digital playing field, including issues such as identification and digital payments, connectivity, and the next generation of logistics solutions. In fact, there is a no-holds-barred ongoing race among these tech giants to consolidate their market share in developing economies, from the race to grow the advertising market to the race to increase online payments.

An e-commerce agenda that claims unprecedented development for the Global South is a Trojan horse move. Beginning negotiations on such topics at this stage – before governments are prepared to understand what is at stake – could lead to devastating results, accelerating liberalization and the consolidation of the power of tech giants to the detriment of local industries, consumers, and citizens. Aware of the increased disparities between North and South, and the data dominance of a tiny group of GAFA-A companies, a group of African nations issued a statement opposing the digital ambitions of the host for MC11. But the political landscape is more complex, with China, the EU, and Russia now supporting the idea of a "digital" mandate .

Repeating the Same Mistakes?

The relationships of most countries with tech companies are as imbalanced as their relationships with Big Pharma, and there are many parallels to note. Not so long ago, the countries of the Global South faced Big Pharma power in pharmaceutical markets in a similar way. Some developing countries had the same enthusiasm when they negotiated intellectual property rules for the protection of innovation and research and development costs. In reality, those countries were nothing more than users and consumers of that innovation, not the owners or creators. The lessons of negotiating trade issues that lie at the core of public interest issues – in that case, access to medicines – were costly. Human lives and fundamental rights of those who use online services should not be forgotten when addressing the increasingly worrying and unequal relationships with tech power.

The threat before our eyes is similarly complex and equally harmful to the way our societies will be shaped in the coming years. In the past, the Big Pharma race was for patent exclusivity, to eliminate local generic production and keep drug prices high. Today, the Big Tech race is for data extractivism from those who have yet to be connected in the world, and tech companies will use all the power they hold to achieve a global regime in which small nations cannot regulate either data extraction or data localization.

Big Tech is one of the most concentrated and resourceful industries of all time. The bargaining power of developing countries is minimal. Developing countries will basically be granting the right to cultivate small parcels of a land controlled by data lords -- under their rules, their mandate, and their will -- with practically no public oversight. The stakes are high. At the core of it is the race to conquer the markets of digital payments and the battle to become the platform where data flows, splitting the territory as old empires did in the past. As the Economist claimed on May 6, 2017: "Conflicts over control of oil have scarred the world for decades. No one yet worries that wars will be fought over data. But the data economy has the same potential for confrontation."

If countries from the Global South want to prepare for data wars, they should start thinking about how to reduce the control of Big Tech over -- how we communicate, shop, and learn the news -- , again, over our societies. The solution lies not in making rules for data liberalization, but in devising ways to use the law to reduce Big Tech's power and protect consumers and citizens. Finding the balance would take some time and we are going to take that time to find the right balance, we are not ready to lock the future yet.

Jef , December 14, 2017 at 11:32 am

I thought thats what the WTO is for?

Thuto , December 14, 2017 at 2:14 pm

One suspects big money will be thrown at this by the leading tech giants. To paraphrase from a comment I made recently regarding a similar topic : "with markets in the developed world pretty much sewn up by the tripartite tech overlords (google, fb and amazon), the next 3 billion users for their products/services are going to come from developing world". With this dynamic in mind, and the "constant growth" mantra humming incessantly in the background, it's easy to see how high stakes a game this is for the tech giants and how no resources will be spared to stymie any efforts at establishing a regulatory oversight framework that will protect the digital rights of citizens in the global south.

Multilateral fora like the WTO are de facto enablers for the marauding frontal attacks of transnational corporations, and it's disheartening to see that some developing nations have already nailed the digital futures of their citizens to the mast of the tech giants by joining this alliance. What's more, this signing away of their liberty will be sold to the citizenry as the best way to usher them into the brightest of all digital futures.

Mark P. , December 14, 2017 at 3:30 pm

One suspects big money will be thrown at this by the leading tech giants.

Vast sums of money are already being thrown at bringing Africa online, for better or worse. Thus, the R&D aimed at providing wireless Internet via giant drones/balloons/satellites by Google, Facebook, etc.

You're African. Possibly South African by your user name, which may explain why you're a little behind the curve, because the action is already happening, but more to the north -- and particularly in East Africa.

The big corporations -- and the tech giants are competing with the banking/credit card giants -- have noted how mobile technology leapt over the dearth of last century's telephony tech, land lines, and in turn enabled the highest adoption rates of cellphone banking in the world. (Particularly in East Africa, as I say.) The payoffs for big corporations are massive -- de facto cashless societies where the corporations control the payment systems –and the politicians are mostly cheap.

In Nigeria, the government has launched a Mastercard-branded national ID card that's also a payment card, in one swoop handing Mastercard more than 170 million potential customers, and their personal and biometric data.

In Kenya, the sums transferred by mobile money operator M-Pesa are more than 25 percent of that country's GDP.

You can see that bringing Africa online is technically a big, decade-long project. But also that the potential payoffs are vast. Though I also suspect China may come out ahead -- they're investing far more in Africa and in some areas their technology -- drones, for instance -- is already superior to what the Europeans and the American companies have.

Thuto , December 14, 2017 at 4:58 pm

Thank you Mark P.

Hoisted from a comment I made here recently: "Here in South Africa and through its Free Basics programme, facebook is jumping into bed with unsuspecting ISPs (I say unsuspecting because fb will soon be muscling in on their territory and becoming an ISP itself by provisioning bandwidth directly from its floating satellites) and circumventing net neutrality "

I'm also keenly aware of the developments in Kenya re: safaricom and Mpesa and how that has led to traditional banking via bank accounts being largely leapfrogged for those moving from being unbanked to active economic citizens requiring money transfer facilities. Given the huge succes of Mpesa, I wouldn't be surprised if a multinational tech behemoth (chinese or american) were to make a play for acquiring safaricom and positioning it as a triple-play ISP, money transfer/banking services and digital content provider (harvesting data about users habits on an unprecedented scale across multiple areas of their lives), first in Kenya then expanded throughout east, central and west africa. I must add that your statement about Nigeria puts Mark Zuckerberg's visit there a few months back into context somewhat, perhaps a reconnaissance mission of sorts.

Out of idle curiosity, how could you accurately deduce my country of origin from my name?

Mark P. , December 14, 2017 at 6:59 pm

Out of idle curiosity, how could you accurately deduce my country of origin from my name?

Though I've lived in California for decades, my mother was South African and I maintain a UK passport, having grown up in London.

Mark P. , December 14, 2017 at 3:34 pm

As you also write: "with markets in the developed world pretty much sewn up by the tripartite tech overlords (google, fb and amazon), the next 3 billion users for their products/services are going to come from developing world."

Absolutely true. This cannot be stressed enough. The tech giants know this and the race is on.

Mattski , December 14, 2017 at 3:41 pm

Been happening with food for 50 years.

[Dec 14, 2017] In defence of the labour theory of value

Actually Marx's "labor theory of value" should be properly called the "theory of surplus value".
Notable quotes:
"... For Marx, value was socially-necessary labour time: David Harvey is good on this. From this perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value" is some mystical entity embodied in commodities. ..."
"... This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between people. And unequal ones at that. ..."
"... I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited. ..."
"... * He seems to be recovering now. The vet is also expected to make a full recovery eventually. ..."
"... Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities. ..."
"... And this follows into the impression that I have derived from various authors that our high standards of living depend not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility of land ..."
"... the complex process of differentiation in the economy (aka the division of labor) obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle) and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship is occluded by the mechanics of employment, markets, and property. ..."
"... My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their work, from work as a human activity, as distinct from an economic activity ..."
"... Practically every "Dilbert" strip is about "alienation". This is my favourite ..."
"... Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an extremely expensive thing to buy with money alone. ..."
Dec 11, 2017 | stumblingandmumbling.typepad.com

Lucius has been poorly recently, which has required some trips to the vet and therefore a bill of a size that only David Davis could negotiate*. This has made me wonder: is there more to be said for the labour theory of value than we like to think?

For a long time, I've not really cared about this theory one way or the other. This is partly because I've not bothered much with questions of value; partly because, as John Roemer has shown, we don't need (pdf) a labour theory of value to suggest workers are exploited; and partly because the main Marxian charges against capitalism – for example that it entails relationships of domination – hold true (or not!) independently of the theory.

As I approach retirement, however, I've begun to change my mind. I think of major expenses in terms of labour-time because they mean I have to work longer. A trip to the vet is an extra fortnight of work; a good guitar an extra month, a car an extra year, and so on.

When I consider my spending, I ask: what must I give up in order to get that? And the answer is my time and freedom. My labour-time is the measure of value.

This is a reasonable basis for the claim that workers are exploited. To buy a bundle of goods and services, we must work a number of hours a week. But taking all workers together, the hours we work are greater than the hours needed to produce those bundles because we must also work to provide a profit for the capitalist. As Marx put it:

We have seen that the labourer, during one portion of the labour-process, produces only the value of his labour-power, that is, the value of his means of subsistence During the second period of the labour-process, that in which his labour is no longer necessary labour, the workman, it is true, labours, expends labour-power; but his labour, being no longer necessary labour, he creates no value for himself. He creates surplus-value which, for the capitalist, has all the charms of a creation out of nothing. This portion of the working-day, I name surplus labour-time.

For Marx, value was socially-necessary labour time: David Harvey is good on this. From this perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value" is some mystical entity embodied in commodities.

This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between people. And unequal ones at that.

What's more, the charge of obscurantism against Marx is an especially weak one when it comes from orthodox economics. Much of this invokes unobservable concepts such as the natural rate of unemployment, marginal productivity, utility, the marginal product of capital and natural rate of interest – ideas which, in the last two cases, might not even be theoretically coherent.

In fact, the LTV is reasonably successful by the standards of conventional economics: we have empirical evidence to suggest that it does (pdf) a decent (pdf) job of explaining (pdf) relative prices – not that this was how Marx intended it to be used.

You can of course, think of counter-examples to the theory. But so what? in the social sciences, no substantial theory is 100% true.

I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited.

By the (low) standards of economic theories, perhaps the LTV isn't so bad.

* He seems to be recovering now. The vet is also expected to make a full recovery eventually.

December 11, 2017 Permalink

Comments

Luis Enrique , December 11, 2017 at 02:09 PM

But the LTV says more than the output of the economy is divided between the workers and the (suppliers and) owners of capital goods, doesn't it? I mean, mainstream econ says that too. And unless ownership of capital inputs to production is distributed equally across society, then some people consume things that other's labour has produced, which means workers must produce more than they consume. But again, that's basic mainstream stuff, not LVT. You end by saying you can believe in exploitation but not LVT, and vice versa, but the main body of this blog seems to be connecting the two. I am confused.

Of course if you have the ability to vary your labour supply, and labour is how you earn your money, then you ask yourself how much you need to work to purchase whatever. But again that's mainstream not LVT.

David Friedman , December 11, 2017 at 06:14 PM

Your version of the labor theory of value is one of Adam Smith's versions. I don't think it is Marx's, but I know Smith better than Marx.

And definitely not Ricardo's.

ConfusedNeoLiberal , December 11, 2017 at 08:51 PM

What about value, in terms of risk among others, that the employers put in starting a new business?

Blissex , December 12, 2017 at 12:23 AM

"Smith believed the LTV without arguing that workers were exploited."

The Marxian approach was interested in, as other commenters have said, in the specific capitalist case, where "capitalism" for him means strictly "labour for hire" by workers alienated from the means of production by their ownership by capitalists.

But the labour theory of value, as understood by what Marx called "classicals", applies also to all labour, and he used it in that sense.

My understanding of the classicals and the LTV is reduced to a minimum this:

Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities.

And this follows into the impression that I have derived from various authors that our high standards of living depend not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility of land.

Blissex , December 12, 2017 at 12:29 AM

"value, in terms of risk among others, that the employers put in starting a new business?"

If the business produces a surplus, that is value added, than the surplus is the product of the energy/labour expended by all participants

How it is accounted for is one issue, especially over multiple time periods, and how it is shared out is a social relationship.

As to risk, everybody in the business runs the risk of not getting paid at the end of the month, and the opportunity cost of not doing something else, whichever labour they put in.

How risk and opportunity cost are accounted for, especially over multiple time periods, is another issue, and how they are shared is another social relationship.

Blissex , December 12, 2017 at 01:14 AM

"the surplus is the product of the energy/labour expended by all participants"

I'll perhaps further diminish the reputation of my "contributions" this way: perhaps all social relationships of production (at least among males) map closely onto (cursorial) group hunts.

https://78.media.tumblr.com/d4db6631d383cbfc9bd135c799a06e7f/tumblr_n3u8r0eJu01sohvpko1_500.jpg

:-)

Luis Enrique , December 12, 2017 at 08:40 AM

That's a very long winded way of saying that making stuff requires labour.

Blissex , December 12, 2017 at 01:50 PM

"a very long winded way of saying that making stuff requires labour"

Well, that's obvious, but what the classicals thought of as the LTV was not entirely obvious: that "surplus" (rather than "stuff") comes from the fertility of land and the transformation achieved with labour, and that nothing else is needed to achieve "surplus". Because for example capital goods are themselves surplus from fertility or labour, again back to the first blades made from chipping lumps of obsidian.

That's quite a bit more insightful, never mind also controversial, than "making stuff requires labour".

Rich Clayton , December 12, 2017 at 03:35 PM

Love this post. But, being a fellow marxist, I can't help but to disagree with this bit: "And they are alienated because this work is unsatisfying and a source of unfreedom." This is a colloquial use of alienation, and its not wrong.

But Marx is getting at something else: the complex process of differentiation in the economy (aka the division of labor) obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle) and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship is occluded by the mechanics of employment, markets, and property.

That's the sense in which workers are alienated under capitalism. Socialism could still have boring work, but, in so far as the investment function is brought under collective democratic control, workers would not be alienated in the special sense Marx is using.

Lukas , December 12, 2017 at 03:41 PM

@Luis Enrique

"Where else could stuff come from?" Well, assuming by "stuff" we mean objects of value, nowhere. But the reasons for which we value them are not dependent upon their natural origins or the labor required for their production. I don't value a computer because it's made of plastic and silicon and so forth, nor because of the labor required to produce it. It's useful because of what it does, not what it is; it's sort of Kant's definition of art versus the general conception of tools.

As for the relationship between production functions and the LTV, that seems (at least prima facie) pretty straightforward. If there is a high olefimity ascribed to the surplus provided by the product created by X, Y, then those production functions will, themselves, be assigned greater value, i.e., be worthy of more labor-time to attain. E.g., even if I'm not very good at fishing, if I really like the flavor of fish over other protein sources, I'll spend more time increasing my labor efficiency (be a better fisherman).

Blissex , December 12, 2017 at 05:36 PM

"Everything ultimately derives from nature and the labour of humans. Where else could stuff come from? That's all there is."

Then in theory the cost (not the price) of everything can be measured in terms of physical quantities of primary inputs and of hours of work.

"What's controversial about it?"

What is controversial is that written like that you sound like a Marxist: the alternative approach is to say that *property* creates surplus.
In the standard neoclassical approach "property" is the often forgotten "initial endowments" of the single representative agent.

Anyhow the "narrative" is: as Mr. Moneybags owns the iron mine and the coal mine and the smelter and the ingot roller and spoon press, then he is entitled to the surplus because without his property it is impossible to make spoons. Labour on its own is worthless, wastes away, while property is "valuable" capital.

"And how one gets from a production function (stuff is made from X, Y and Z) to LTV"

Production functions are just not very elaborate scams to pretend that property is the factor of production, rather then the fertility of land and the energy of labour, and land does not exist (after JB Clark "disappeared" it) and labour is just an accessory. Part of the scam is that "X, Y and Z" are denominated in money, not physical quantities.

As I wrote in another answer accounting for the output of land fertility and labour energy and how it is shared are the difficult bits. Welcome to the institutional approach to the political economy. :-)

Blissex , December 12, 2017 at 05:41 PM

"the reasons for which we value them are not dependent upon their natural origins or the labor required for their production"

And here be dragons. Your old bearded acquaintance Karl has something to say about this :-).

"It's useful because of what it does, not what it is"

So cleaning floors which is very useful should have a high value, while Leonardo paintings, that are merely scarce, should have a low value :-).

I though that most people reckoned that "value" depends on scarcity: so there is a scarcity of even not very good promoters of torysm, so G Osborne is entitled to £600,000 a year to edit the "Evening Standard", but there is no scarcity of excellent cleaners, so cleaners gets minimum wage if they are lucky.

:-)

Luis Enrique , December 12, 2017 at 05:43 PM

counting hours of worked is not a measure of cost, it is a tally of hours worked. In mainstream econ, production functions describe a physical production process (to make 1 unit of Y, you combine inputs like so) and are not not denominated in money. e.g. You multiply L by w to get cost.

mulp , December 12, 2017 at 05:46 PM

Economies are zero sum. GDP must be paid for, otherwise it won't be produced. The only source of money comes from labor costs, the money paid to workers to work producing GDP. As conservatives note, all taxes fall on workers by directly taking their pay, or by hiking the prices of what workers buy.

Taxes pay workers, e.g. teachers, and doctors with Medicare and Medicaid, weapons makers and warriors, or pay people to pay workers, Social Security benefits and SNAP.

Capital has value because it is built by paying workers. It gets a cut to repay the payers of workers.

Monopoly rent seeking is unsustainable. If a monoplists takes more from workers than they pay workers, he eventually takes so much money workers can no longer pay for GDP and it falls to zero as workers produce what they consume without buying from the monopolist capital.

Tanstaafl

As Keynes put it:

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce."


Economies are zero sum. The value of goods and services must equal the labor costs in the long run. Tanstaaafl

Blissex , December 12, 2017 at 06:01 PM

"Socialism could still have boring work, but, in so far as the investment function is brought under collective democratic control, workers would not be alienated in the special sense Marx is using."

My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their work, from work as a human activity, as distinct from an economic activity.

Collective ownership does not change at all that kind of alienation: being a cog in the capitalist machinery is no less alienating than being a cog in the collectivist machinery.

I think that our blogger when he talks about distributing control of the production process to workers is far closer to the marxian ideal than a collectivist approach.

Practically every "Dilbert" strip is about "alienation". This is my favourite:

http://dilbert.com/strip/2002-03-09

But these are also good:

http://dilbert.com/strip/1991-12-26
http://dilbert.com/strip/1993-01-05
http://dilbert.com/strip/1993-04-26
http://dilbert.com/strip/1994-11-07
http://dilbert.com/strip/1996-03-03
http://dilbert.com/strip/1996-07-24
http://dilbert.com/strip/1996-10-10
http://dilbert.com/strip/2002-08-10

Luis Enrique , December 12, 2017 at 06:26 PM

That is not what zero sum means

Blissex , December 12, 2017 at 06:53 PM

"counting hours of worked is not a measure of cost"

For a definition of "cost" that is made-up disregarding P Sraffa's work and in general the classics.

"multiply L by w to get cost."

As J Robinson and others pointed out that "w" depends on the distribution of income, on the interest rate, etc., so is an institutional matter.
As I was saying, accounting for the surplus and how to share it is not so easily handwavable.

Luis Enrique , December 12, 2017 at 08:55 PM

sorry, I meant for a money definition of cost that is not just counting inputs, but which is inputs multiplied by their prices.

nobody is hand waving. I think the mainstream view is that 'value' and 'surplus' are not meaningful terms, only prices and profits and subjective value. A production function says nothing about prices, you have to explain them with other stuff, and as you say, institutions and all manner of things could come in the play there.

You can say that that workers produce more in money terms than than they are paid, which is trivial (the wages paid by an employer are less than its gross profits so long as there are non-zero returns to capital, interest on a loan or dividends or whatever) and to my mind it's silly to define that as exploitation because it would apply in situations where the 'capitalist' is getting a small return and workers rewarded handsomely by any standard. Better imo to define exploitation as when capitalists are earning excess returns (and I'd fudge that by differentiating between workers' wages and salaries of top execs). Otherwise you lay yourself open to "the only thing worse than being exploited by capitlists is not beingn exploited by capitalists" which is J Robinson too I believe.

Luis Enrique , December 12, 2017 at 08:57 PM

and i think you only have to look at the income distribution to infer workers are being expoloited

B.L. Zebub , December 13, 2017 at 04:02 AM

@Blissex,

This is a genuine question: what you exposed above is related to or influenced by Steve Keen's ideas, yes? If so, I'd be interested in reading about that in more detail.

Lukas , December 13, 2017 at 04:28 AM

@Blissex

I've always thought that defining value by scarcity was an absurd misdirection, in part because there is no reason that the two should correlate at all. At any point in socioeconomic development beyond subsistence, value is to some extent socially defined, not economically defined. Status ends up being the most "useful" resource, as we see among all those who've never had to worry about their material conditions.

Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an extremely expensive thing to buy with money alone.

@Luis Enrique

Ah, but name for me a production process that doesn't take place over time. There's an infinite amount of time for all of us, but for each of us only so much, and those who fail to value it die full of regret. Surely someone somewhere must have something to say about this.

Luis Enrique , December 13, 2017 at 08:34 AM

I don't know why I wrote the above. Surplus is also a mainstream term. See wages set by bargaing over a surplus. Presume it's based on prices of outputs compared to inputs or if in model with real quantities not prices, then in subjective values.

Lukas production functions are defined over a period of time.

Blissex , December 13, 2017 at 11:43 AM

Ahem, I am trying to explain my understanding of Marx, who wrote both as economist and a philosopher, and a politial theorist.

Alienation, exploitation and inequality are technically distinct concepts, even if in the marxist (view (and that of every business school, that are faithful to marxist political economy) capitalist control of the means of production leads to alienation which leads to exploitation which leads to inequality. In the marxian political economy inequality can exist even with exploitation, for example, and that makes it less objectionable.

"Surplus is also a mainstream term. See wages set by bargaing over a surplus."

Some Economists have not forgotten at least some terminology of political economy and some Departments of Business still have surviving "history of economic thought" courses that some postgrads may still accidentally occasionally wander into and pick up some terms from...

"are not meaningful terms, only prices and profits and subjective value."

But the mainstream focus on prices and profits etc. is the purest handwaving, because it begs the question...

"A production function says nothing about prices"

Ha! This is one of the best examples where mainstream theory handwaves furiously: mainstream production functions switch effortlessly from "capital" as phusical quantities to aggregating "capital" by reckoning it in "numeraire". That is all about prices, and even about future expected prices and future expected rates of discount. Therefore rational expectations, a grand feat of handwaving.

Blissex , December 13, 2017 at 11:51 AM

"defining value by scarcity was an absurd misdirection, in part because there is no reason that the two should correlate at all."

Ahhhhhhh but this is a very political point and not quite agreeable because:

One of the conceits of "microfoundations" is to show that there are "laws" of Economics that are precise, so everybody get exactly their just compensation, so for example demand-supply schedules are always presented, cleverly, as lines and static.

The view of political economists is that instead "everything" lies within boundaries of feasibility, which are dynamic, so for example demand-supply schedules are ribbons that change over time and circumstances, and transactions happens not at uniquely determined points of intersections, but in regions of feasibility, the precise point dependent on institutional arrangements.

So the LTV determines one boundary for "price" and desirability another boundary.

Blissex , December 13, 2017 at 12:03 PM

"exposed above is related to or influenced by Steve Keen's ideas"

Related and independently derived, but also a bit influenced. I had always suspected that the "classicals" used "labour" as a synonym for "muscle power", but various later readings persuaded me that was indeed the case. Later post will have some hopefully interesting detail. Then I looked into the literature and found that obviously this had been figured out before (centuries ago in some cases, like B de Mandeville).

Anyhow for similar approaches some references:

Luis Enrique , December 13, 2017 at 04:33 PM

Blissex if you can come up with a better way of trying to describe total quantities of highly heterogeneous things (i.e. capital) you have a Nobel awaiting. Everybody know that attempts to put a number on the real quantity of capital is always going to be a rough and ready endeavour.

I don't see how working with prices and profits is 'handwaving'. What question does it beg? Much of economics is about trying to explain these things. I would not say economics focuses on prices and profits because many economics models work with real quantities that are high abstract and in theory are made commensurate using subjective value (utility) as the unit of account.

And I don't think this lot
https://www.theguardian.com/business/2010/oct/11/nobel-prize-for-economics-three-winners
picked up the term surplus by accidentally wandering in to the wrong seminar

[Dec 13, 2017] Stress of long-term unemployment takes a toll on thousands of Jerseyans who are out of work by Leslie Kwoh

Notable quotes:
"... Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147. ..."
Jun 13, 2010 | www.nj.com

At 5:30 every morning, Tony Gwiazdowski rolls out of bed, brews a pot of coffee and carefully arranges his laptop, cell phone and notepad like silverware across the kitchen table.

And then he waits.

Gwiazdowski, 57, has been waiting for 16 months. Since losing his job as a transportation sales manager in February 2009, he wakes each morning to the sobering reminder that, yes, he is still unemployed. So he pushes aside the fatigue, throws on some clothes and sends out another flurry of resumes and cheery cover letters.

But most days go by without a single phone call. And around sundown, when he hears his neighbors returning home from work, Gwiazdowski -- the former mayor of Hillsborough -- can't help but allow himself one tiny sigh of resignation.

"You sit there and you wonder, 'What am I doing wrong?'" said Gwiazdowski, who finds companionship in his 2-year-old golden retriever, Charlie, until his wife returns from work.

"The worst moment is at the end of the day when it's 4:30 and you did everything you could, and the phone hasn't rung, the e-mails haven't come through."

Gwiazdowski is one of a growing number of chronically unemployed workers in New Jersey and across the country who are struggling to get through what is becoming one long, jobless nightmare -- even as the rest of the economy has begun to show signs of recovery.

Nationwide, 46 percent of the unemployed -- 6.7 million Americans -- have been without work for at least half a year, by far the highest percentage recorded since the U.S. Labor Department began tracking the data in 1948.

In New Jersey, nearly 40 percent of the 416,000 unemployed workers last year fit that profile, up from about 20 percent in previous years, according to the department, which provides only annual breakdowns for individual states. Most of them were unemployed for more than a year.

But the repercussions of chronic unemployment go beyond the loss of a paycheck or the realization that one might never find the same kind of job again. For many, the sinking feeling of joblessness -- with no end in sight -- can take a psychological toll, experts say.

Across the state, mental health crisis units saw a 20 percent increase in demand last year as more residents reported suffering from unemployment-related stress, according to the New Jersey Association of Mental Health Agencies.

"The longer the unemployment continues, the more impact it will have on their personal lives and mental health," said Shauna Moses, the association's associate executive director. "There's stress in the marriage, with the kids, other family members, with friends."

And while a few continue to cling to optimism, even the toughest admit there are moments of despair: Fear of never finding work, envy of employed friends and embarassment at having to tell acquaintances that, nope, still no luck.

"When they say, 'Hi Mayor,' I don't tell a lot of people I'm out of work -- I say I'm semi-retired," said Gwiazdowski, who maxed out on unemployment benefits several months ago.

"They might think, 'Gee, what's wrong with him? Why can't he get a job?' It's a long story and maybe people really don't care and now they want to get away from you."


SECOND TIME AROUND

Lynn Kafalas has been there before, too. After losing her computer training job in 2000, the East Hanover resident took four agonizing years to find new work -- by then, she had refashioned herself into a web designer.

That not-too-distant experience is why Kafalas, 52, who was laid off again eight months ago, grows uneasier with each passing day. Already, some of her old demons have returned, like loneliness, self-doubt and, worst of all, insomnia. At night, her mind races to dissect the latest interview: What went wrong? What else should she be doing? And why won't even Barnes & Noble hire her?

"It's like putting a stopper on my life -- I can't move on," said Kafalas, who has given up karate lessons, vacations and regular outings with friends. "Everything is about the interviews."

And while most of her friends have been supportive, a few have hinted to her that she is doing something wrong, or not doing enough. The remarks always hit Kafalas with a pang.

In a recent study, researchers at Rutgers University found that the chronically unemployed are prone to high levels of stress, anxiety, depression, loneliness and even substance abuse, which take a toll on their self-esteem and personal relationships.

"They're the forgotten group," said Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers, and a co-author of the report. "And the longer you are unemployed, the less likely you are to get a job."

Of the 900 unemployed workers first interviewed last August for the study, only one in 10 landed full-time work by March of this year, and only half of those lucky few expressed satisfaction with their new jobs. Another one in 10 simply gave up searching.

Among those who were still unemployed, many struggled to make ends meet by borrowing from friends or family, turning to government food stamps and forgoing health care, according to the study.

More than half said they avoided all social contact, while slightly less than half said they had lost touch with close friends. Six in 10 said they had problems sleeping.

Kafalas says she deals with her chronic insomnia by hitting the gym for two hours almost every evening, lifting weights and pounding the treadmill until she feels tired enough to fall asleep.

"Sometimes I forget what day it is. Is it Tuesday? And then I'll think of what TV show ran the night before," she said. "Waiting is the toughest part."


AGE A FACTOR

Generally, the likelihood of long-term unemployment increases with age, experts say. A report by the National Employment Law Project this month found that nearly half of those who were unemployed for six months or longer were at least 45 years old. Those between 16 and 24 made up just 14 percent.

Tell that to Adam Blank, 24, who has been living with his girlfriend and her parents at their Martinsville home since losing his sales job at Best Buy a year and half ago.

Blank, who graduated from Rutgers with a major in communications, says he feels like a burden sometimes, especially since his girlfriend, Tracy Rosen, 24, works full-time at a local nonprofit. He shows her family gratitude with small chores, like taking out the garbage, washing dishes, sweeping floors and doing laundry.

Still, he often feels inadequate.

"All I'm doing on an almost daily basis is sitting around the house trying to keep myself from going stir-crazy," said Blank, who dreams of starting a social media company.

When he is feeling particularly low, Blank said he turns to a tactic employed by prisoners of war in Vietnam: "They used to build dream houses in their head to help keep their sanity. It's really just imagining a place I can call my own."


LESSONS LEARNED

Meanwhile, Gwiazdowski, ever the optimist, says unemployment has taught him a few things.

He has learned, for example, how to quickly assess an interviewer's age and play up or down his work experience accordingly -- he doesn't want to appear "threatening" to a potential employer who is younger. He has learned that by occasionally deleting and reuploading his resume to job sites, his entry appears fresh.

"It's almost like a game," he said, laughing. "You are desperate, but you can't show it."

But there are days when he just can't find any humor in his predicament -- like when he finishes a great interview but receives no offer, or when he hears a fellow job seeker finally found work and feels a slight twinge of jealousy.

"That's what I'm missing -- putting on that shirt and tie in the morning and going to work," he said.

The memory of getting dressed for work is still so vivid, Gwiazdowski says, that he has to believe another job is just around the corner.

"You always have to hope that that morning when you get up, it's going to be the day," he said.

"Today is going to be the day that something is going to happen."

Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147.

DrBuzzard Jun 13, 2010

I collect from the state of iowa, was on tier I and when the gov't recessed without passing extension, iowa stopped paying tier I claims that were already open, i was scheduled to be on tier I until july 15th, and its gone now, as a surprise, when i tried to claim my week this week i was notified. SURPRISE, talk about stress.

berganliz Jun 13, 2010

This is terrible....just wait until RIF'd teachers hit the unemployment offices....but then, this is what NJ wanted...fired teachers who are to blame for the worst recession our country has seen in 150 years...thanks GWB.....thanks Donald Rumsfeld......thanks Dick Cheney....thanks Karl "Miss Piggy" Rove...and thank you Mr. Big Boy himself...Gov Krispy Kreame!

rp121 Jun 13, 2010

For readers who care about this nation's unemployed- Call your Senators to pass HR 4213, the "Extenders" bill. Unfortunately, it does not add UI benefits weeks, however it DOES continue the emergency federal tiers of UI. If it does not pass this week many of us are cut off at 26 wks. No tier 1, 2 -nothing.

[Dec 13, 2017] Unemployment health hazard and stress

The longer you are unemployed, the more you are effected by those factors.
Notable quotes:
"... The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects. ..."
"... Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system. ..."
"... Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises. ..."
"... Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem. ..."
"... One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available. ..."
"... Depression is universally hated by anyone who's ever had it. ..."
"... Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either. ..."
"... You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard. ..."
Dec 13, 2017 | www.cvtips.com

It's almost impossible to describe the various psychological impacts, because there are so many. There are sometimes serious consequences, including suicide, and, some would say worse, chronic depression.

There's not really a single cause and effect. It's a compound effect, and unemployment, by adding stress, affects people, often badly.

The world doesn't need any more untrained psychologists, and we're not pretending to give medical advice. That's for professionals. Everybody is different, and their problems are different. What we can do is give you an outline of the common problems, and what you can do about them.

The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects.

For others, there are a series of issues, and the big three are:

Stress

Stress is Stage One. It's a natural result of the situation. Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system.

Over an extended period, the body's natural hormonal balances are affected, and this can lead to problems. These are actually physical issues, but the effects are mental, and the first obvious effects are, naturally, emotional.

Anger, and other negative emotions

Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises.

If the actual situation was already bad, this mental state makes it a lot worse. Constant aggravation doesn't help people to keep a sense of perspective. Clear thinking isn't easy when under constant stress.

Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem.

One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available.

If you have reservations about seeking help, bear in mind it can't possibly be any worse than the problem.

Depression

Depression is universally hated by anyone who's ever had it. This is the next stage, and it's caused by hormonal imbalances which affect serotonin. It's actually a physical problem, but it has mental effects which are sometimes devastating, and potentially life threatening.

The common symptoms are:

It's a disgusting experience. No level of obscenity could possibly describe it. Depression is misery on a level people wouldn't conceive in a nightmare. At this stage the patient needs help, and getting it is actually relatively easy. It's convincing the person they need to do something about it that's difficult. Again, the mental state is working against the person. Even admitting there's a problem is hard for many people in this condition.

Generally speaking, a person who is trusted is the best person to tell anyone experiencing the onset of depression to seek help. Important: If you're experiencing any of those symptoms:

Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either.

Alcohol, in particular, makes depression much worse. Alcohol is a depressant, itself, and it's also a nasty chemical mix with all those stress hormones.

If you've ever had alcohol problems, or seen someone with alcohol wrecking their lives, depression makes things about a million times worse.

Just don't do it. Steer clear of any so-called stimulants, because they don't mix with antidepressants, either.

Unemployment and staying healthy

The above is what you need to know about the risks of unemployment to your health and mental well being.

These situations are avoidable.

Your best defense against the mental stresses and strains of unemployment, and their related problems is staying healthy.

We can promise you that is nothing less than the truth. The healthier you are, the better your defenses against stress, and the more strength you have to cope with situations.

Basic health is actually pretty easy to achieve:

Diet

Eat real food, not junk, and make sure you're getting enough food. Your body can't work with resources it doesn't have. Good food is a real asset, and you'll find you don't get tired as easily. You need the energy reserves.

Give yourself a good selection of food that you like, that's also worth eating.

The good news is that plain food is also reasonably cheap, and you can eat as much as you need. Basic meals are easy enough to prepare, and as long as you're getting all the protein veg and minerals you need, you're pretty much covered.

You can also use a multivitamin cap, or broad spectrum supplements, to make sure you're getting all your trace elements. Also make sure you're getting the benefits of your food by taking acidophilus or eating yogurt regularly.

Exercise

You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard.

Don't just sit and suffer

If anything's wrong, check it out when it starts, not six months later. Most medical conditions become serious when they're allowed to get worse.

For unemployed people the added risk is also that they may prevent you getting that job, or going for interviews. If something's causing you problems, get rid of it.

Nobody who's been through the blender of unemployment thinks it's fun.

Anyone who's really done it tough will tell you one thing:

Don't be a victim. Beat the problem, and you'll really appreciate the feeling.

[Dec 12, 2017] Can Uber Ever Deliver Part Eleven Annual Uber Losses Now Approaching $5 Billion

Notable quotes:
"... Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. ..."
"... Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins. ..."
"... In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week. ..."
"... An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8] ..."
"... Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017. ..."
"... Socialize the losses, privatize the gains, VC-ize the subsidies. ..."
"... The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. ..."
"... "Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs ..."
Dec 12, 2017 | www.nakedcapitalism.com

Uber lost $2.5 billion in 2015, probably lost $4 billion in 2016, and is on track to lose $5 billion in 2017.

The top line on the table below shows is total passenger payments, which must be split between Uber corporate and its drivers. Driver gross earnings are substantially higher than actual take home pay, as gross earning must cover all the expenses drivers bear, including fuel, vehicle ownership, insurance and maintenance.

Most of the "profit" data released by Uber over time and discussed in the press is not true GAAP (generally accepted accounting principles) profit comparable to the net income numbers public companies publish but is EBIDTAR contribution. Companies have significant leeway as to how they calculate EBIDTAR (although it would exclude interest, taxes, depreciation, amortization) and the percentage of total costs excluded from EBIDTAR can vary significantly from quarter to quarter, given the impact of one-time expenses such as legal settlements and stock compensation. We only have true GAAP net profit results for 2014, 2015 and the 2nd/3rd quarters of 2017, but have EBIDTAR contribution numbers for all other periods. [5]

Uber had GAAP net income of negative $2.6 billion in 2015, and a negative profit margin of 132%. This is consistent with the negative $2.0 billion loss and (143%) margin for the year ending September 2015 presented in part one of the NC Uber series over a year ago.

No GAAP profit results for 2016 have been disclosed, but actual losses likely exceed $4 billion given the EBIDTAR contribution of negative $3.2 billion. Uber's GAAP losses for the 2nd and 3rd quarters of 2017 were over $2.5 billion, suggesting annual losses of roughly $5 billion.

While many Silicon Valley funded startups suffered large initial losses, none of them lost anything remotely close to $2.6 billion in their sixth year of operation and then doubled their losses to $5 billion in year eight. Reversing losses of this magnitude would require the greatest corporate financial turnaround in history.

No evidence of significant efficiency/scale gains; 2015 and 2016 margin improvements entirely explained by unilateral cuts in driver compensation, but losses soared when Uber had to reverse these cuts in 2017.

Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. These driver compensation cuts improved Uber's EBIDTAR margin, but Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins.

In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week.

An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8]

A business model where profit improvement is hugely dependent on wage cuts is unsustainable, especially when take home wages fall to (or below) minimum wage levels. Uber's primary focus has always been the rate of growth in gross passenger revenue, as this has been a major justification for its $68 billion valuation. This growth rate came under enormous pressure in 2017 given Uber efforts to raise fares, major increases in driver turnover as wages fell, [9] and the avalanche of adverse publicity it was facing.

Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

MKS , December 12, 2017 at 6:19 am

"Uber's business model can never produce sustainable profits"

Two words not in my vocabulary are "Never" and "Always", that is a pretty absolute statement in an non-absolute environment. The same environment that has produced the "Silicon Valley Growth Model", with 15x earnings companies like NVIDA, FB and Tesla (Average earnings/stock price ratio in dot com bubble was 10x) will people pay ridiculous amounts of money for a company with no underlying fundamentals you damn right they will! Please stop with the I know all no body knows anything, especially the psychology and irrationality of markets which are made up of irrational people/investors/traders.

JohnnySacks , December 12, 2017 at 7:34 am

My thoughts exactly. Seems the only possible recovery for the investors is a perfectly engineered legendary pump and dump IPO scheme. Risky, but there's a lot of fools out there and many who would also like to get on board early in the ride in fear of missing out on all the money to be hoovered up from the greater fools. Count me out.

SoCal Rhino , December 12, 2017 at 8:30 am

The author clearly distinguishes between GAAP profitability and valuations, which is after all rather the point of the series. And he makes a more nuanced point than the half sentence you have quoted without context or with an indication that you omitted a portion. Did you miss the part about how Uber would have a strong incentive to share the evidence of a network effect or other financial story that pointed the way to eventual profit? Otherwise (my words) it is the classic sell at a loss, make it up with volume path to liquidation.

tegnost , December 12, 2017 at 9:52 am

apples and oranges comparison, nvidia has lots and lots of patented tech that produces revenue, facebook has a kajillion admittedly irrational users, but those users drive massive ad sales (as just one example of how that company capitalizes itself) and tesla makes an actual car, using technology that inspires it's buyers (the put your money where your mouth is crowd and it can't be denied that tesla, whatever it's faults are, battery tech is not one of them and that intellectual property is worth a lot, and tesla's investors are in on that real business, profitable or otherwise)

Uber is an iphone app. They lose money and have no path to profitability (unless it's the theory you espouse that people are unintelligent so even unintelligent ideas work to fleece them). This article touches on one of the great things about the time we now inhabit, uber drivers could bail en masse, there are two sides to the low attachment employees who you can get rid of easily. The drivers can delete the uber app as soon as another iphone app comes along that gets them a better return

allan , December 12, 2017 at 6:52 am

Yet another source (unintended) of subsidies for Uber, Lyft, etc., which might or might not have been mentioned earlier in the series:

Airports Are Losing Money as Ride-Hailing Services Grow [NYT]

For many air travelers, getting to and from the airport has long been part of the whole miserable experience. Do they drive and park in some distant lot? Take mass transit or a taxi? Deal with a rental car?

Ride-hailing services like Uber and Lyft are quickly changing those calculations. That has meant a bit less angst for travelers.

But that's not the case for airports. Travelers' changing habits, in fact, have begun to shake the airports' financial underpinnings. The money they currently collect from ride-hailing services do not compensate for the lower revenues from the other sources.

At the same time, some airports have had to add staff to oversee the operations of the ride-hailing companies, the report said. And with more ride-hailing vehicles on the roads outside terminals,
there's more congestion.

Socialize the losses, privatize the gains, VC-ize the subsidies.

Thuto , December 12, 2017 at 6:55 am

The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. The only question is how long can they keep the show going before the lights go out, slick marketing and propaganda can only take you so far, and one assumes the dumb money has a finite supply of patience and will at some point begin asking the tough questions.

Louis Fyne , December 12, 2017 at 8:35 am

The irony is that Uber would have been a perfectly fine, very profitable mid-sized company if Uber stuck with its initial model -- sticking to dense cities with limited parking, limiting driver supply, and charging a premium price for door-to-door delivery, whether by livery or a regular sedan. And then perhaps branching into robo-cars.

But somehow Uber/board/Travis got suckered into the siren call of self-driving cars, triple-digit user growth, and being in the top 100 US cities and on every continent.

Thuto , December 12, 2017 at 11:30 am

I've shared a similar sentiment in one of the previous posts about Uber. But operating profitably in decent sized niche doesn't fit well with ambitions of global domination. For Uber to be "right-sized", an admission of folly would have to be made, its managers and investors would have to transcend the sunk cost fallacy in their strategic decision making, and said investors would have to accept massive hits on their invested capital. The cold, hard reality of being blindsided and kicked to the curb in the smartphone business forced RIM/Blackberry to right-size, and they may yet have a profitable future as an enterprise facing software and services company. Uber would benefit from that form of sober mindedness, but I wouldn't hold my breath.

David Carl Grimes , December 12, 2017 at 6:57 am

The question is: Why did Softbank invest in Uber?

Michael Fiorillo , December 12, 2017 at 9:33 am

I know nothing about Softbank or its management, but I do know that the Japanese were the dumb money rubes in the late '80's, overpaying for trophy real estate they lost billions on.

Until informed otherwise, that's my default assumption

JimTan , December 12, 2017 at 10:50 am

Softbank possibly looking to buy more Uber shares at a 30% discount is very odd. Uber had a Series G funding round in June 2016 where a $3.5 billion investment from Saudi Arabia's Public Investment Fund resulted in its current $68 billion valuation. Now apparently Softbank wants to lead a new $6 billion funding round to buy the shares of Uber employees and early investors at a 30% discount from this last "valuation". It's odd because Saudi Arabia's Public Investment Fund has pledged $45 billion to SoftBank's Vision Fund , an amount which was supposed to come from the proceeds of its pending Aramco IPO. If the Uber bid is linked to SoftBank's Vision Fund, or KSA money, then its not clear why this investor might be looking to literally 'double down' from $3.5 billion o $6 billion on a declining investment.

Yves Smith Post author , December 12, 2017 at 11:38 am

SoftBank has not yet invested. Its tender is still open. If it does not get enough shares at a price it likes, it won't invest.

As to why, I have no idea.

Robert McGregor , December 12, 2017 at 7:04 am

"Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs of efficiency, and hopes of greater efficiency, and make most people just overlook the essential fact that Uber is the most unprofitable company of all time!

divadab , December 12, 2017 at 7:19 am

What comprises "Uber Expenses"? 2014 – $1.06 billion; 2015 $3.33 billion; 2016 $9.65 billion; forecast 2017 $11.418 billion!!!!!! To me this is the big question – what are they spending $10 billion per year on?

ALso – why did driver share go from 68% in 2016 to 80% in 2017? If you use 68% as in 2016, 2017 Uber revenue is $11.808 billion, which means a bit better than break-even EBITDA, assuming Uber expenses are as stated $11.428 billion.

Perhaps not so bleak as the article presents, although I would not invest in this thing.

Phil in Kansas City , December 12, 2017 at 7:55 am

I have the same question: What comprises over 11 billion dollars in expenses in 2017? Could it be they are paying out dividends to the early investors? Which would mean they are cannibalizing their own company for the sake of the VC! How long can this go on before they'll need a new infusion of cash?

lyman alpha blob , December 12, 2017 at 2:37 pm

The Saudis have thrown a few billion Uber's way and they aren't necessarily known as the smart money.

Maybe the pole dancers have started chipping in too as they are for bitcoin .

Vedant Desai , December 12, 2017 at 10:37 am

Oh article does answer your 2nd question. Read this paragraph:-

Since mass driver defections would cause passenger volume growth to collapse completely , Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

As for the 1st, read this line in the article:-

There are undoubtedly a number of things Uber could do to reduce losses at the margin, but it is difficult to imagine it could suddenly find the $4-5 billion in profit improvement needed merely to reach breakeven.

Louis Fyne , December 12, 2017 at 8:44 am

in addition to all the points listed in the article/comments, the absolute biggest flaw with Uber is that Uber HQ conditioned its customers on (a) cheap fares and (b) that a car is available within minutes (1-5 if in a big city).

Those two are not mutually compatible in the long-term.

Alfred , December 12, 2017 at 9:49 am

Thus (a) "We cost less" and (b) "We're more convenient" -- aren't those also the advantages that Walmart claims and feeds as a steady diet to its ever hungry consumers? Often if not always, disruption may repose upon delusion.

Martin Finnucane , December 12, 2017 at 11:06 am

Uber's business model could never produce sustainable profits unless it was able to exploit significant anti-competitive market power.

Upon that dependent clause hangs the future of capitalism, and – dare I say it? – its inevitable demise.

Altandmain , December 12, 2017 at 11:09 am

When this Uber madness blows up, I wonder if people will finally begin to discuss the brutal reality of Silicon Valley's so called "disruption".

It is heavily built in around the idea of economic exploitation. Uber drivers are often, especially when the true costs to operate an Uber including the vehicle depreciation are factored in, making not very much per hour driven, especially if they don't get the surge money.

Instacart is another example. They are paying the deliver operators very little.

Jim A. , December 12, 2017 at 12:21 pm

At a fundamental level, I think that the Silicon Valley "disruption" model only works for markets (like software) where the marginal cost for production is de minimus and the products can be protected by IP laws. Volume and market power really work in those cases. But out here in meat-space, where actual material and labor are big inputs to each item sold, you can never just sit back on your laurels and rake in the money. Somebody else will always be able to come and and make an equivalent product. If they can do it more cheaply, you are in trouble.

Altandmain , December 12, 2017 at 5:40 pm

There aren't that many areas in goods and services where the marginal costs are very low.

Software is actually quite unique in that regard, costing merely the bandwidth and permanent storage space to store.

Let's see:

1. From the article, they cannot go public and have limited ways to raise more money. An IPO with its more stringent disclosure requirements would expose them.

2. They tried lowering driver compensation and found that model unsustainable.

3. There are no benefits to expanding in terms of economies of scale.

From where I am standing, it looks like a lot of industries gave similar barriers. Silicon Valley is not going to be able to disrupt those.

Tesla, another Silicon Valley company seems to be struggling to mass produce its Model 3 and deliver an electric car that breaks even, is reliable, while disrupting the industry in the ways that Elon Musk attempted to hype up.

So that basically leaves services and manufacturing out for Silicon Valley disruption.

Joe Bentzel , December 12, 2017 at 2:19 pm

UBER has become a "too big to fail" startup because of all the different tentacles of capital from various Tier 1 VCs and investment bankers.

VCs have admitted openly that UBER is a subsidized business, meaning it's product is sold below market value, and the losses reflect that subsidization. The whole "2 sided platform" argument is just marketecture to hustle more investors. It's a form of service "dumping" that puts legacy businesses into bankruptcy. Back during the dotcom bubble one popular investment banker (Paul Deninger) characterized this model as "Terrorist Competition", i.e. coffers full of invested cash to commoditize the market and drive out competition.

UBER is an absolute disaster that has forked the startup model in Silicon Valley in order to drive total dependence on venture capital by founders. And its current diversification into "autonomous vehicles", food delivery, et al are simply more evidence that the company will never be profitable due to its whacky "blitzscaling" approach of layering on new "businesses" prior to achieving "fit" in its current one.

It's economic model has also metastasized into a form of startup cancer that is killing Silicon Valley as a "technology" innovator. Now it's all cargo cult marketing BS tied to "strategic capital".

UBER is the victory of venture capital and user subsidized startups over creativity by real entrepreneurs.

It's shadow is long and that's why this company should be ..wait for it UNBUNDLED (the new silicon valley word attached to that other BS religion called "disruption"). Call it a great unbundling and you can break up this monster corp any way you want.

Naked Capitalism is a great website.

Phil in KC , December 12, 2017 at 3:20 pm

1. I Agree with your last point.

2. The elevator pitch for Uber: subsidize rides to attract customers, put the competition out of business, and then enjoy an unregulated monopoly, all while exploiting economically ignorant drivers–ahem–"partners."

3. But more than one can play that game, and

4. Cab and livery companies are finding ways to survive!

Phil in KC , December 12, 2017 at 3:10 pm

If subsidizing rides is counted as an expense, (not being an accountant, I would guess it so), then whether the subsidy goes to the driver or the passenger, that would account for the ballooning expenses, to answer my own question. Otherwise, the overhead for operating what Uber describes as a tech company should be minimal: A billion should fund a decent headquarters with staff, plus field offices in, say, 100 U.S. cities. However, their global pretensions are probably burning cash like crazy. On top of that, I wonder what the exec compensation is like?

After reading HH's initial series, I made a crude, back-of-the-envelope calculation that Uber would run out of money sometime in the third fiscal quarter of 2018, but that was based on assuming losses were stabilizing in the range of 3 billion a year. Not so, according to the article. I think crunch time is rapidly approaching. If so, then SoftBank's tender offer may look quite appetizing to VC firms and to any Uber employee able to cash in their options. I think there is a way to make a re-envisioned Uber profitable, and with a more independent board, they may be able to restructure the company to show a pathway to profitability before the IPO. But time is running out.

A not insignificant question is the recruitment and retention of the front line "partners." It would seem to me that at some point, Uber will run out of economically ignorant drivers with good manners and nice cars. I would be very interested to know how many drivers give up Uber and other ride-sharing gigs once the 1099's start flying at the beginning of the year. One of the harsh realities of owning a business or being an contractor is the humble fact that you get paid LAST!

Jan Stickle , December 12, 2017 at 5:00 pm

We became instant Uber riders while spending holidays with relatives in San Diego. While their model is indeed unique from a rider perspective, it was the driver pool that fascinates me. These are not professional livery drivers, but rather freebooters of all stripes driving for various reasons. The remuneration they receive cannot possibly generate much income after expenses, never mind the problems associated with IRS filing as independent contractors.

One guy was just cruising listening to music; cooler to get paid for it than just sitting home! A young lady was babbling and gesticulating non stop about nothing coherent and appeared to be on some sort of stimulant. A foreign gentleman, very professional, drove for extra money when not at his regular job. He was the only one who had actually bought a new Prius for this gig, hoping to pay it off in two years.

This is indeed a brave new world. There was a period in Nicaragua just after the Contra war ended when citizens emerged from their homes and hit the streets in large numbers, desperately looking for income. Every car was a taxi and there was a bipedal mini Walmart at every city intersection as individuals sold everything and anything in a sort of euphoric optimism towards the future. Reality just hadn't caught up with them yet .

[Dec 12, 2017] The neoliberal revolution by Sean Michael Butler

Notable quotes:
"... Copyright Sean Butler 2006 ..."
"... Written for an Intro to Political Economy class at Carleton University in 2006 ..."
Dec 12, 2017 | seanmichaelbutler.wordpress.com

For 25 years following the end of the Second World War, the global economy experienced an unprecedented period of sustained growth. In the industrialized world, millions of people joined the ranks of the middle class, and wealth inequality sunk to historic lows. After decades of strife, labour and capital reached a relative ceasefire, and a mixed economy of governmental macroeconomic guidance combined with private microeconomic initiative emerged. Capital was able to make healthy profits, while much of the rising productivity of labour was passed on in the form of higher wages. Governments made full employment a priority, and increasingly accepted the responsibility of providing for the poor and disadvantaged. By the late 1960s, governments were seriously considering implementing a basic income (also known as a guaranteed annual income) and many policymakers thought that our biggest problem in another 20 years would be what to do with all our free time once the work week had been significantly reduced.

This exuberant economic attitude was arguably reflected in the radical social experimentation and revolution that emanated from universities now accessible to the majority, and in the various movements for liberty and social justice erupting worldwide. For many, all this social and economic optimism had one man to thank: the British political economist John Maynard Keynes, who had emerged from the academic wilderness in the 1930s to play a leading role in the design of the post-war economy at Bretton Woods, and whose focus on the counter-cyclical stimulus of aggregate demand became the lynchpin of governmental economic policy in subsequent decades. "There was a broad body of optimism that the 1950s and 1960s were the product of Keynesian economic engineering. Indeed, there was no reason why the prosperity of the international economy should not continue as long as appropriate Keynesian policies were pursued " In 1971, even the conservative US president Richard Nixon would famously proclaim, "We are all Keynesians now." The triumph of Keynesianism seemed complete.

Yet shortly after Nixon uttered these words, it all fell apart. That same year, Nixon ended the era of dollar to gold convertibility, a move that many see as the beginning of the end for the great post-war compromise between capital and labour.

Three years later, in the face of the first oil embargo and other pressures, the economy nose-dived into the worst recession since the Great Depression, never to rebound to earlier levels. Worse still, the theoretical underpinnings of Keynesianism were called into question by the simultaneous appearance of high inflation and high unemployment – a new phenomenon dubbed "stagflation". While Keynesianism floundered for an explanation, new theories stepped into the breach; monetarism and supply-side economics were the two most popular. While these new theories had distinctive approaches, both shared the belief that big government – namely Keynesianism – was the problem, and that the solution to stagflation was to restrict government intervention in the economy to a strict inflation-fighting monetary policy (in the case of monetarism) or to cut taxes to stimulate private investment (in the case of the supply-siders). This move away from government intervention and the welfare state, and towards more emphasis on an unfettered market, can been summed up by the term "neoliberalism". As the 1970s ran their course, neoliberalism gradually took over from Keynesianism as the reigning economic orthodoxy, to be consummated in the Anglo-Saxon world by the elections of Margaret Thatcher in the UK in 1979, Ronald Reagan in the US in 1980, and Brian Mulroney in Canada in 1984.

The story told by the victors of this ideological battle – the neoliberals – is that Keynesianism, despite its apparent success for 25 years, was in the end responsible for the constellation of economic crises that descended on the industrialized countries during the 1970s, and that neoliberalism was the remedy. The shift from Keynesianism to neoliberalism was, according to this story, the only rational option in the face of stagflation; as Thatcher crisply remarked at the time, "There is no alternative."

I will call into question this story, by first examining the causes of the 1970s economic malaise, and then looking at what interests were behind the promotion of neoliberalism as a solution, how it gained political power, and how it was disseminated around the world. I will fashion an alternate narrative, one in which Keynesianism was not to blame for stagflation, in which the economic crises of the 1970s put the compromise between capital and labour under severe strain and ultimately broke it, in which the capitalist class went on the offensive partly because it feared for its very survival, and in which this class achieved its ends by forming an alliance with social conservatives equally fearful in the face of the 1960s counter-cultural revolution. The protagonist of this story will be the United States; as the capitalist world's superpower, it was largely responsible for the crisis of the 1970s, it suffered the worst from it, and it led the way down the new path of neoliberalism.

THE FALL OF KEYNESIANISM

As one of the principle fathers of neoliberalism, the economist Milton Friedman's indictment of Keynesianism is of special relevance, for it is emblematic of the neoliberal attempt to – quite successfully – pin the blame for chronic recession squarely on Keynesian shoulders. Briefly, Friedman theorized that there was a so-called "natural" rate of unemployment, which persisted in the long-term despite governmental attempts to stimulate demand through spending. Running a budget deficit to pump money into the economy might bring down the unemployment rate in the short term, he thought, but in the long run it would only create inflation, while unemployment would inevitably return to its natural rate – now higher because of the inflation. He essentially argued that fiscal policy was useless – even damaging – and that if governments wanted to bring down the natural rate of unemployment, they should focus on keeping inflation low through monetary policy, while loosening restrictions on markets so that, for instance, wage levels could find their equilibrium point. This explanation for the stagflation encountered in the 1970s proved quite convincing to many searching for answers to the predicament, as well as enormously appealing to those who had always wished for a return to unfettered markets, and played a key role in justifying the switch from Keynesianism to neoliberalism, in its guise of monetarism.

How realistic is this account? Certainly, deficit financing played an important role in the soaring inflation of the 1970s, but was this solely the result of spending on social programs, such as under president Lyndon Johnson's Great Society initiative, or were there other causes for deficit spending? The Vietnam War, combined with Johnson's unwillingness to raise taxes in the face of rising war expenditures, caused the US Federal Reserve to print large amounts of new dollars. Military spending is often seen as the most inflationary form of government spending, because it puts new money into the economy without a corresponding increase in output. The US had some leeway to get away with this rapid increase in the money supply, since the dollar was the international reserve currency, but there was a limit to this, and the explosive inflation of the 1970s was the result.

It must be noted that the US proved a dismal failure in its short-lived role as manager of the world's monetary system. At Bretton Woods, it had been entrusted with the task of maintaining a sound monetary system, through the gold exchange standard, just as Britain had previously. Britain, being a trading nation, had had a strong interest in maintaining a sound international monetary system, and had been effective (some would say too effective) at maintaining it. The United States, on the other hand, traded much less, and consequentially took its responsibilities much less seriously. It is easy to speculate about the justification made by US officials as they printed irresponsible amounts money to pay for their war in Vietnam: they surely saw themselves as defending the free world against the tyranny of communism, a cause for which a little monetary instability, shouldered by the "free world" in general, was a small price to pay.

The first cracks in the system started to show during the series of currency crises that struck in the late 1960s. By the end of the decade, the dollars held outside the US were worth eight times as much as the US had in gold reserves. In 1971, rather than saving the system by devaluing the dollar, and fearing a run on US gold, Nixon ended the gold exchange standard. The US had abused its power of seigniorage (as monarchs before had), but wouldn't escape without paying a price.

The result was more inflation, as the dollar, now cut loose from the Bretton Woods standard of $35 per ounce of gold, shed its inflated value. The lower dollar also raised the cost of imports to the US consumer, further fueling domestic inflation. (The end of dollar convertibility also brought with it more far-reaching consequences. The fixed exchange rates of the 1950s and 60s were incompatible with free flows of capital. Yet taking the dollar off gold led directly to floating exchange rates, which in turn paved the way for freer flows of capital between countries. This development would later aid greatly in the furtherance of the neoliberal agenda.)

As if these developments were not inflationary enough, the Yom Kippur War of October 1973 led OPEC to restrict oil exports to Israel's allies, quadrupling oil prices virtually overnight. Yet this was inflation of a different nature than the kind that had been building up in the 1960s; rather than being linked to excess demand and an overheated economy, it was driven by increases in costs on the supply side and brought with it recessionary pressures. An increase in the price of oil, being fundamental to so much of the economy, is "similar to the imposition of a substantial sales tax. The price of the product goes up and consumers have less income available to spend on other goods and services. The result is a bout of inflation, at least temporarily, and sluggish economic expansion if not recession." This goes a long way towards explaining the supposedly impossible coincidence of high inflation with high unemployment.

Yet there were other factors that also contributed to the so-called "misery index" (inflation rate plus unemployment rate). The most basic of these was that governments tried repeatedly to beat inflation by attacking perceived excess demand through restrictive monetary and fiscal policies; when Nixon tried this strategy in 1970, it resulted in recession. His successor, Gerald Ford, tried the same approach in 1974 – despite the fact that inflation at that point was not being driven by excess demand, but by high costs on the supple side (namely oil). Thus, poor governmental reaction to inflation caused recession and rising unemployment, while failing to master inflation.

Another factor contributing to the slow-down of growth in the US economy was the end of the privileged position it enjoyed as the only power to emerge from the Second World War relatively unscathed. As Germany and Japan laboured to reconstruct their war-ravaged economies, the US faced little competition. Yet by the end of the 1960s, the old Axis powers, now recast as capitalist democracies but still economic powerhouses, were flexing their economic muscles again. This, combined with increasing competition from newly industrialized countries in East Asia and from other developing countries, cut into the robust economic growth the US had enjoyed for two decades previously.

To sum up, inflation caused by first the Vietnam War and later the oil embargo (itself the result of war in the Mideast), coupled with increasing competition to US business internationally, along with the shock of the collapse of the Bretton Woods framework, were the major factors that combined to create the "perfect storm" known as stagflation:

the stage was set for the deepest recession since the 1930s. The long period of post-war expansion had at last come to an end; America and world capitalism entered a new phase of turbulence which, amongst other things, threw economic policy and economics as a theory into a state of flux.

AND THE RISE OF NEOLIBERALISM

In the previous section, I outlined the confluence of factors that led to the crisis of stagflation in the 1970s. In the following section, I will describe the reaction to this crisis – the how and why of neoliberalism's triumph as the new economic orthodoxy.

Different authors ascribe to different points in time when the balance decisively shifted from Keynesianism to neoliberalism – some place the tipping point as early as the latter half of the 1960s, others as late as the ascendancy of Thatcher and Reagan – but the midway year 1974 seems as good as any. It was in this year that Gerald Ford came to the White House with the slogan, "Whip Inflation Now" (WIN), declaring that inflation was public enemy number one and that reduction in government spending was the chief means to that end. It was also in this year that inflation peaked (at 11% – although it would later be surpassed by a second peak of 13.5% in 1980), and that the "perfect storm" that had been building for years, catalyzed by the energy crisis, finally unleashed its full fury on the economy. In declaring war on inflation, Ford broke with the Keynesian bias of giving precedence to full employment; whereas before inflation had been a tool to control unemployment, now unemployment was to be used as a tool to control inflation:

The choice seemed to be stark: accept some inflation as the price of expansion and adapt business and accounting practices accordingly, or pursue a firm deflationary policy even if that meant accepting a higher level of unemployment than had been customary since the Second World War.

In choosing the latter, Ford shattered the fragile compromise between labour and capital and, favouring capital, took America on its first real steps towards neoliberalism.

Yet, as the crisis had gathered steam in the early 1970s, it was by no means clear which way the winds would blow. It was well remembered that the last major economic crisis, in the 1930s, had resulted in the socialist policies of the New Deal, and indeed in the 1970s labour again called for more governmental intervention as the solution to the crisis. Capital, meanwhile, as it suffered from reduced profits due to increased competition abroad and recession at home, also saw the crisis as both an opportunity to advance its interests and as a threat to its interests from an increasingly militant labour. "The upper classes had to move decisively if they were to protect themselves from political and economic annihilation." The ceasefire between labour and capital had held when times were good, but as soon as conditions started to sour, both sides went on the offensive. It was to be one or the other.

Sensing both the opportunity and the threat presented by the crisis, the capitalist class put aside its differences and united against the common enemy of labour. The 1970s marked the beginning of the right-wing think tank, with corporate dollars founding such now well-known beacons of neoliberal thought as the Heritage Foundation, the Hoover Institute, and the American Enterprise Institute. Lobbying efforts, though such umbrella organizations as the American Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable (a group of CEOs founded in 1972), were massively ramped up; business schools at Stanford and Harvard, established through corporation benefaction, " became centres of neoliberal orthodoxy from the very moment they opened" ; and "the supposedly 'progressive' campaign finance laws of 1971 [that] in effect legalized the financial corruption of politics," were followed by a series of Supreme Court decisions that established the right of corporations to make unlimited donations to political parties. "During the 1970s, the political wing of the nation's corporate sector staged one of the most remarkable campaigns in the pursuit of power in recent history."

The ideology adopted by capital during this remarkable drive to win the minds of the political leadership " had long been lurking in the wings of public policy." It emanated largely from the writings of the Austrian economist Friedrich von Hayek, around whom a collection of admirers (including Milton Friedman) called the Mont Pelerin Society had formed in 1947. This group's ideas became known as neoliberalism because of its adherence to such neoclassical economists of the latter half of the 19th Century as Alfred Marshall, William Stanley Jevons, and Leon Walras. Hayek had argued presciently that it might take a generation before they could win the battle of ideas; by the time he won the Nobel Prize for economics in 1974, followed by Friedman two years later, victory was indeed close at hand.

Why did capital " [pluck] from the shadows of relative obscurity [this] particular doctrine that went under the name of 'neoliberalism' "? Was it to save the world from the ravages of Keynesian stagnation and to free people from the heavy hand of bloated government? This was certainly part of the rhetoric used to sell neoliberalism to the public, but one need only look at who benefited from neoliberalism to get a strong sense of whose interests it really served. It was eventually quite successful in lowering inflation rates, and moderately successful in lowering unemployment, but failed to revive economic growth to pre-1970s levels; meanwhile, it resulted in levels of wealth inequality not seen since the 1920s in the US, stagnating real wages, and a decreased quality of life for those reliant on government services. Alan Budd, Thatcher's economic advisor, was candid about the real motives behind the neoliberal rhetoric when he said, "The 1980s policies of attacking inflation by squeezing the economy and public spending were a cover to bash the workers." Neoliberalism was capital's way of disciplining labour through unemployment, creating what Marx called an "industrial reserve army" that would break unions and drag wages down. Reagan facing down the air traffic controller's union, PATCO, during a bitter strike in 1981, paralleled across the Atlantic by Thatcher's similarly tough stance with the National Union of Mineworkers' year-long strike in 1984-85, was emblematic of the new hostile approach to labour reintroduced to state policy by neoliberalism. In short, neoliberalism was driven by class interests; it was the vehicle best suited " to restor[ing] the power of economic elites." The true point of neoliberalism is revealed by the fact that whenever the dictates of neoliberal theory conflicted with the interests of the capitalist class, such as when it came to running massive budgetary deficits to pay for military spending during peacetime, neoliberalism was discarded in favour of the interests of capital.

Before neoliberalism came to roost in the White House, however, there were several experiments conducted in the periphery. It is revealing to note that the first nationwide imposition of neoliberalism occurred under conditions of tyranny: Augusto Pinochet's Chile; it is likewise fitting that neoliberalism drove from Chile its antithesis, the communism of Salvador Allende, and that it was imposed through a US-backed coup. After the coup in 1973, Chile became a field school for graduates from the economics department of the University of Chicago, where disciples of Milton Friedman, who taught there, had formed their own monetarist/neoliberal school of thought. These economists attempted to remake the Chilean economy into the ideal neoliberal state (in the same way that US neoliberals are currently attempting in Iraq), a transformation that likely would not have been possible without the Chilean military ensuring a compliant labour. Despite lackluster economic results (particularly after the 1982 debt crisis in Latin America), Chile served as a model to neoliberals who wanted the rich countries to follow the same path.

There was another coup, of sorts – less known and less violent – that occurred in New York City in 1975. In that year, the city went bankrupt, and the subsequent bailout came with strict conditions attached, including budgetary rules and other institutional restructuring. "This amounted to a coup by the financial institutions against the democratically elected government of New York City, and it was every bit as effective as the military coup that had occurred in Chile." It was "an early, perhaps decisive battle in a new war," the purpose of which was "to show others that what is happening to New York could and in some cases would happen to them." "The management of the New York fiscal crisis pioneered the way for neoliberal practices both domestically under Reagan and internationally through the IMF in the 1980s."

While coups, either military or financial, were possible against developing countries and municipalities, neoliberalism would have to gain dominance in the US federal government through slightly more democratic means. As noted earlier, the intense drive to power through lobbying, think tanks, and academia convinced many in the elite of the virtues of neoliberalism, but ultimately this ideology would have to sway masses of people to actually vote in favour of it. In order to secure the broad base of support necessary to win elections, neoliberals formed an alliance in the 1970s with the religious right (a move that has forever since confused the terms "liberal" and "conservative"). While this significant segment of the American population had previously been largely apolitical, the counter-cultural revolution of the late 1960s and early 1970s provoked many of these "neoconservatives" to enter the political arena to oppose the perceived moral corruption of American society – a movement that came to fruition with preacher Jerry Fallwell's so-called "moral majority" in 1978. While neoliberals and neoconservatives may seem like strange bedfellows, the coalition was likely facilitated by religious fundamentalists' relative indifference towards the material, economic world; according to their extremist Christian worldview, their material interests in this world would be well worth sacrificing to secure the spiritual interests of their nation in the next world. Furthermore, both religious and economic fundamentalists must have found a comforting familiarity in each other's simplistic extremism (the "invisible hand" of the neoliberals' free market is eerily similar to the Christians' God in its omnipotence, omnipresence, and inscrutability).

The Republican Party gathered under its banner these religious reactionaries, as well as those non-religious (largely white, heterosexual, male, and working-class) who simply feared the growing liberation of blacks, gays, and women, and who felt threatened by affirmative action, the emerging welfare state, and the Soviet Union. "Not for the first time, nor, it is to be feared, for the last time in history had a social group been persuaded to vote against its material, economic, and class interests for cultural, nationalist, and religious reasons." It was this alliance of social fear and economic opportunism that swept arch-neoliberal Ronald Reagan to the White House in 1980 – " a turning point in post-war American economic and social history." After a decade-long campaign, the neoliberals had come to Washington.

Of course, the crusade to reshape society along neoliberal ideals was far from won; Reagan faced a Democratic Congress, and was often forced to govern more pragmatically than ideologically when his supply-side policies failed. As Margaret Thatcher said, "Economics are the method, but the object is to change the soul," and it takes time to change people's souls.

There was also still a whole world to convert to the gospel of market liberalization. The crisis of stagflation that had opened the door to neoliberal ideas in the US had also created financial incentives for the dissemination of neoliberalism to other countries. With the impact of the first oil crisis flooding New York investment banks with petrodollars, and a depressed economy at home offering fewer places to spend them, the banks poured the money into developing countries. This created pressure on the US government to pry open new markets for investment, as well as to protect the growing investments overseas – helping to bring US-bred neoliberalism to foreign shores.

Yet these pressures were only a taste of what was to come; after the Iranian revolution in 1979 caused oil prices to suddenly double, inflation in the US returned with a vengeance. This in turn led the US Federal Reserve, under its new neoliberal-minded chairman Paul Volcker, to drastically raise interest rates. This "Volcker shock", resulting in nominal interest rates close to 20% by 1981, coming on the heels of the profligate lending of petrodollars during the 1970s, played a major part in the debt crisis that descended on the developing world during the 1980s. As countries defaulted on their debts, they were driven into the arms of the International Monetary Fund (IMF), which, after what economist Joseph Stiglitz described as a "purge" of Keynesians in 1982, became a center " for the propagation and enforcement of 'free market fundamentalism' and neoliberal orthodoxy." Mexico, after its debt default of 1982-84, became one of the first countries to submit to neoliberal reforms in exchange for debt rescheduling, thus " beginning the long era of structural adjustment."

Many of the IMF economists who designed these Structural Adjustment Programs (SAPs), as well as those who staffed the World Bank and the finance departments of many developing countries, were trained at the top US research universities, which by 1990 were dominated by neoliberal ideas – providing yet another avenue by which neoliberalism spread from the US to other parts of the world. By the mid-1990s, the process of neoliberal market liberalization (under the supervision of the World Trade Organization (WTO)) came to be known as the "Washington Consensus", in recognition of the origins of this ideological revolution.

THE REVOLUTION CONTINUES

Some authors have called neoliberalism the antithesis to Keynesianism , yet its real opposite is communism; Keynesianism represented a compromise between the two – a middle way. Yet this fragile balance did not survive the economic crucible of the 1970s. Neoliberalism's strategic political alliance with neoconservatism can be seen as a natural reaction to the rapid changes that had unfolded during the 1950s and 60s in both the US economy (with the growth of the welfare state) and society (with the rise of the counter-cultural revolution); at the same time, it can also be seen as an opportunist power grab by the capitalist class during a period of uncertainty about the foundations of the old order. The fear of communism – captured succinctly in the title of Hayek's famous work, The Road to Serfdom – drove neoliberals to the opposite extreme: the belief in the superiority of the unfettered marketplace as the guiding principle to human civilization. Neoliberalism, therefore, represents an extremist ideology that, if carried through to its end, will likely end up being as destructive to the societies it touches as extremist socialism was to the former Soviet bloc.

Although the neoliberal revolution is still winning many political battles, such as the growing attack on Medicare in Canada or on Social Security in the United States, evidence of an emerging counter-movement (such as the poorly named "anti-globalization movement" – anti-neoliberalization would be more apt) is growing. As Karl Polanyi described in his classic, The Great Transformation, the industrialization and economic liberalization of the 19th Century resulted in a reaction from society for more governmental intervention to protect people and communities from the destructive effects of unfettered markets. It is highly likely that we are now witnessing the first stages of a similar reaction to the latest round of rapid technological change and market liberalization. Hopefully, this reaction will lead to a society that better balances capitalism's creative destruction with the needs of humans and their communities for continuity and security.

Copyright Sean Butler 2006

Written for an Intro to Political Economy class at Carleton University in 2006

[Dec 12, 2017] The end of neoliberalism

Dec 12, 2017 | www.weforum.org

World Economic Forum

A similar trend can be seen at the organizational level. A recent study by Erling Bath, Alex Bryson, James Davis, and Richard Freeman showed that the diffusion of individual pay since the 1970s is associated with pay differences between, not within, companies. The Stanford economists Nicholas Bloom and David Price confirmed this finding, and argue that virtually the entire increase in income inequality in the US is rooted in the growing gap in average wages paid by firms. Such outcomes are the result not just of inevitable structural shifts, but also of decisions about how to handle those shifts. In the late 1970s, as neoliberalism took hold, policymakers became less concerned about big firms converting profits into political influence, and instead worried that governments were protecting uncompetitive companies. With this in mind, policymakers began to dismantle the economic rules and regulations that had been implemented after the Great Depression, and encouraged vertical and horizontal mergers. These decisions played a major role in enabling a new wave of globalization, which increasingly diffused growth and wealth across countries, but also laid the groundwork for the concentration of income and wealth within countries. The growing "platform economy" is a case in point. In China, the e-commerce giant Alibaba is leading a massive effort to connect rural areas to national and global markets, including through its consumer-to-consumer platform Taobao. That effort entails substantial diffusion: in more than 1,000 rural Chinese communities – so-called " Taobao Villages " – over 10% of the population now makes a living by selling products on Taobao. But, as Alibaba helps to build an inclusive economy comprising millions of mini-multinationals, it is also expanding its own market power. Policymakers now need a new approach that resists excessive concentration, which may create efficiency gains, but also allows firms to hoard profits and invest less. Of course, Joseph Schumpeter famously argued that one need not worry too much about monopoly rents, because competition would quickly erase the advantage. But corporate performance in recent decades paints a different picture: 80% of the firms that made a return of 25% or more in 2003 were still doing so ten years later. (In the 1990s, that share stood at about 50% .) Have you read? To counter such concentration, policymakers should, first, implement smarter competition laws that focus not only on market share or pricing power, but also on the many forms of rent extraction, from copyright and patent rules that allow incumbents to cash in on old discoveries to the misuse of network centrality. The question is not "how big is too big," but how to differentiate between "good" and "bad" bigness. The answer hinges on the balance businesses strike between value capture and creation. Moreover, policymakers need to make it easier for startups to scale up. A vibrant entrepreneurial ecosystem remains the most effective antidote to rent extraction. Digital ledger technologies, for instance, have the potential to curb the power of large oligopolies more effectively than heavy-handed policy interventions. Yet economies must not rely on markets alone to bring about the "churn" that capitalism so badly needs. Indeed, even as policymakers pay lip service to entrepreneurship, the number of startups has declined in many advanced economies. Finally, policymakers must move beyond the neoliberal conceit that those who work hard and play by the rules are those who will rise. After all, the flipside of that perspective, which rests on a fundamental belief in the equalizing effect of the market, is what Michael Sandel calls our " meritocratic hubris ": the misguided idea that success (and failure) is up to us alone. This implies that investments in education and skills training, while necessary, will not be sufficient to reduce inequality. Policies that tackle structural biases head-on – from minimum wages to, potentially, universal basic income schemes – are also needed. Neoliberal economics has reached a breaking point, causing the traditional left-right political divide to be replaced by a different split: between those seeking forms of growth that are less inclined toward extreme concentration and those who want to end concentration by closing open markets and societies. Both sides challenge the old orthodoxies; but while one seeks to remove the "neo" from neoliberalism, the other seeks to dismantle liberalism altogether. The neoliberal age had its day. It is time to define what comes next.

[Dec 11, 2017] Religion has de-legitimized itself with its hypocrisy

Should probably be "neoliberal religion has de-legitimized itself with its hypocrisy
Notable quotes:
"... Sorry, as a church-attending person, I object. Religion has de-legitimized itself with its hypocrisy. One example: Jerry Falwell, a "battler" against abortion actually supported it before his plutocratic masters told him it was a wedge issue. ..."
"... Michael Hudso says Jesus' first appearance in the Jerusalem temple was to announce just such a Jubilee Boy is that ever ignored! ..."
"... Your correlating the hypocritical actions of the leadership with the ideals of a religion. Corrupt leadership may delegitimize those individuals but does not delegitimize the ideals of the religion. Is the ideal of America totally dependent on the actions of its political leadership? Personally, I think there is far more to America than just the president and congress whether corrupt or not. ..."
"... What is or are the ideal(s) of "America?" Get rich quick, violence on all fronts, anti-intellectualism, imperial project across the planet? "Democracy?" If you trot that out as a "feature", you better explain what you mean, with some specificity. More to America? If youtube is any guide, try searching it for "syria combat" or "redneck" or "full auto," or all the really sick racist and extreme stuff - a pretty sorry place. But we all recite the Pledge so dutifully, don't we? and feel a thrill as the F-22s swoop over the football stadium? ..."
Apr 18, 2017 | www.nakedcapitalism.com
Adam Eran, April 17, 2017 at 1:31 pm

Sorry, as a church-attending person, I object. Religion has de-legitimized itself with its hypocrisy. One example: Jerry Falwell, a "battler" against abortion actually supported it before his plutocratic masters told him it was a wedge issue.

Positions on the wedge issues (abortion, the gays) are actually difficult to prove with scripture–not that it has the kind of authority it did before 35,000 variations on old manuscripts were discovered in the 17th century. (Marcus Borg is the scholar to consult here).

Meanwhile, the big issues - e.g. covetousness, forbidden very explicitly in one of the 10 commandments - is an *industry* in the U.S.

I'll believe these evangelicals are guided by the bible when I see them picketing Madison Avenue for promoting covetousness, or when I see them lobbying for a debt jubilee.

Michael Hudso says Jesus' first appearance in the Jerusalem temple was to announce just such a Jubilee Boy is that ever ignored!

Jagger , April 17, 2017 at 2:32 pm

Your correlating the hypocritical actions of the leadership with the ideals of a religion. Corrupt leadership may delegitimize those individuals but does not delegitimize the ideals of the religion. Is the ideal of America totally dependent on the actions of its political leadership? Personally, I think there is far more to America than just the president and congress whether corrupt or not.

hunkerdown , April 17, 2017 at 5:00 pm

Ideals only serve in practice to create primordial debts, buttress power differentials, and enable selective malfeasance. I fail to see the social utility of any of those products and believe humanity would be better off repudiating them and their vectors. Disease is not a public good.

Jagger , April 17, 2017 at 7:57 pm

Well I am using this definition of ideal: "a person or thing conceived as embodying such a conception or conforming to such a standard, and taken as a model for imitation". I guess you are welcome to your definition.

JTMcPhee , April 17, 2017 at 5:10 pm

I think "America" is maybe a shibboleth of some sort, but there is not a dam' thing left of the stuff I was taught and brought to believe, as a young person, Boy Scout, attendee at the Presbyterian Westminster Fellowship, attentive student of Mrs. Thompson and Mr. Fleming in Civics, Social Studies and US History classes, and all that. I was well enough steeped in that stuff to let "patriotism" overcome better sense, strongly enough to enlist in the Army in 1966.

Maybe you think "The Birth of a Nation" captures the essence of our great country?

What is or are the ideal(s) of "America?" Get rich quick, violence on all fronts, anti-intellectualism, imperial project across the planet? "Democracy?" If you trot that out as a "feature", you better explain what you mean, with some specificity. More to America? If youtube is any guide, try searching it for "syria combat" or "redneck" or "full auto," or all the really sick racist and extreme stuff - a pretty sorry place. But we all recite the Pledge so dutifully, don't we? and feel a thrill as the F-22s swoop over the football stadium?

[Dec 10, 2017] blamePutin continues to be the media's dominant hashtag. Vladimir Putin finally confesses his entire responsibility for everything bad that has ever happened since the beginning of time

Highly recommended!
Dec 10, 2017 | off-guardian.org

by VT

The decline of the falsely self-described "quality" media outlet The Guardian/Observer into a deranged fake news site pushing anti-Russian hate propaganda continues apace. Take a look at this gem :

The Russian president, Vladimir Putin, has accused prominent British businessman Bill Browder of being a "serial killer" – the latest extraordinary attempt by the Kremlin to frame one of its most high-profile public enemies.

But Putin has not been reported anywhere else as making any recent statement about Browder whatever, and the Observer article makes no further mention of Putin's supposed utterance or the circumstances in which it was supposedly made.

As the rest of the article makes clear, the suspicions against Browder were actually voiced by Russian police investigators and not by Putin at all.

The Observer fabricated a direct quote from the Russian president for their propaganda purposes without any regard to basic journalistic standards. They wanted to blame Putin personally for the suspicions of some Russian investigators, so they just invented an imaginary statement from him so they could conveniently do so.

What is really going on here is the classic trope of demonisation propaganda in which the demonised leader is conflated with all officials of their government and with the targeted country itself, so as to simplify and personalise the narrative of the subsequent Two Minutes Hate to be unleashed against them.

When, as in this case, the required substitution of the demonised leader for their country can't be wrung out of the facts even through the most vigorous twisting, a disreputable fake news site like The Guardian/Observer is free to simply make up new, alternative facts that better fit their disinformative agenda. Because facts aren't at all sacred when the official propaganda line demands lies.

In the same article, the documents from Russian investigators naming Browder as a suspect in certain crimes are first "seen as" a frame-up (by the sympathetic chorus of completely anonymous observers yellow journalism can always call on when an unsupported claim needs a spurious bolstering) and then outright labelled as such (see quote above) as if this alleged frame-up is a proven fact. Which it isn't.

No evidence is required down there in the Guardian/Observer journalistic gutter before unsupported claims against Russian officials can be treated as unquestionable pseudo-facts, just as opponents of Putin can commit no crime for the outlet's hate-befuddled hacks.

The above falsifications were brought to the attention of the Observer's so-called Readers Editor – the official at the Guardian/Observer responsible for "independently" defending the outlet's misdeeds against outraged readers – who did nothing. By now the article has rolled off the site's front page, rendering any possible future correction nugatory in any case.

Later in the same article Magnitsky is described as having been Browder's "tax lawyer" a standard trope of the Western propaganda narrative about the case. Magnitsky was actually an accountant .

A trifecta of fakery in one article! That makes crystal clear what the Guardian meant in this article , published at precisely the same moment as the disinformation cited above, when it said:

"We know what you are doing," Theresa May said of Russia. It's not enough to know. We need to do something about it.

By "doing something about it" they mean they're going to tell one hostile lie about Russia after another.


michaelk says November 26, 2017

https://www.theguardian.com/news/2017/nov/26/big-issue-who-will-step-in-after-bullies-have-silenced-dissenters

From the 'liberal' Guardian/Observer wing of the rightwing bourgeois press, spot the differences with the article in the Mail on Sunday by Nick Robinson?

michaelk says November 26, 2017
http://www.dailymail.co.uk/debate/article-5117723/Nick-Robinson-Putin-using-fake-news-weaken-West.html

This thing seems to have been cobbled together by a guy called Nick Robinson. The same BBC Nick Robinson that hosts the Today Programme? I dunno, one feels really rather depressed at how low our media has sunk.

michaelk says November 23, 2017
I think huge swathes of the media, in the eyes of many people, have never really recovered from the ghastly debacle that was their dreadful coverage of the reasons for the illegal attack on Iraq.

The journalists want us to forget and move on, but many, many, people still remember. Nothing happened afterwards. There was no tribunal to examine the media's role in that massive international crime against humanity and things actually got worse post Iraq, which the attack on Libya and Syria illustrates.

rtj1211 says November 29, 2017
Exactly: in my opinion there should be life sentences banning scribblers who printed lies and bloodthirsty kill, kill, kill articles from ever working again in the media.

Better still, make them go fight right now in Yemen. Amazing how quickly truth will spread if journalists know they have a good chance of dying if they print lies and falsehoods ..

michaelk says November 23, 2017
At a time when the ruling elite, across virtually the entire western world, is losing it; it being, political legitimacy and the breakdown of any semblance of a social contract between the ruled and the rulers the Guardian lurches even further to the political right . amazing, though not really surprising. The Guardian's role appears to be to 'coral' radical and leftist ideas and opinions and 'groom' the educated middle class into accepting their own subjugation.

The Guardian's writers get so much, so wrong, so often it's staggering and nobody gets the boot, except for the people who allude to the incompetence at the heart of the Guardian. They fail dismally on Trump, Brexit and Corbyn and yet carry on as if everything is fine and dandy. Nothing to complain about here, mover along now.

I suppose it's because they are actually media aristocrats living in a world of privilege, and they, as members of the ruling elite, look after one another regardless of how poorly they actually perform. This is typical of an elite that's on the ropes and doomed. They choose to retreat from grubby reality into a parallel world where their own dogmas aren't challenged and they begin to believe their propaganda is real and not an artificial contruct. This is incredibly dangerous for a ruling elite because society becomes brittle and weaker by the day as the ruling dogmas become hollow and ritualized, but without traction in reality and real purpose.

The Guardian is a bit like the Tory government, lost and without any real ideas or ideals. The slow strangulation of the CIF symbolizes the crisis of confidence at the Guardian. A strong and confident ruling class welcomes criticism and is ready to brush it all off with a smile and a shrug. When they start running scared and pretending there is no dissent or opposition, well, this is a sign of decadence and profound weakness. They are losing the battle of ideas and the battle of solutions to our problems. All that really stands between them and a social revolution is a thin veneer of 'authority' and status, and that's really not enough anymore.

All our problems are pathetically and conviniently blamed on the Russians and their Demon King and his vast army of evil Trolls. It's like a political version of the Lord of the Rings.

WeatherEye says November 21, 2017
Don't expect the Guardian to cover the biggest military build-up (NATO) on Russia's borders since Hitler's 1941 invasion.

John Pilger has described the "respectable" liberal press (Guardian, NYT etc) as the most effective component of the propaganda system, precisely BECAUSE it is respectable and trusted. As to why the Guardian is so insistent in demonising Russia, I would propose that is integrates them further with a Brexit-ridden Tory government. Its Blairite columnists prefer May over Corbyn any day.

rtj1211 says November 29, 2017
The Guardian is now owned by Neocon Americans, that is why it is demonising Russia. Simple as that.
WeatherEye says November 29, 2017
Evidence?
Harry Stotle says November 21, 2017
The Guardian is trying to rescue citizens from 'dreadful dangers that we cannot see, or do not understand' – in other words they play a central role in 'the power of nightmares' https://www.youtube.com/embed/LlA8KutU2to
rtj1211 says November 21, 2017
So Russians cannot do business in America but Americans must be protected to do business in Russia?

If you look at Ukraine and how US corporations are benefitting from the US-funded coup, you ask what the US did in Russia in the 1990s and the effect it had on US business and ordinary Russian people. Were the two consistent with a common US template of economic imperialism?

In particular, you ask what Bill Browder was doing, his links to US spying organisations etc etc. You ask if he supported the rape of Russian State assets, turned a blind eye to the millions of Russians dying in the 1990s courtesy of catastrophic economic conditions. If he was killing people to stay alive, he would not have been the only one. More important is whether him making $100m+ in Russia needed conditions where tens of millions of Russians were starving .and whether he saw that as acceptable collateral damage ..he made a proactive choice, after all, to go live in Moscow. It is not like he was born there and had no chance to leave ..

I do not know the trurh about Bill Browder, but one thing I do know: very powerful Americans are capable of organising mass genocide to become rich, so there is no possible basis for painting all American businessmen as philanthropists and all Russians as murdering savages ..

michaelk says November 21, 2017
It's perfectly possible, in fact the norm historically, for people to believe passionately in the existence of invisible threats to their well-being, which, when examined calmly from another era, resemble a form of mass-hysteria or collective madness. For example; the religious faith/dogma that Satan, demons and witches were all around us. An invisible, parallel, world, by the side of our own that really existed and we were 'at war with.' Satan was our adversary, the great trickster and disseminator of 'fake news' opposed to the 'good news' provided by the Gospels.

What's remarkable, disturbing and frightening is how closely our media resemble a religious cult or the Catholic Church in the Middle Ages. The journalists have taken on a role that's close to that of a priesthood. They function as a 'filtering' layer between us and the world around us. They are, supposedly, uniquely qualified to understand the difference between truth and lies, or what's right and wrong, real news and propaganda. The Guardian actually likes this role. They our the guardians of the truth in a chaotic world.

This reminds one of the role of the clergy. Their role was to stand between ordinary people and the 'complexities' of the Bible and separate the Truths it contained from wild and 'fake' interpretations, which could easily become dangerous and undermine the social order and fundamental power relationships.

The big challenge to the role of the Church happened when the printing press allowed the ordinary people to access the information themselves and worst still when the texts were translated into the common language and not just Latin. Suddenly people could access the texts, read and begin to interpret and understand for themselves. It's hard to imagine that people were actually burned alive in England for smuggling the Bible in English translation a few centuries ago. That's how dangerous the State regarded such a 'crime.'

One can compare the translation of the Bible and the challenge to the authority of the Church and the clergy as 'guardians of the truth' to what's happeing today with the rise of the Internet and something like Wikileaks, where texts and infromation are made available uncensored and raw and the role of the traditional 'media church' and the journalist priesthood is challenged.

We're seeing a kind of media counter-reformation. That's why the Guardian turned on Assange so disgracefully and what Wikileaks represented.

WeatherEye says November 21, 2017
A brilliant historical comparison. They're now on the legal offensive in censoring the internet of course, because in truth the filter system is wholly vulnerable. Alternative media has been operating freely, yet the majority have continued to rely on MSM as if it's their only source of (dis)information, utilizing our vast internet age to the pettiness of social media and prank videos. Marx was right: capitalist society alienates people from their own humanity. We're now aliens, deprived of our original being and floating in a vacuum of Darwinist competition and barbarism. And we wonder why climate change is happening?
tutisicecream says November 21, 2017
Apparently we are "living in disorientating times" according to Viner, she goes on to say that "championing the public interest is at the heart of the Guardian's mission".

Really? How is it possible for her to say that when many of the controversial articles which appear in the Guardian are not open for comment any more. They have adopted now a view that THEIR "opinion" should not be challenged, how is that in the public interest?

In the Observer on Sunday a piece also appeared smearing RT entitled: "MPs defend fees of up to £1,000 an hour to appear on 'Kremlin propaganda' channel." However they allowed comments which make interesting reading. Many commenter's saw through their ruse and although the most vociferous critics of the Graun have been banished, but even the mild mannered ones which remain appear not the buy into the idea that RT is any different than other media outlets. With many expressing support for the news and op-ed outlet for giving voice to those who the MSM ignore – including former Guardian writers from time to time.

Why Viner's words are so poisonous is that the Graun under her stewardship has become a agitprop outlet offering no balance. In the below linked cringe worthy article there is no mention of RT being under attack in the US and having to register itself and staff as foreign agents. NO DEFENCE OF ATTACKS ON FREEDOM OF THE PRESS by the US state is mentioned.

Surely this issue is at the heart of championing public interest?

https://www.theguardian.com/world/2017/nov/18/mps-kremlin-propaganda-channel-rt#comments

The fact that it's not shows clearly the fake Guardian/Observer claim and their real agenda.

WE ARE DEFINITELY LIVING IN DISORIENTATION TIMES and the Guardian/Observer are leading the charge.

tutisicecream says November 21, 2017
Correction: DISORIENTATING TIMES
Peter says November 21, 2017
For the political/media/business elites (I suppose you could call them 'the Establishment') in the US and UK, the main problem with RT seems to be that a lot of people are watching it. I wonder how long it will be before access is cut. RT is launching a French-language channel next month. We are already being warned by the French MSM about how RT makes up fake news to further Putin's evil propaganda aims (unlike said MSM, we are told). Basically, elites just don't trust the people (this is certainly a constant in French political life).
Jim says November 21, 2017
It's not just that they don't allow comments on many of their articles, but even on the articles where CiF is enabled, they ban any accounts that disagree with their narrative. The end result is that Guardianistas get the false impression everyone shares their view and that they are in the majority. The Guardian moderators are like Scientology leaders who banish any outsiders for fear of influencing their cult members.
BigB says November 20, 2017
Everyone knows that Russia-gate is a feat of mass hypnosis, mesmerized from DNC financed lies. The Trump collusion myth is baseless and becoming dangerously hysterical: but conversely, the Clinton collusion scandal is not so easy to allay. Whilst it may turn out to be the greatest story never told: it looks substantive enough to me. HRC colluded with Russian oligarchy to the tune of $145m of "donations" into her slush fund. In return, Rosatom gained control of Uranium One.

A curious adjunct to this corruption: HRC opposed the Magnitsky Act in 2012. Given her subsequent rabid Russophobia: you'd have thought that if the Russians (as it has been spun) arrested a brave whistleblowing tax lawyer and murdered him in prison – she would have been quite vocal in her condemnation. No, she wanted to make Russia great again. It's amazing how $145m can focus ones attention away from ones natural instinct.

[Browder and Magnitsky were as corrupt as each other: the story that the Russians took over Browder's hedge fund and implicated them both in a $230m tax fraud and corruption scandal is as fantastical as the "Golden Shower" dossier. However, it seems to me Magnitsky's death was preventable (he died from complications of pancreatitis, for which it seems he was initially refused treatment ) ]

So if we turn the clock back to 2010-2013, it sure looks to me as though we have a Russian collusion scandal: only it's not one the Guardian will ever want to tell. Will it come out when the FBI 's "secret" informant (William D Cambell) testifies to Congress sometime this week? Not in the Guardian, because their precious Hillary Clinton is the real scandal here.

jag37777 says November 20, 2017
Browder is a spook.
susannapanevin says November 20, 2017
Reblogged this on Susanna Panevin .
Eric Blair says November 20, 2017
This "tactic" – a bold or outrageous claim made in the headline or in the first few sentences of a piece that is proven false in the very same article – is becoming depressingly common in the legacy media.

In other words, the so-called respectable media knowingly prints outright lies for propaganda and clickbait purposes.

labrebisgalloise says November 20, 2017
I dropped a line to a friend yesterday saying "only in a parallel universe would a businessman/shady dealer/tax evader such as Browder be described as an "anti-corruption campaigner."" Those not familiar with the history of Browder's grandfather, after whom a whole new "deviation" in leftist thinking was named, should look it up.
Eric Blair says November 20, 2017
Hey, MbS is also an "anti-corruption" campaigner! If the media says so it must be true!
Sav says November 20, 2017
Some months ago you saw tweets saying Russophobia had hit ridiculous levels. They hadn't seen anything yet. It's scary how easily people can be brainwashed.

The US are the masters of molesting other nations. It's not even a secret what they've been up to. Look at their budgets or the size of the intelligence buildings. Most journalists know full well of their programs, including those on social media, which they even reported on a few years back. The Guardian run stories by the CIA created and US state funded RFE/RL & then tell us with a straight face that RT is state propaganda which is destroying our democracy.

A Petherbridge says November 20, 2017
Well said – interesting to know what the Guardian is paid to run these stories funded by this arm of US state propaganda.
bevin says November 20, 2017
The madness spreads: today The Canary has/had an article 'proving' that the 'Russians' were responsible for Brexit, Trump, etc etc.

Then there is the neo-liberal 'President' of the EU charging that the extreme right wing and Russophobic warmongers in the Polish government are in fact, like the President of the USA, in Putin's pocket..

This outbreak is reaching the dimensions of the sort of mass hysteria that gave us St Vitus' dance. Oh and the 'sonic' terrorism practised against US diplomats in Havana, in which crickets working for the evil one (who he?) appear to have been responsible for a breach in diplomatic relations. It couldn't have happened to a nicer empire.

Admin says November 21, 2017
The Canary is publishing mainstream russophobia?

[Dec 10, 2017] Neoliberlaism is barbarism

Dec 10, 2017 | www.defenddemocracy.press

"It's barbarism. I see it coming masqueraded under lawless alliances and predetermined enslavements. It may not be about Hitler's furnaces, but about the methodical and quasi-scientific subjugation of Man. His absolute humiliation. His disgrace"

Odysseas Elytis, Greek poet, in a press conference on the occasion of receiving the Nobel Prize (1979)

[Dec 09, 2017] China, Saudi Arabia, and the US by James Petras

Financialization of the economy and the lust for war goes hand in hand. That means that "casino capitalism" is an aggressive capitalism.
" In the transition, politicians, who had no connection to domestic industry, found a powerful niche promoting overseas wars for allies , like Saudi Arabia and Israel, and disseminating domestic spats, intrigues and conspiracies to the voters." -- this is an astute observation.
Notable quotes:
"... Simultaneously, finance reversed its relation to industry: Industrial capital was now harnessed to finance, speculation, real estate, insurance sectors and electronic gadgets/play-by-yourself ' i-phones' promoting isolated ' selfies' and idle chatter. ..."
"... Wall Street, Silicon Valley and Hollywood replaced Detroit, Pittsburgh, Cleveland and Chicago. Stockbrokers proliferated, while master tool-and-die makers disappeared and workers' children overdosed on 'Oxy'. ..."
"... In the transition, politicians, who had no connection to domestic industry, found a powerful niche promoting overseas wars for allies , like Saudi Arabia and Israel, and disseminating domestic spats, intrigues and conspiracies to the voters. ..."
"... In this historic transformation, American political culture put on a new face: perpetual wars, Wall Street swindles and Washington scandals. It culminated in the farcical Hillary Clinton – Donald Trump presidential election campaign: the war goddess-cuckquean of chaos versus the crotch-grabbing real-estate conman. ..."
"... Trump's presidential election campaign went about the country pleasuring the business and finance elite (promises of tax cuts, deregulations, re-contamination and jacking up the earth's temperature with a handful of jobs), and successfully pushed aside the outrage over his crude rump grabbing boasts. Wars, Wall Street, Silicon Valley and Hollywood all gathered to set the parameters of the United States' political economy: The chase was on! ..."
Dec 09, 2017 | www.unz.com

... ... ...

The chaotic free-for-all in the US political economy is manipulated by scandalmongers, conspirators and flight capitalists. Instead of preparing an economic plan to ' make America great again' , they have embraced the political blackmailers and intriguers of Saudi Arabia in a sui-generis global political alliance. Both countries feature purges, resignations and pugnacious politicos who have never been weaned from the destructive bosom of war.

As a point of history, the United States didn't start out as a bloated, speculative state of crony capitalists and parasitical allies: The US was once a powerful industrial country, harnessing finance and overseas investments to securing raw materials for domestic industries and directing profits back into industry for higher productivity.

Fake, or semi-fake, political rivalries and electoral competition counted little as incumbents retained their positions most of the time, and bi-partisan agreements ensured stability through sharing the spoils of office.

Things have changed. Overseas neo-colonies started to offer more than just raw materials: They introduced low-tax manufacturing sites promising free access to cheap, healthy and educated workers. US manufacturers abandoned Old Glory, invested overseas, hoarded profits in tax havens and happily evaded paying taxes to fund a new economy for displaced US workers. Simultaneously, finance reversed its relation to industry: Industrial capital was now harnessed to finance, speculation, real estate, insurance sectors and electronic gadgets/play-by-yourself ' i-phones' promoting isolated ' selfies' and idle chatter.

Wall Street, Silicon Valley and Hollywood replaced Detroit, Pittsburgh, Cleveland and Chicago. Stockbrokers proliferated, while master tool-and-die makers disappeared and workers' children overdosed on 'Oxy'.

In the transition, politicians, who had no connection to domestic industry, found a powerful niche promoting overseas wars for allies , like Saudi Arabia and Israel, and disseminating domestic spats, intrigues and conspiracies to the voters. Vietnam and Watergate, Afghanistan and Volker, Iran-Contra and Reaganomics , Yugoslavia and Iraq, daily drone strikes and bombings and Bill Clinton's White House sex scandals giving salacious birth to SpecialProsecutors . . .

In this historic transformation, American political culture put on a new face: perpetual wars, Wall Street swindles and Washington scandals. It culminated in the farcical Hillary Clinton – Donald Trump presidential election campaign: the war goddess-cuckquean of chaos versus the crotch-grabbing real-estate conman.

The public heard Secretary of State Clinton's maniacal laugh upon her viewing the 'snuff-film' torture and slaughter of the wounded Libya's President Gadhafi: She crowed: ' We came, we saw and he died' with a sword up his backside. This defined the Clinton doctrine in foreign affairs, while slaughter of the welfare state and the bloated prison industry would define her domestic agenda.

Trump's presidential election campaign went about the country pleasuring the business and finance elite (promises of tax cuts, deregulations, re-contamination and jacking up the earth's temperature with a handful of jobs), and successfully pushed aside the outrage over his crude rump grabbing boasts. Wars, Wall Street, Silicon Valley and Hollywood all gathered to set the parameters of the United States' political economy: The chase was on!

... ... ...

Joe Levantine , December 5, 2017 at 9:13 am GMT

This great article is an elaborate intellectual expansion on what Mr. Gerald Celente of Trendsresearch.com has been proclaiming for years that" while the business of China is business, the business of America is war". Professor Petras is pointing to the moral decline that is behind the social and economic decline of the nation of America that was once a beacon of light to the world.
This analysis leaves the reader with little doubt as to the direction in which the momentum of historic leadership is moving; it is to the East away from the West in a reversal of the dawn of the Renaissance era of Europe. The last hope for the west to stay at the helm of civilisation is to have a leader who can ignite a moral renaissance in the West short of which the 21st century will definitely be China's century. The impetus for such a revival is a shake up of the world of finance that will chase the money changers out of the altar of the Western economy and put he lying scribes of the Western media in labour camp where they will be re educated about the virtues of truth and reality.
Astuteobservor II , December 6, 2017 at 3:01 am GMT
there are 2 types of elites.

elites who line their pockets and only their pockets.

elites who line their pockets and also makes sure the rest of the country gets a little too.

guess which one is the american and chinese?

the saudis aren't even in the same category. they are just pets on a leash.

jacques sheete , December 9, 2017 at 11:53 am GMT

Official truth has become a stinking mound of offal.

Has become?

A good thing about it is that we should know to laugh at it whenever we hear it, and accept the fact that "authority" is lying until proven otherwise.

Were I to indulge my own theory, I should wish [the states] to practise neither commerce nor navigation, but to stand with respect to Europe precisely on the footing of China. We should thus avoid wars

-Thomas Jefferson, letter To G. K. van Hogendorp , Paris, Oct. 13, 1785

Isn't Western "civilization" just peachy? Civilization?

jacques sheete , December 9, 2017 at 12:46 pm GMT
@Joe Levantine

moral renaissance

One has to have had a "naissance" of morals to experience a "re" of them, but yes, chasing the money changers out of the temple and money worship out of our souls would have helped.

Would have.

Our great mass of workers have labored for the money changers too long.

-Jacob Thorkelson, Rescue the Republic, p 9. 1939

Few listened. We've had a moral abortion.

Joe Hide , December 9, 2017 at 2:54 pm GMT
You're right about many things you presented, but you still don't understand the multi-layered gradually administered releases of mis-information, dis-information, and information, designed to awaken and transform our nation, planet, and human consciousness. Given that half the population has below average intelligence, new positive leadership does not merely announce that generations of psychopaths have manipulated them. As a personal example, half the people I communicate with are sub-average intelligence, and I've learned to very gradually wake them up, or they will, in their unreasonable thinking, try to make trouble for me. There's the saying, "Don't throw pearls before swine." I know this too harshly stated, and I should have gradually and gently presented it for half the reader's. Sorry.
P.S. . Unz.com and it's reader's are likely far above average.

[Dec 05, 2017] Rise of casino capitalism by Stefan Stern

This was written a decade ago. neoliberalism is a stable social system but nothing changed, although fault lines of the system became more evident.
Notable quotes:
"... "The prototype of the successful man in modern society is not the scientist, the inventor, the scholar. It is the financier, the gambler and those with social pull. The others share [in the winnings] sometimes, it is true, but their share is modest compared with the oligarchs and tycoons; and they don't usually keep their share for long. They are no match for the commercial prowlers." ..."
"... Mr Monks contrasted businesses' healthy profitability with the ruthless way some have treated their staff recently, whether through large-scale redundancies or the constant threat that jobs may be sent off-shore or outsourced. While median wages have stagnated, record executive salaries are legion. ..."
"... he was appalled by the increasingly "shameless", short-termist behaviour of overpaid corporate executives. "More and more they resemble the Bourbons - and they should be aware of what eventually happened to the Bourbons." ..."
"... "All this is too important to be left to the practitioners who have a vested interest in obscuring what they do from the rest of us," he said. And, with bonus season fast approaching, he took one final, sweeping aim at the high rollers of "casino capitalism". Their actions are "dangerous to economic stability, traditional industry and jobs", he said. "I would like to see the City pages of the press more challenging and less respectful on these matters . . . Our future - the world's future - is too important to place in the hands of the new capitalists." ..."
"... Half a century ago, Nye Bevan expressed a similar concern. In In Place of Fear he wrote: "There is a sense of injustice in modern society, and this induces a feeling of instability even in normal circumstances. The rewards are not in keeping with social worth, and the consciousness of this, both among the successful and the unsuccessful, will simmer and bubble, blowing up into geysers of political and social disturbance in times of economic stress." ..."
www.warc.ch

"The prototype of the successful man in modern society is not the scientist, the inventor, the scholar. It is the financier, the gambler and those with social pull. The others share [in the winnings] sometimes, it is true, but their share is modest compared with the oligarchs and tycoons; and they don't usually keep their share for long. They are no match for the commercial prowlers."

A snap-shot of London's Mayfair district, home to the burgeoning hedge-fund phenomenon, in November 2006? Actually, no. The above words were written in 1952 by the Labour politician Aneurin Bevan in his book In Place of Fear. Bevan had a gift - his most passionate supporters would say a genius - for exposing the truth of a situation in language that could be both scintillating and pungent.

Fifty years ago, he criticised the prime minister of the day, Sir Anthony Eden, for his reckless actions during the Suez crisis. "[He] has been pretending that he is now invading Egypt in order to strengthen the United Nations," Bevan said in a famous speech in Trafalgar Square. "Every burglar of course could say the same thing: he could argue that he was entering the house in order to train the police. So, if Sir Anthony Eden is sincere in what he is saying, and he may be . . . then he is too stupid to be a prime minister!" Here was political rhetoric with a touch of prophesy about it.

It was the enduring appeal of speeches such as these that helped draw a good crowd to the fifth annual Bevan memorial lecture in London last week. The lecture was to be given by John Monks, formerly general secretary of the British Trades Union Congress, now the Brussels-based leader of the European trade union confederation.

No one in the audience would have been expecting Bevanite rhetorical fireworks from Mr Monks. That has never been his style. Between 1993 and 2003, he led the British trade union movement with modesty and distinction. He was the moderate's moderate: avoiding confrontation wherever possible and advocating partnership at work between management and employees. Business leaders were happy to do business with him.

They would not have found this lecture so easy to deal with. Confronted by today's turbo-charged capitalism, Mr Monks cast off his former moderation. He even seemed to be on the verge of recanting his commitment to the partnership model. "Partnership with who?" he asked. There has been, he said, a "disintegration of the social nexus between worker and employer - a culture containing broad social rights and obligations. The new capitalism wants none of it."

Mr Monks contrasted businesses' healthy profitability with the ruthless way some have treated their staff recently, whether through large-scale redundancies or the constant threat that jobs may be sent off-shore or outsourced. While median wages have stagnated, record executive salaries are legion.

He admitted that he had possibly been a bit naive in the past. "I did not fully appreciate what was happening on the other side of the table," Mr Monks said. While he sympathised with business leaders for the relentless pressure they find themselves under - "It cannot be easy running a firm . . . when you are up for sale every day and every night of every year" - he was appalled by the increasingly "shameless", short-termist behaviour of overpaid corporate executives. "More and more they resemble the Bourbons - and they should be aware of what eventually happened to the Bourbons."

For someone like me, who has sat through 10 years of reasonableness from John Monks, this speech was remarkable, devastating stuff. Maybe there is something in the Brussels water. Perhaps the ghost of Nye Bevan was speaking through him. Or was it just anxiety over the career choice of his daughter's boyfriend? He is now working for - you guessed it - a hedge fund. Whatever its cause, a challenge was being thrown down.

"All this is too important to be left to the practitioners who have a vested interest in obscuring what they do from the rest of us," he said. And, with bonus season fast approaching, he took one final, sweeping aim at the high rollers of "casino capitalism". Their actions are "dangerous to economic stability, traditional industry and jobs", he said. "I would like to see the City pages of the press more challenging and less respectful on these matters . . . Our future - the world's future - is too important to place in the hands of the new capitalists."

Will corporate leaders - those that have read this far anyway - simply shrug their shoulders and get back to their slashing and burning ways? Is Mr Monks merely offering a wholly predictable, knee-jerk, lefty rant? I do not think so. This general secretary just does not do lefty rants. So business people should take note. When the John Monkses of this world say enough is enough, that the capitalist system itself is sick, you can be sure that elsewhere in the world there is deep-seated, lingering resentment and unhappiness.

Half a century ago, Nye Bevan expressed a similar concern. In In Place of Fear he wrote: "There is a sense of injustice in modern society, and this induces a feeling of instability even in normal circumstances. The rewards are not in keeping with social worth, and the consciousness of this, both among the successful and the unsuccessful, will simmer and bubble, blowing up into geysers of political and social disturbance in times of economic stress."

Reading these words, you can see why so many people were prepared to come out on a dark Tuesday night...

[Dec 05, 2017] Controlling speculation in world financial markets Progressive Christians Uniting by Gordon K Douglass

Highly recommended!
Nov 09, 2002 | www.prospect-magazine.co.uk

Financial markets 101
Early history
The Bretton Woods system
The power of financial actors
Consequences of global financial flows
Policy options
Theological and ethical considerations
A new financial architecture
What Christians can do
Want to know more?
Questions For Discussion


"During my whole career at Goldman Sachs - 1967 to 1991 - I never owned a foreign stock or emerging market bonds. Now I have hundreds of millions of dollars in Russia, Brazil, Argentina and Chile, and I worry constantly about the dollar-yen rate. Every night before I go to bed I call in for the dollar-yen quote, and to find out what the Nikkei is doing and what the Hang Seng Index is doing. We have bets in all these markets. Right now Paul [one of my traders] is long [on] the Canadian dollar. We have bets all over the place. I would not have worried about any of these twenty years ago. Now I have to worry about all of them."

Leon Coopermann, hedge fund manager1


Economic globalization is probably the most fundamental transformation of the world's political and economic arrangements since the Industrial Revolution. Decisions made in one part of the world more and more affect people and communities elsewhere in the world. Sometimes the consequences of globalization are positive, liberating inventive and entrepreneurial talents and accelerating the pace of sustainable development. But at other times they are negative, as when many people, especially in less-developed countries, are left behind without a social safety net. Globalization undermines the ability of the nation to tax and to regulate its own economy. This weakens the power of sovereign nations relative to that of large transnational corporations and distorts how social and economic priorities are chosen.

Economic globalization is most often associated with rapid growth in the flow of goods and services across international borders. Indeed, the economic "openness" of a nation is often measured by the value of its exports, imports, or their sum when compared to the size of its economy. Economic globalization also involves large investments from outside each nation, often by transnational corporations. These corporations often combine technology and know-how with their investments that enhance the productive capacity of a nation. Previous position papers of the Mobilization, contained in Speaking of Religion & Politics: The Progressive Church Tackles Hot Topics2, have dealt with globalization primarily in these terms.

But international trade and investment are only part of the openness that has come to be called globalization. Another part, and arguably the most important, is the quickening flow of financial assets internationally. While a small portion of this flow is directly associated with the "real" economy of production and exchange, its vast majority is composed of trades in the "paper" economy of short-term financial markets. This paper economy is enormous: The value of global financial securities greatly exceeds the value of annual world output of goods and services. Moreover, the paper economy often contributes to crises in the real economy. Thus it is important to the well being of humanity and the planet as a whole, yet it is little understood by most people. This essay undertakes to provide a basic understanding of this paper economy, especially as its more speculative features have multiplied during the last two or three decades, so that Christians and others concerned about what is happening in our world can join in an intelligent discussion of how the harmful consequences of financial markets can be controlled.


Financial markets 101

To better understand this paper economy, one first needs to know something about foreign exchange markets, international money markets, and "external" financial markets.

In an open economy, domestic residents often engage in international transactions. American car dealers, for example, buy Japanese Toyotas and Datsuns, while German computer companies sell electronic notebooks to Mexican businessmen. Similarly, Australian mutual funds invest in the shares of companies all over the world, while the treasurer of a Canadian transnational corporation parks idle cash in 90-day Bank of England notes. Most of these transactions require one or more participants to acquire a foreign currency. If an American buys a Toyota and pays the Japanese Toyota dealer in dollars, for example, the latter will have to exchange the dollars for yens in order to have the local currency with which to pay his workers and local suppliers.

The foreign exchange market is the market in which national currencies are traded. As in any market, a price must exist at which trade can occur. An exchange rate is the price of a unit of domestic currency in terms of a foreign currency. Thus, if the exchange rate of the dollar in terms of the Japanese yen increases, we say the dollar has depreciated and the yen has appreciated. Similarly, a decrease in the dollar/yen exchange rate would imply an appreciation of the dollar and a depreciation of the yen.

Foreign exchange markets can be classified as spot markets and forward markets. In spot markets currencies are bought and sold for immediate delivery and payment. In forward markets, currencies are bought or sold for future delivery and payment. A U.S. music company, say, enters into a contract to buy British records for delivery in 30 days. To guard against the possibility of the dollar/pound exchange rate increasing in the meantime, the company buys pounds forward, for delivery in 30 days, at the corresponding forward exchange rate quoted today. This is called hedging.

Of course, there has to be a counterpart to the music company's forward purchase of pounds. Who is the seller of those pounds? The immediate seller would be a commercial bank, as in the spot market. But the bank only acts as an intermediary. The ultimate seller of forward pounds may be another hedger, like the music company, but with a position just its opposite. Suppose, for example, that an American firm or individual has invested in 30-day British securities that it wants to convert back into dollars after the end of 30 days. The investor may decide to sell the pound proceeds forward in order to assure itself of the rate at which the pounds are to be converted back into dollars after 30 days.

Another type of investor may be providing the forward contract bought by the music company. This is the speculator, who attempts to profit from changes in exchange rates. Depending on their expectations, speculators may enter the forward market either as sellers or as buyers of forward exchange. In this particular case, the speculator may have reason to believe that the dollar/pound exchange rate will decrease in the next 30 days, permitting him to obtain the promised pounds at a lower price in the spot market 30 days hence.

The main instruments of foreign exchange transactions include electronic bank deposit transfers and bank drafts, bills of exchange, and a whole array of other short-term instruments expressed in terms of foreign currency. Thus, foreign exchange transactions do not generally involve a physical exchange of currencies across borders. They generally involve only changes in debits and credits at different banks in different countries. Very large banks in the main financial centers such as New York, London, Brussels and Zurich, account for most foreign exchange transactions. Local banks can provide foreign exchange by purchasing it in turn from major banks.

Although the foreign exchange market is dispersed in many cities and countries, it is unified by keen competition among the highly sophisticated market participants. A powerful force keeping exchange rate quotations in different places in line with each other is the search on the part of market participants for foreign exchange arbitrage opportunities. Arbitrage is the simultaneous purchase and sale of a commodity or financial asset in different markets with the purpose of obtaining a profit from the differential between the buying and selling price.

When foreign exchange is acquired in order to engage in international transactions involving the purchase or sale of goods and services, it is said that international trade has taken place in the real economy. When international transactions involve the purchase or sale of financial assets, they are referred to as international financial transactions. They constitute the paper economy.

Financial markets are commonly classified as capital markets or money markets. Capital markets deal in financial claims that reach more than one year into the future. Such claims include shares of stock, bonds, and long-term loans, among others. Money markets, on the other hand, deal in short-term claims, with maturities of less than one year. These include marketable government securities (like Treasury bills), large-denomination certificates of deposit issued by banks, commercial paper (representing short-term corporate debt), money market funds, and many other kinds of short-term, highly liquid (easily transferable) financial instruments. It is these short-term money market securities that account for most of the instability in the global paper economy.

Buying or selling a money market security internationally involves the same kind of foreign exchange risk that plagues buyers or sellers of merchandise internationally. If one wishes to guard against the possibility of an increase or decrease in the foreign exchange rate, one can insure against such fluctuations by "covering" in the forward market. By the same token, the decision about whether to own domestic or foreign money market securities is not simply a comparison of the rates of interest paid on otherwise comparable securities, because one must also take into account the gain (or loss) from purchasing foreign currency spot and selling it forward. Thus, choosing the security with the highest return does not necessarily imply the one with the highest interest rate.

People who trade in international money markets, moreover, need to take into account many other variables, including the costs of gathering and processing information, transaction costs, the possibility of government intervention and regulation, other forms of political risk, and the inability to make direct comparisons of alternative assets. Speculating in international money markets is a risky proposition.

International money markets involve assets denominated in different currencies. External financial markets involve assets denominated in the same currency but issued in different political jurisdictions. Eurodollars, for example, are dollar deposits held outside the United States (offshore), such as dollar deposits in London, Zurich, or even Singapore banks. The deposits may be in banks owned locally or in the offshore banking subsidiaries of U.S. banks. Deutsche mark deposits in London banks or pound sterling deposits in Amsterdam banks also are examples of external deposits. They are referred to as eurocurrency deposits. (The advent of a new common currency in the European Community - the Euro - will require the development of new nomenclature for external financial markets)

External banking activities are a segment of the wholesale international money market. The vast majority of eurocurrency transactions fall in the above $1 million value range, frequently reaching the hundreds of millions (or even billion) dollar value. Accordingly, the customers of eurobanks are almost exclusively large organizations, including multinational corporations, government entities, hedge funds, and international organizations, as well as eurobanks themselves. Like domestic banks, eurobanks that have excess reserves may make loans denominated in eurocurrencies, expanding the supply of eurocurrency deposits. The eurocurrency market funnels funds from lending countries to borrowing countries. Thus, it performs an important function as global financial intermediator.


Early history

The origins of what Karl Polanyi3 called haute finance can be traced to Renaissance Italy, where as early as 1422 there were seventy-two bankers or bill-brokers in or near the Mecato Vecchio of Florence.4 Many combined trade with purely financial business. By the middle of the fifteenth century, the Medici of Florence had opened branches in Bruges, London and Avignon, both as a means of financing international trade and as a way of marketing new kinds of financial assets. Many banking terms and practices still in use today originated in the burgeoning financial centers of Renaissance Europe.

By the early seventeenth century, the Dutch and East India Companies began issuing shares to the public in order to fund imperial enterprises closely linked to Holland and Britain. Their shares were made freely transferable, permitting development of a secondary financial market for claims to future income. Amsterdam opened a stock exchange in 1611, and shortly thereafter, the British government began issuing lottery tickets, an early form of government bonds, to finance colonial expansion, wars and other major areas of state expenditure. A lively secondary market in these financial instruments also emerged.5

Throughout these early years, financial markets were anything but riskless and stable. Consider the famous Dutch tulip mania of 1630, for example. This speculative bubble saw prices of tulip bulbs reach what seemed like absurd levels, yet "the rage among the Dutch to possess them [tulips] was so great that the ordinary industry of the country was neglected." Some investors in Britain and France shared this "irrational exuberance," though it was centered mostly in Holland. Then, not unlike speculative bubbles of more recent vintage, prices crashed6, pushing the economy into a depression and leaving many investors angry and confused.

Paris developed into an early financial center in the eighteenth century, but the Revolution of 1789 dissipated its power. The New York Stock Exchange was formally organized in 1792 and the official London Stock Exchange opened in 1802. The expansion westward of the railroads in the U.S. offered the financial community opportunity to sell railway shares and bonds that quickly became dominant in the financial markets. Indeed, the bond markets of London, Paris, Berlin, and Amsterdam were vehicles for collecting massive amounts of European savings and transferring it at higher returns to the emerging markets of the U.S., Canada, Australia, Latin America and Russia in the century preceding World War I.

Forward markets soon developed, especially in the U.S., in order to counter the impact of long distances and unpredictable weather. As capital and money markets expanded, other new financial instruments came into use. Joint stock companies were formed, enabled by legislation that clarified the distinction between the owners and managers of corporations. This, in turn, helped stimulate the growth of the American stock market in the late nineteenth century. To be sure, financial markets did not grow continuously in the nineteenth century. Lending to the emerging markets was interrupted by defaults in the 1820s, 1850s, 1870s and 1890s, but each wave of default was confined to a relatively small number of countries, permitting growth of financial flows to resume.7

In the four decades leading up to World War I, a truly worldwide economy was forged for the first time, extending from the core of Western Europe and the U.S. to latecomers in Eastern Europe and Latin America and even to the countries supplying raw materials on the periphery. Central to this expansion of trade and investment was an expanding system of finance that girded the globe. The amount was enormous: between 1870 and 1914 something like $30 billion,8 the equivalent in 2002 dollars of $550 billion, was transferred to recipient countries, in a world economy perhaps one-twelfth as large as today's.

During this "Gilded Age" of haute finance, the risks of participating in international trade and investment were generously shared with governments and the banking system. The reason is that foreign exchange rates were kept reasonably stable by the commitment of most governments to the "high" gold standard. In this way, businesses and individuals engaging in international transactions were reasonably certain that the value of their contracts was not going to change before they matured. Their exchange risk was shared with government by its willingness to buy or sell gold in order to keep the exchange rate constant. Because of this assurance, financial flows were reasonably free of regulation.

They were not immune from crises, however. When the sources of financial capital temporarily dried up, capital-importing countries occasionally found they could not expand export earnings sufficiently to avoid suspending interest payments on their debts or abandoning gold parity. On two occasions, the United States faced this possibility. The first was in 1893, when it switched in a sharp economic downturn to bimetallism (which caused William Jennings Bryan to denounce the "cross of gold"), and the second was in 1907, which led to the creation of the Federal Reserve System, handing to the government the function of lender of last resort previously carried out by Wall Street banks under the tutelage of J. Pierpont Morgan.

In his magisterial book The Great Transformation, Karl Polanyi reflected on the pervasive influence of haute finance on the policies of nations even in this "Gilded Age." The globalising financial markets and the gold standard, according to Polanyi, left very little room for states, especially smaller ones, to adopt monetary and fiscal policies independent of the new international order. "Loans, and the renewal of loans, hinged upon credit, and credit upon good behavior. Since, under constitutional government ..., behavior is reflected in the budget and the external value of the currency cannot be detached from the appreciation of the budget, debtor governments were well advised to watch their exchanges carefully and to avoid policies which might reflect upon the soundness of budget positions." Thus, even one hundred years ago the then-dominant world power, Great Britain, speaking as it did so often through the voice of the City of London, "prevailed by the timely pull of a thread in the international monetary network.9

Following World War I, the United States emerged not merely as a creditor country but as the primary source of new international financial flows. At first, the principal borrowers were the national governments of the stronger countries, but as the boom in security underwriting developed in the U.S, numerous obscure provinces, departments and municipalities found it possible to sell their bonds to American investors.10 Just as domestic construction, land, and equity markets went through speculative rises in the 1920s, so too did the U.S. experience a speculative surge in foreign investment. In the aftermath of successive defaults by foreign debtors in 1932, the Senate Committee on Banking and Currency concluded:

The record of the activities of investment bankers in the flotation of foreign securities is one of the most scandalous chapters in the history of American investment banking. The sale of these foreign issues was characterized by practices and abuses that violated the most elementary principles of business ethics.11

Speculation in the stock markets leading up to 1929 offers still another window on the instability of short-term financial flows. A speculative market can be defined as one in which prices move in response to the balance of opinion regarding the future movement of prices rather than responding normally to changes in the demand for and supply of whatever is priced. Helped by the willingness of Wall Street to allow people to buy stocks on margin, people were only too ready to bet prices would rise as long as others thought so too. Day after day and month after month the price of stocks went up in 1927. The gains by later standards were not large, but they had an aspect of great reliability. Then in 1928, the nature of the boom changed. "The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.12

Following World War I, the gold standard itself took on new form. Nations were allowed to hold their international reserves in either gold or foreign exchange. This worked for a while in the 1920s, but as speculation mounted and balances of payments disequilibria grew, fears of devaluation led central banks to try to replace their foreign-exchange holdings with specie in a "scramble for gold." The worldwide result of these shifts in central bank portfolios was an overall contraction of the supply of money and credit that sapped aggregate demand and forced prices to fall and output levels to shrink. Thus, it can be argued - persuasively in our view - that the Great Depression of the 1930s was as much, if not more, the result of mismanagement of money and credit as it was the result of protectionist policies. Protectionist policies were more likely the result of slowed growth and stalled trade. Countries that broke with the gold-exchange standard early, such as Britain in 1931, and pursued more expansionary monetary policies fared somewhat better.


The Bretton Woods system

During the darkest days of World War II, a radically new economic architecture was designed for the postwar world at a New Hampshire ski resort called Bretton Woods. With the competitive devaluation and protectionist policies of the 1930s still fresh in their minds, the mostly British and American delegates to the conference wanted most of all to design a system with fixed exchange rates that did not rely on national gold hoards to keep exchange rates stable. They decided to depend instead on strict controls of international financial movements. In this way, they hoped to allow countries to pursue full-employment policies through appropriate monetary (money and credit) and fiscal (tax and spending) policies without some of the anxieties associated with open financial markets. The role of monetary and financial stabilizer was given to the International Monetary Fund (IMF), which was provided with modest funds to assist nations to adjust imbalances in their external payments obligations. The International Bank for Reconstruction and Development (IBRD, later the World Bank) assumed the task of helping to finance post-war reconstruction.13

The IMF as it emerged from Bretton Woods had inadequate reserves to advance money for the long periods that many countries require for "soft-landings" from big current-account deficits. It would make only short-term loans. To make sure that borrowing nations were constrained, "conditionality" attached to IMF loans became standard practice, even in the early years of the Fund's operation. Policy limitations and "performance targets" tied to credit lines advanced under "standby agreements" began in the middle 1950s and were universal by the 1960s, long before the notions of "stabilization" and "structural adjustment" came into common parlance.

The Bretton Woods agreement also imposed a foreign exchange standard by which exchange rates between major currencies were fixed in terms of the dollar, and the value of the dollar was tied to gold at a U.S. guaranteed price of thirty-five dollars per ounce. By devising a system that controlled financial movements and assisted with the adjustment of countries' balances of payments, the new system succeeded in keeping exchange rates remarkably stable. They were changed only very occasionally, e.g., as when the value of sterling relative to the dollar was reduced in 1949 and again in 1966. This meant that companies doing business abroad did not need to worry constantly about the risk of exchanging one currency for another.

Among the reasons for this remarkable stability was the willingness of the central banks of other countries to hold an increasing proportion of their official reserves in the form of U.S. dollars. It was an essential part of the system that the dollars held by other countries would be seen as IOUs backed by the U.S. offer to exchange them for gold at a fixed pre-war price. But as the balance-of-payments of the U.S. moved more deeply into deficits in the 1960s, there were more and more U.S. dollars held by other countries, and this so-called "dollar overhang" became disturbingly large.15 General de Gaulle called it "the exorbitant privilege," meaning that the Americans were paying their bills - for defense spending to fight the Vietnam War among other things - with IOUs instead of real resources in the form of exports of goods and services.

Strict control over financial movements began to weaken as early as the 1950s, when the first eurodollar (later eurocurrency) deposits were made in London. At first a trickle, limited originally to Europe, these offshore banking operations soon expanded worldwide. The American "Interest Equalization Tax" (IET) instituted in 1963 raised the costs to banks of lending offshore from their domestic branches.16 The higher external rates led dollar depositors such as foreign corporations to switch their funds from onshore U.S. institutions to eurobanks. Thus, the real effect of the IET was to encourage the dollar to follow the foreigners abroad, rather than the other way around. Eurobanks paid higher interest rates on deposits and loaned eurocurrencies at lower rates than U.S. banks could at home. Still another large inflow of eurodeposits occurred in 1973-74 as the Organization of Petroleum Exporting Countries (OPEC) began "recycling" their surplus dollar earnings through eurobanks. Because of their existence, a country such as Brazil could arrange within a reasonably regulation-free environment to obtain multimillion-dollar loans from a consortium of offshore American, German and Japanese banks and thereby finance its oil imports. Net eurocurrency deposit liabilities that amounted to around $10 billion in the mid-1960s, grew to $500 billion by 1980.

These eurocurrency transactions taught the players in financial markets how to shift their deposits, loans, and investments from one currency to another whenever exchange rates or interest rates were thought to be ready to change. Even the ability of central banks to regulate the supply of money and credit was undermined by the readiness of commercial banks to borrow and lend offshore. Hence, the effectiveness of regulatory mechanisms that had been put in place to implement the Bretton Woods agreement - interest rate ceilings, lending limits, portfolio restrictions, reserve and liquidity requirements - gradually eroded as offshore transactions started to balloon.

The world economy developed at unprecedented rates during the roughly twenty-five years immediately following World War II. Growth and employment rates during these years were at historic highs in most countries. Productivity also advanced rapidly in most developing countries as well as in the technological leaders. These facts suggest that the system devised at Bretton Woods worked reasonably well, despite occasional adjustments. To be sure, it helped to sow the seeds of its own destruction by failing to retain operational control of international financial flows. But the twenty-five years of its survival leading up to August 15, 1971, when President Nixon closed the gold window, have nonetheless come to be called by some economic historians the "Golden Years."

Controlling private risk

Fixed exchange rates did not last long after the U.S. stopped exchanging gold for claims on the dollar held by foreign central banks. The pound sterling was allowed to float against the dollar in July, 1972. Japan set the yen free to float in February, 1973, and most European currencies followed suit shortly thereafter. The Bretton Woods gold-dollar system was doomed.

The fact that exchange rates no longer were fixed meant that companies doing business in different countries had to cope with the day-to-day shifts in the dollar's rate of exchange with other currencies. The risks of unexpected changes in the value of international contracts suddenly had shifted from the public to the private sector. Corporate finance officers now had to hedge against possible exchange losses by buying a currency forward and investing the equivalent in the short-term money market, or by investing in the eurocurrency market. The corporations' banks, in turn, tried to match each foreign currency transaction with another contrary transaction in order not to leave each of the banks exposed to foreign exchange risk overnight. Since no single bank was likely to balance its foreign exchange positions exactly, the need arose to swap deposits in different currencies in order to match corporate hedging transactions and to square the bank's books.

The price of this forward cover on inter-bank transactions - that is to say, the premium or discount on a currency's spot value - has tended to accord with the differences between interest-rates offered for eurocurrency deposits in different currencies. This is the connection between the foreign exchange market and the short-term credit markets, between exchange rates and interest rates. Whenever exchange rates move up or down, therefore, their influence is immediately transmitted through the eurocurrency markets to the credit markets.

It is this scramble to avoid private risk that accounted for the dramatic rise in international financial movements following the demise of the Bretton Woods system. By 1973, daily foreign exchange trading around the world varied between $10 and $20 billion per day. This amount was approximately twice the value of world trade at the time. Bank of International Settlements data suggests that the daily average of foreign exchange trading had climbed by 1980 to about $80 billion, and that the ratio between foreign exchange trading and international trade was more nearly ten to one. The data for 1992 was $880 billion and fifty to one, respectively; for 1995, $l,260 billion and seventy to one; and for 2000, almost $1,800 and ninety to one.

There is very little doubt, therefore, that the lion's share of international financial flows is relatively short-run. Indeed, about eighty percent of foreign exchange transactions are reversed in less than seven business days. Only a very small proportion is used to finance international trade and direct foreign investment. The vast majority must be used with the expectation of gain or to avoid losses that may result from changes in the value of financial assets. In general terms, they are speculative, made in hope of capital gain or to hedge against potential capital loss, or to seek the gains of arbitrage based on slight differences in rates of return in different financial centers.


The power of financial actors17

Foreign exchange markets and markets for money and credit seem remote and abstract to most people. This section introduces the real institutions that operate these markets and assesses the nature of their power.

According to recent work by political scientists, the power of these financial actors is based in part on a complicated "process of multiplication" of loans, assets and transactions. Many investors in financial markets buy financial instruments on very thin margins, based on loans obtained by pledging the assets as collateral. This is called "leverage" in the jargon of financial markets. In turn, the borrowed funds are invested in other financial assets, multiplying the demand for credit and financial assets. As demand rises, more sophisticated financial assets are invented, including many forms of financial derivatives. A major portion of the accumulated debt remains serviceable only as long as the prices of most assets will rise or at least remain relatively stable. If prices turn down, they easily can lead to a chain-reaction. If investors respond instinctively like a herd, they will bring a far-reaching collapse that constitutes a crisis.

As the flow of financial assets climbs, some bankers, brokers, and managers of financial institutions become prominent players in the competition for investor dollars. Some become known for picking profitable places to invest and for promoting their selections successfully. This can influence markets if people have confidence in their advice. A notorious example of the influence of prominent players was the attack on British sterling in 1992 by George Soros' Quantum Fund. Believing that sterling was overvalued, the Fund quietly established credit lines that allowed it to borrow $15 billion worth of sterling and sell it for dollars at the then "overvalued" price. Its purpose, of course, was to pay back the loan with cheaper pounds after they had depreciated. Having gone long on dollars and short on sterling, Soros decided to speak up noisily. He publicized his short-selling and made statements in newspapers that the pound would soon be devalued. It wasn't long before sterling was devalued; he made $1 billion in profit.

The point can be made more generally: financial markets are subject to manipulation because they have become socially structured. Market leaders and financial gurus are admired and followed (at least until very recently). The heavyweights thus dominate the business. An obvious consequence of this is that there is a strong tendency in financial markets for further concentration of resources.

Another source of the power of financial actors is their obvious affinity for the rampant free-market philosophy of neo-liberalism. The freedom with which they move financial capital around depends, of course, on the market-friendly policies of the so-called Washington Consensus.19 As long as they are seen as part of the governing coalition, they derive special powers to regulate themselves rather than be controlled by an independent government agency or civil society. Their power also is reinforced by the activities of several collective associations of financial actors,20 which lobby on their behalf.

One more source of power for the financial actors is their knowledge that if they are big enough and sufficiently interlaced with other financial actors, then the "system" will keep them from failing. Consider the case of Long-term Capital Management, a hedge fund partnership started in 1994. It was able to borrow from various banks the equivalent of forty times its capitalization in order to make bets on changes in the relative prices of bonds in the U.S. and abroad. When the Russian government announced a devaluation and debt moratorium in August, 1998, it produced losses that the fund could not sustain. Nor could some of the banks that had loaned large amounts to the fund. Accordingly, the Federal Reserve Bank of New York, fearful that the risk to the entire system was too high, orchestrated a private rescue operation by fourteen banks and other financial institutions, which re-capitalized the company for $3.5 billion.

Financial actors also have the power indirectly to influence non-financial actors such as firms or states. By providing economic incentives to gamble and speculate on financial instruments, global financial markets divert funds from long-term productive investments. In all probability, they also encourage banks and financial institutions to maintain a regime of higher real interest rates that reduce the ability of productive enterprises to obtain credit. The volatility of global financial markets, moreover, brings uncertainty and volatility in interest rates and exchange rates that are harmful to various sectors of the real economy, particularly international trade.

The above stories about George Soros and Long-term Capital Management are good illustrations of the consequences for non-financial actors of actions by financial actors. Both episodes are examples of games that are basically zero-sum, at least in the short-run. Nothing new was produced; no new values were created. In the 1992 case about speculating against sterling, the Quantum Fund's profits were at the expense of the British government, especially the Bank of England, and British taxpayers. In 1998, the losses suffered by Long-term Capital Management came out of the pockets of the stockholders of the banks that bailed it out, as the stock-market value of their shares depreciated. Hence, the financial system tends to feed itself by drawing more resources from other sectors of the economy, undermining the vitality of the real economy.


Consequences of global financial flows

The dominant economic ideology of the last twenty-five years has been embodied in the so-called Washington Consensus. It is a "market-friendly" ideology that traces its roots to longstanding policies of the IMF that encourage macroeconomic "stabilization;" to adoption by the World Bank of ideas in vogue in Washington early in the Reagan period concerning deregulation and supply-side economics; to the zeal of the Thatcher government in England for privatizing public enterprises; and perhaps most of all to the neo-liberal tendencies of the business community and the economics profession in the U.S. The implementation of these policies of economic "reform," by first "stabilizing" the macro-economy and then "adjusting" the market so that it can perform more efficiently, are supposed to pay off in the form of faster output growth and rising real incomes

Among these policy prescriptions is financial liberalization in both the developed and the developing countries. Domestically it is achieved by weakening or removing controls on interest and credit and by diluting the differences between banks, insurance and finance companies. International financial liberation, on the other hand, demands removal of controls and regulations on both the inflows and outflows of financial instruments that move through foreign exchange markets. It is the implementation of these reforms that is perhaps the single most important cause of the surge in global financial flows. To be sure, the influence of technological advances has broken the natural barriers of space and time for financial markets as twenty-four hour electronic trading has grown. The fact that throughout most of the 1980s and 1990s the developed countries suffered from over-capacity and overproduction in manufacturing may also have led the owners of financial capital to look for alternative profit opportunities.

It now is time to ask whether the implementation of all these reforms, on balance, has produced good or bad results. The focus of this section will be mostly on the consequences of large and expanding international financial flows. After all, they are the main concern of this essay. But first, we should ask whether or not the policies of growth and rising real incomes promoted by the Washington Consensus have borne fruit.

Growth and income

There is little doubt that the introduction of the Washington Consensus' policy mix expanded the volume of international trade. As a result, trade in goods and services has grown at more than twice the rate of global gross domestic product (GDP), and developing countries' share of trade has risen from 23 to 29 percent. Increasing numbers of firms from developing countries, like their industrial-country counterparts, engage in transnational production and adopt a global perspective in structuring their operations. The flow of foreign direct investments and foreign portfolio investments has multiplied even more rapidly than trade, despite the financial instability experienced in Asia, Brazil, Russia, and elsewhere in recent years.

The effects of liberalization have not been uniformly favorable, however. After at least ten full years of experience with the Washington Consensus, several recent studies have begun to assess the consequences for developing countries of this experiment in more open markets.21 Except for the years of crisis in a number of the countries studied, most developing countries achieved moderate growth rates of gross domestic product in the 1990s - considerably higher than in the l980s in Africa and Latin America during the debt crisis, but remarkably unchanged in most other regions. Moreover, average annual growth in the 1990s was slightly lower than in the twenty-five years preceding the debt crisis when a strategy of substituting domestic production for imports was in fullest use. When population growth rates are taken into consideration, the growth rate of per capita income in the developing countries studied during the 1990s also was somewhat lower than in the 1960s and 1970s. Toward the end of the 1990s, growth tapered off in many countries due to emerging domestic financial crises or external events. There is little evidence in these figures, therefore, to suggest the strategy of liberalization boosted growth rates appreciably.

Nor did the distribution of income improve in most developing countries in the 1990s. On the contrary, virtually without exception the wage differentials between skilled and unskilled workers rose with liberalization. The reasons for this varied widely among countries, but one of the most important reasons was the fact that the number of relatively well-paid jobs in sectors of the economy involved with international trade, though growing, was insufficient to absorb available workers, forcing many workers into more precarious and poorly paid employment in the non-traded, informal trade, and service sectors or where traditional agriculture served as a sponge for the labor market. Between the mid-1960s and the late-1990s, the poorest 20 percent of the world population saw its share of income fall from 2.3 to 1.4 percent. Meanwhile, the share of the wealthiest quintile increased from 70 to 85 percent.22

Risk and reward

While all markets are imperfect and subject to failure, financial markets are more prone than others to fail because they are plagued with three particular shortcomings: asymmetric information, herd behavior and self-fulfilling panics. Asymmetric information is a problem whenever one party to an economic transaction has insufficient information to make rational and consistent decisions. In most financial markets where borrowing and lending take place, borrowers usually have better information about the potential returns and risks associated with the investments to be financed by the loans than do the lenders. This becomes especially true as financial transactions disperse across the globe, often between borrowers and lenders of widely different cultures.

Asymmetric information leads to adverse selection and moral hazard. Adverse selection occurs when, say, lenders have too little information to choose from among potential borrowers those who are most likely to use the loans wisely. The lenders' gullibility, therefore, attracts more unworthy borrowers. Moral hazard occurs when borrowers engage in excessively risky activities that were unanticipated by lenders and lead to significant losses for the lender. Yet another form of moral hazard occurs when lenders indulge in lending indiscriminately because they assume that the government or an international institution will bail them out if the loans go awry.

A good illustration of asymmetric information is the story of bank lending following OPEC's large increase in oil prices following 1973. Awash in cash, the oil exporters deposited large amounts in commercial banks that then perfected the Euro-currency loan for developing countries. Eager to put excess reserves to use, the banks spent little time discriminating among potential borrowers, in part because they believed host governments or international agencies would guarantee the loans. At the same time, developing countries found they could readily borrow not only to import oil, but also to increase other kinds of expenditures. This meant they could use borrowed funds to maintain domestic spending rather than be forced to adjust to the new realities of higher prices for necessary imports. There is considerable evidence that moral hazard also was present in the Mexican crises in 1982 and 1994, and in the Southeast Asian crises in 1997-8.

Yet another illustration of asymmetric information is the tendency of financial firms, especially on Wall Street and in the City of London, to invent ever more complex derivatives to shift risk around the financial system. The market for these products is growing rapidly, both on futures and options exchanges (two of the several places where derivatives are traded). A financial engineer, for example, can take the risk in, say, a bond and break it down into a series of smaller risks, such as that inflation will reduce its real value or that the borrower will default. These smaller risks can then be priced and sold, using derivatives, so that the bondholder keeps only those risks he wishes to bear. But this is not a simple task, particularly when it involves assets with risk exposures far into the future and which are traded so rarely that there is no good market benchmark for setting the price. Enron, for instance, sold a lot of these sorts of derivatives, booking profits on them immediately even though there was a serious doubt about their long-term profitability. Stories of huge losses incurred in derivative trading are legion. The real challenge before central banks and regulatory bodies is to curb speculative behavior and bring discipline in derivative markets.

A second source of risk in financial markets is the tendency of borrowers and lenders alike to engage in herd behavior. John Maynard Keynes, writing in the 1930s, suggested that financial markets are like "beauty contests." His analogy was to a game in the British Sunday newspapers that asked readers to rank pictures of women according to their guess about the average choice by other respondents. The winner, therefore, does not express his own preferences, but rather anticipates "what average opinion expects average opinion to be." Accordingly, Keynes thought that anyone who obtained information or signals that pointed to swings in average opinion and to how it would react to changing events had the basis for substantial gain. Objective information about economic data was not enough. Rather, simple slogans "like public expenditure is bad," "lower unemployment leads to inflation," "larger deficits lead to higher interest rates," were then the more likely sources of changes in public opinion. What mattered was that average opinion believed them to be true, and that advance knowledge of, say, more public spending, lower unemployment, or larger deficits, respectively, offered the speculator a special advantage.

A financial market that operates as a beauty contest is likely to be highly unstable and prone to severe changes. One reason for this is that people trading in financial assets, even today, know very little about them. People who hold stock know little about the companies that issued them. Investors in mutual funds know little about the stocks their funds are invested in. Bondholders know little about the companies or governments that issued the bonds. Even knowledgeable professionals are often more concerned with judging how swings in conventional opinion might change market values rather than with the long-term returns on investments. Indeed, since careful analysis of risks and rewards is costly and time consuming, it often makes sense for fund managers and traders to follow the herd. If they decide rationally not to follow the herd, their competence may be seriously questioned. On the other hand, if fund managers follow the herd and the herd suffers losses, few will question their competence because others too suffered losses. When financial markets are operated like a beauty contest, everyone wants to sell at the same time and nobody wants to buy.

The financial markets behaved as predicted shortly after several industrial countries, including the U.S. and Germany, abolished all restrictions on international capital movements in 1973. The new system proved to be highly volatile, with exchange rates, interest rates, and financial asset-prices subject to large short-term fluctuations. The markets also were susceptible to contagion when financial tremors spread from their epicenter to other countries and markets that seemingly had little connection with the initial problem. In less than five years, it already was clear that both the surpluses and the deficits on the major countries' balance of payments were getting larger, not smaller, despite significant changes in the exchange rates.

In some cases, a financial crisis can be self-fulfilling. A rumor can trigger a self-fulfilling speculative attack, e.g. on a currency, that may be baseless and far removed from the economic fundamentals (unlike the Soros story above). This can cause a sudden shift in the herd's intentions and lead to unanticipated market movements that create severe financial crises. Consider, for example, the succession of major financial crises that have pock-marked the recent history of international financial markets, including Latin America's Southern Cone crisis of 1979-81, the developing-country debt crisis of 1982, the Mexican crisis of 1994-95, the Asian crisis of 1997-98, the Russian crisis of 1998, the Brazilian crisis of 1999, and the Argentine crisis of 2001-02.

Perhaps the Asian crisis of 1997-98 is the most interesting in this regard, for there were relatively few signals beforehand of impending crisis. All the main East Asian economies displayed in 1994-96 low inflation, fiscal surpluses or balanced budgets, limited public debt, high savings and investment rates, substantial foreign exchange reserves and no signs of deterioration before the crisis. This background has led many analysts to suppose that the crisis was a mere product of the global financial system. But what could have triggered the herd to stampede out of Asian currencies? No doubt several factors were at work. Before the crisis that started in the summer of 1997, there was a rise in short-term lending to Asians by Western and Japanese banks with little or no premiums, a fact that the Bank for International Settlement raised questions about. Alert investors, especially hedge funds, also noticed that substantial portions of East and Southeast Asian borrowings were going into non-productive assets and real estate that often were linked to political connections. In fact, some of the funds pouring into non-productive assets were coming out of the productive sector, mortgaging the longer-term viability of some real economies. Information about the structure and policies of financial sectors was opaque. Thus, opinions began to change among key lenders about the regulation of financial sectors in several Asian countries and their destabilizing lack of transparency. Suddenly, several important hedge funds reduced their exposure by shorting currency futures, followed quickly by Western mutual funds. The calling of loans led quickly to deep depression in several Asian countries. It has been estimated that the Asian crisis and its global repercussions cut global output by $2 trillion in 1998-2000.

Loss of government autonomy

Both economic theory and the experience of managing the external financial affairs of nations tell us that it is virtually impossible to maintain (1) full financial mobility, (2) a fixed exchange rate, and (3) freedom to seek macro-economic balance (full employment with little inflation) with appropriate monetary and fiscal policies. Only two of these policy objectives can be consistently maintained. If the authorities try to pursue all three, they will sooner or later be punished by destabilizing financial flows, as in the run up to the Great Depression around 1930 and in the months before sterling's collapse 1992. If a government tries to stimulate its economy with lax monetary policy, for example, and players with significant market power like George Soros sense that at a fixed exchange rate, foreigners will be unwilling to lend enough to finance the country's current account deficit, they will begin to flee the home currency in order to avoid the capital losses they will suffer if and when there is a devaluation. If reserve losses accelerate and more players follow suit, crisis ensues. The authorities are forced to devalue, interest rates soar, and the successful attackers sit back to count their profits.

For nations wishing to retain reasonably independent monetary and fiscal authority in order to cater to domestic needs, the solution is to allow the exchange rate to move up or down as conditions in the foreign exchange markets dictate, or to establish some sort of control over the movement of financial instruments in and out of the country, or to devise some combination of these two adjustment mechanisms. The debate over whether fixed or flexible exchange rates is the wiser policy continues to rage in academic quarters and in finance ministries all over the world. For the most part, the international business community prefers reasonably fixed exchange rates in order to minimize their costs of hedging foreign currency positions. Thus instituting some form of control over speculative financial movements may be an appropriate solution to the "trilemma."

The capacity of a nation to levy enough taxes to finance needed public expenditures is another important reason to retain independent authority. A central function of government has been to insulate domestic groups from excessive market risks, particularly those originating in international transactions. This is the way governments have maintained domestic political support for liberalizing trade and finance throughout the postwar period. Yet many governments are less able today to help citizens that are injured by freer markets with unemployment compensation, severance payments, and adjustment assistance because the slightest hint of raising taxes to pay for these vital public services leads to capital flight in a world of heightened financial mobility.

This is a dilemma. Increased integration into the world economy has raised the need of governments to redistribute tax revenues or implement generous social programs in order to protect the vast majority of the population that remains internationally immobile. At the same time, governments find themselves less able to maintain the safety nets needed to preserve social stability. It seems reasonable to suppose, therefore, that doing things that will bolster the ability of governments to levy sufficient taxes - curbing tax avoidance by transnational corporations, controlling offshore tax havens, regulating capital flight - would help make globalization slightly more democratic.

Winners and losers

The people who benefit from speculative financial movements are, for the most part, better educated and wealthier than the vast majority of fellow citizens. They are the elites, whatever the country. As noted above, they have fewer connections to the real economy of production and exchange than most people. And their purpose in trading financial assets, again for the most part, is to make a profit quickly rather than wait for an investment project to mature.

People who do not participate directly in the buying and selling of short-term financial instruments are nonetheless influenced indirectly by the macroeconomic instability and contagion that often accompany interruptions in financial market flows. This is true for people both in developed and developing countries. In developed countries, the voracious appetite of financial markets for more and more resources saps the vitality of the real economy - the economy that most people depend upon for their livelihood. It has been shown that real interest rates rise as a result of the expansion of speculative financial markets. This rise in real interest rates, in turn, dampens real investment and economic growth while serving to concentrate wealth and political power within a growing worldwide rentier class (people who depend for their income on interest, dividends, and rents).23 Rather, the long-term health of the economy depends upon directing investable funds into productive investments rather than into speculation.

In developing countries, attracting global investors' attention is a mixed blessing. Capital market inflows provide important support for building infrastructure and harnessing natural and human resources. At the same time, surges in money market inflows may distort relative prices, exacerbate weakness in a nation's financial sector, and feed bubbles. As the 1997 Asian crisis attests, financial capital may just as easily flow out of as into a country. Unstable financial flows often lead to one of three kinds of crises:

Although these three types of crises sometimes appear singly, they more often arrive in combination because external shocks or changed market expectations are likely to occur simultaneously in the market for government bonds, the foreign exchange market, and the markets for bank assets. Approximately sixty developing countries have experienced extreme financial crises in the past decade.24

The vast majority of people in the developing world suffer from these convulsive changes. They are tired of adjusting to changes over which they exercise absolutely no control. Most people in these countries view Western capitalism as a private club, a discriminatory system that benefits only the West and the elites who live inside "the bell jars" of poor countries. Even as they consume the consumer goods of the West, they are quite aware that they still linger at the periphery of the capitalist game. They have no stake in it, and they believe that they suffer its consequences. As Hernando deSoto puts it, "Globalization should not be just about interconnecting the bell jars of the privileged few."25

Social solidarity

Karl Polanyi in The Great Transformation sought to explain how the "liberal creed" contributed to the catastrophes of war and depression associated with the first half of the twentieth century. Polanyi's central argument, which in fact can be traced back to Adam Smith, is that markets do indeed promote efficiency and change, but that they achieve this through undermining social coherence and solidarity. Markets must therefore be embedded within social institutions that mitigate their negative consequences.

The evidence of more recent times suggests that the global spread of free-market policies has been accompanied by the decline of countervailing institutions of social solidarity. Indeed, a main feature of the introduction of market-friendly policies has been to weaken local institutions of social solidarity. Consider, for example, the top-down policy prescriptions of the IMF and World Bank during the developing world's debt crisis in the 1980s. These policies evolved into an intricate web of expected behaviors by developing countries. In order for developing countries to expect private businesses and financial interests to invest funds within their borders and to boost the growth potential of domestic economies, they needed to drop the "outdated and inefficient" policies that dominated development strategies for most of the postwar period and adopt in their place policies that are designed to encourage foreign trade and freer financial markets. Without significant adjustments in the ways economies were managed, it was suggested, nations soon would be left behind.

The list of Washington Consensus requirements was long and daunting:

In a provocative article, Ute Pieper and Lance Taylor point out that market outcomes often conflict with other valuable social institutions. In addition, they emphasize that markets function effectively only when they are "embedded" in society. The authors then look carefully at the experience of a number of developing countries as they struggled to comply with the policy prescriptions of the IMF and the Fund. In almost every case, they demonstrate conclusively that the impact of these efforts was to make society an "adjunct to the market."26

An appropriate balance is not being struck between the economic and non-economic aspirations of human beings and their communities. Indeed, the evidence is mounting that globalization's trajectory can easily lead to social disintegration - to the splitting apart of nations along lines of economic status, mobility, region, or social norms. Globalization not only highlights and exacerbates tensions among groups; it also reduces the willingness of internationally mobile groups to cooperate with others in resolving disagreements and conflicts.


Policy options

History confirms that free-markets are inherently volatile institutions, prone to speculative booms and busts. Overshooting, especially in financial markets, is their normal condition. To work well, free markets need not only regulation, but active management. During the first half of the post-war era, world markets were kept reasonably stable by national governments and by a regime of international cooperation. Only lately has a much earlier idea been revived and made an orthodoxy - the idea adopted by the Washington Consensus that, provided there are clear and well-enforced rules-of-the-game, free markets can be self-regulating because they embody the rational expectations that participants form about the future.

On the contrary, since markets are themselves shaped by human expectations, their behavior cannot be rationally predicted. The forces that drive markets are not mechanical processes of cause and effect, as assumed in most of economic theory. They are what George Soros has termed "reflexive interactions."27 Because markets are governed by highly combustible interactions among beliefs, they cannot be self-regulating.

The question before us then, is what could be done to better regulate financial markets and to bring active management back into the task of "embedding" markets in society, rather than the other way around? Monetary authorities such as the Federal Reserve System in the U.S. and the central banks of other countries were formed long ago in order to dampen the inherent instabilities of financial market in their home countries. But the evolution of an international regulatory framework has not kept pace with the globalization of financial markets. The International Monetary Fund was not designed to cope with the volume and instability of recent financial trends.

Capital controls

Given the problems outlined above about short-term speculative financial transactions, one might wonder why national policy-makers have not insulated their financial markets by imposing some sort of control over financial capital. The answer, of course, is that some have continued trying to do so despite discouragement from the IMF. For example, some have put limitations on the quantity, conditions, or destinations of financial flows. Others have tried to impose a tax on short-term borrowing by national firms from foreign banks. This is said to be "market-based" because it operates by altering the cost of foreign funds. If such transactions were absolutely prohibited, they would be called "non-market" interventions.

A more extreme form of financial capital controls, one that controls movement of foreign exchange across international borders, also has been tried in a number of countries. This form of control requires that some if not all foreign currency inflows be surrendered to the central bank or a government agency, often at a fixed price that differs from that which would be set in free market. The receiving agency then determines the uses of foreign exchange. The absence of exchange controls means that currencies are "convertible."

The neo-liberal argument opposing financial capital controls asserts that their removal will enhance economic efficiency and reduce corruption. It is based on two basic propositions in economic theory that depend for their proof on perfectly competitive markets in the real economy and perfectly efficient gatherers and transmitters of information in financial markets. Neither assumption is realistic in today's world. Indeed, a number of empirical studies have reported the effectiveness of capital controls in controlling capital flight, curbing volatile capital flows and protecting the domestic economy from negative external developments.

Developing countries have only recently abandoned, or still maintain, a variety of control regimes. Latin American countries traditionally have used market-based controls, putting taxes and surcharges on selected financial capital movements or tying them up in escrow accounts. Non-market based restrictions were more common in Asia until the early 1990s. Many commentators believe that their sudden removal in the early 1990s was a contributing cause to the Asian financial crises in 1997-8. The experience of two countries, Malaysia and Chile, with capital controls is especially instructive.

Malaysia, unlike its Asian neighbors, was reluctant to remove its restrictions on external borrowing by national firms unless they could show how they could earn enough foreign exchange to service their debts. Then when the Asian crises hit, its government imposed exchange controls, in effect making its local currency that was held outside the country inconvertible into foreign exchange. After the ringget was devalued, exporters were required to surrender foreign currency earnings to the central bank in exchange for local currency at the new pegged rate. The government also limited the amount of cash nationals could take abroad, and it prohibited the repatriation of earnings on foreign investments that had been held for less than one year. Thus, Malaysia's capital controls were focused mostly on controlling the outflow of short-term financial transactions. Happily, the authorities were able to stabilize the currency and reduce interest rates, leading to a degree of domestic recovery.28

Chile, on the other hand, tried to limit the inflow of short-term financial transactions. It did so by imposing a costly reserve requirement on foreign-owned capital held in the country for less than one year. Despite attempts to stimulate foreign direct investment of the funds, most of the reserve deposits were absorbed in the form of increased reserves at the central bank. In turn, this created a potential for expanding the money supply, which the government feared would lead to inflation. Rather than allow this to happen, the government "sterilized" the inflows by selling government bonds from its portfolio. But this pushed down the prices of bonds and pushed up the interest rates on them, discouraging business investment. Finally, when prices of copper (Chile's primary export) fell sharply in 1998, the control regime was scrapped.29

The tobin tax

A global tax on international currency movements was first proposed by James Tobin, a Yale University economist, in 1972.30 He suggested that a tax of one-quarter to one percent be levied on the value of all currency transactions that cross national borders. He reasoned that such a tax on all spot transactions would fall most heavily on transactions that involve very short round-trips across borders. In other words, it would be speculators with very short time-horizons that the tax would deter, rather than longer-term investors who can amortize the costs of the tax over many years. For example, the yearly cost of a 0.2 percent round trip tax would amount to 48 percent of the value of the traded amount if the round trip were daily, 10 percent if weekly and 2.4 percent if monthly. Since at least eighty percent of spot transactions in the foreign exchange markets are reversed in seven business days or less, the tax could have a profound effect on the costs of short-term speculators.

Of course, for those who believe in the efficiency of markets and the rationality of expectations, a transactions tax would only hinder market efficiency. They argue that speculative sales and purchases of foreign exchange are mostly the result of "wrong" national monetary and fiscal policies. While we readily admit that national policies sometimes do not accord with desired objectives, they nonetheless have little relevance for speculators focused on the next few seconds, minutes or hours.

Tobin did not intend for his proposal to involve a supranational taxation authority. Rather, governments would levy the tax nationally. In order to make the tax rate uniform across countries, however, an international agreement would have to be entered into by at least the principal financial centers. The revenue obtained from the tax could be designated for each country's foreign exchange reserve for use during periods of instability, or it could be directed into a common global fund for uses like aid to the poorest nations. In the latter case, the feasibility of the tax also would depend on an international political agreement. The revenue potential is sizeable, and could run as high as $500 billion annually.

There are two other advantages often cited by proponents of the Tobin tax. Tobin's original rationale for a foreign exchange transactions tax was to enhance policy autonomy in a world of high financial capital mobility. He argued that currency fluctuations often have very significant economic and political costs, especially for producers and consumers of traded goods. A Tobin tax, by breaking the condition that domestic interest rates may differ from foreign interest rates only to the extent that the exchange rate is expected to change (see p. 10), would allow authorities to pursue different policies than those prevailing abroad without exposing them to large exchange rate movements. More recent research suggests that this is only a very modest advantage.31

An additional advantage of the tax is that it could facilitate the monitoring of international financial flows. The world needs a centralized data-base on all kinds of financial flows. Neither the Bank for International Settlements nor the IMF has succeeded in providing enough information to monitor them all. This information should be regularly shared among countries and international institutions in order to collectively respond to emerging issues.

The feasibility issues raised by the Tobin tax are more political than technical. One of the issues is about the likelihood of evasion. All taxes suffer some evasion, but that has rarely been a reason for avoiding them. Ideally all jurisdictions should be a party to any agreement about a common transactions tax, since the temptation to trade through non-participating jurisdictions would be high. Failing that, one could levy a penalty on transactions with "Tobin tax havens" of, say, double the normal tax rate. Moreover, one could limit the problem of substituting untaxed assets for taxed assets by applying the tax to forwards, swaps and possibly other contracts.

Tobin and many others have assumed that the task of managing the tax should be assigned to the IMF. Others argue that the design of the tax is incompatible with the structure of the IMF and that the tax should be managed by a new supranational body. Which view will prevail depends upon the resolution of other outstanding issues. The Tobin tax is an idea that deserves careful consideration. It should not be dismissed as too idealistic or too impractical. It addresses with precision the problems of excessive instability in the foreign exchange markets, and it yields the additional advantage of providing a means to assist those in greater need.

Reforming the IMF

The IMF was established in 1944 to provide temporary financing for member governments to help them maintain pegged exchange rates during a period of internal adjustment. With the collapse of the pegged exchange rate regime in 1971, that responsibility has been eclipsed by its role as central arbiter of financial crises in developing countries. As noted above (p. 20), these crises may be of three different kinds: fiscal crises, foreign exchange crises, and banking crises.

Under current institutional arrangements, a nation suffering a serious fiscal crisis that could easily lead to default must seek temporary relief from its debts from three different (but interrelated) institutions: the IMF, which is sometimes willing to renegotiate loans in return for promises to adopt more stringent policies (see above); the so-called Paris Club that sometimes grants relief on bilateral (country to country) credits; and the London Club that sometimes gives relief on bank credits. This is an extremely cumbersome process that fails to provide debtor countries with standstill protection from creditors, with adequate working capital while debts are being renegotiated, or with ways to ensure an expeditious overall settlement. The existing process often takes several years to complete.

There is a growing consensus that this problem is best resolved with creation of a new international legal framework that provides for de facto sovereign bankruptcy. This could take the form of an International Bankruptcy Code with an international bankruptcy court, or it could involve a less formal functional equivalent to its mechanisms: automatic standstills, priority lending, and comprehensive reorganization plans supported by rules that do not require unanimous consent. Jeffrey Sachs recommends, for example, that the IMF issue a clear statement of operating principles covering all stages of a debtor's progression through "bankruptcy" to solvency. A new system of emergency priority lending from private capital markets could be developed, he suggests, under IMF supervision. He also feels that the IMF and member governments should develop model covenants for inclusion in future sovereign lending instruments that allow for priority lending and speedy renegotiation of debt claims.32

At the Joint Meeting of the IMF and the World Bank in September, 2002, the policy committee directed the IMF staff to develop by April, 2003, a "concrete proposal" for establishing an internationally recognized legal process for restructuring the debts of governments in default. It also endorsed efforts to include "collective action" clauses in future government bond issues to prevent one or two holdout creditors from blocking a debt-restructuring plan approved by a majority of creditors. The objective of both proposals is to resolve future debt crises quickly and before they threaten to destabilize large regions, as happened in Southeast Asia in 1997-98.

Member countries rarely receive support from the IMF any longer to maintain a particular nominal exchange rate. Because financial capital is so mobile now, pegged exchange rates probably are unsupportable. But there are special times when the IMF still might give such support during a foreign exchange crisis. International lending to support a given exchange rate is legitimate if the government is trying to establish confidence in a new national currency, or if its currency is recovering from a severe bout of hyperinflation. Ordinarily the foreign exchange should be provided from an international stabilization fund supervised by the IMF.

National central banks usually supervise and regulate the domestic banking sector. Thus, banking crises normally are handled by domestic institutions. This may not be possible, however, if the nation's banks hold large short-term liabilities denominated in foreign currencies. If the nation's central bank has insufficient reserves of foreign currencies to fund a large outflow of foreign currencies, there may be circumstances when the IMF or other lenders may wish to act as lenders-of-last-resort to a central bank under siege. Nations like Argentina that have engaged in "dollarization" are learning about the downside risks of holding large liabilities denominated in foreign currencies. The best way to avoid this problem is for governments and central banks to restrict the use of foreign currency deposits or other kinds of short-term foreign liabilities at domestic banks.

Overall, what is most needed is the availability of more capital in developing countries and much quicker responses, amply funded, to emerging financial crises.. George Soros has argued powerfully that the IMF needs to establish a better balance between crisis prevention and intervention.33 The IMF has made some progress in prevention by introducing Contingency Credit Lines (CCLs). The CCL rewards countries that follow sound policies by giving them access to IMF credit lines before rather than after a crisis erupts. But CCL terms were set too high and there have been no takers. Soros also has recommended the issuance of Special Drawing Rights (SDRs) that developed-countries would donate for the purpose of providing international assistance. Its proceeds would be used to finance "the provision of public goods on a global scale as well as to foster economic, social, and political progress in individual countries."34

A growing number of civil society institutions, however, oppose giving more money to the IMF unless it is basically reformed. They point out that it is a committed part of the Washington Consensus, the application of whose policies have made societies adjuncts of the market. They see the IMF as an instrument of the U.S. government and its corporate allies. The conditions it attaches to loans for troubled countries often do more to protect the interests of first world investors than to promote the long-term health of the developing countries. The needed chastening of speculative investors does not occur under these circumstances. There is evidence that in several major crises, IMF requirements for assisting nations have in fact worsened the situation and protracted the crises. The IMF opposed the policies that enabled Malaysia to weather the crisis in Southeast Asia, for example, while it urged the failed policies of other Southeast Asian nations. The vast literature cited by Pieper and Taylor (p. 22) is a convincing chronicle of earlier missteps. For such reasons as these, some civil society institutions argue that, unless IMF policies are changed, giving the institution more money will do more harm than good.

Fortunately, the IMF's policies are beginning to change, partly as a result of criticisms by civil society institutions, but more through recognition of the seriousness of the problems with the present system. In the wake of recent financial crises, leaders in the IMF as well as the World Bank are looking for ways to reform the international financial architecture. Arguably, their emphasis is shifting away from slavish devotion to the prescriptions of the Washington Consensus and toward more state intervention in financial markets. Joseph Stiglitz, the Nobel Laureate who has been particularly critical of the IMF, nonetheless acknowledges that its policy stances are improving.35

The IMF has begun to recognize the importance of at least functional public interventions in markets and the need to provide more supporting revenues. It has realized that controls on external financial movements and prudent regulation can help contain financial crises. It has abandoned the doctrine, long the backbone of structural adjustment policies, that raising the local interest rate will stimulate saving and thereby growth. Both the IMF and the World Bank have rolled over or forgiven the bulk of official debt owed by the poorest economies.

Whether these and other promising changes in IMF thinking and policy formation are sufficient to assure that its future responses to crises will be benign still is not clear. While celebrating what they view as belated improvements, many critics of the IMF among civil society institutions are not convinced that they are sufficiently basic. Even if the IMF avoids repeating some of its more egregious mistakes, some believe that it is likely to continue to function chiefly for the benefit of the international financial community rather than the masses of people. Rather, they believe that, at least in the long term, it would be much better for control over international finance to reside in new institutions under a restructured United Nations. They favor the U.N. because it has a broader mandate, is more open and democratic, and, in its practice, has given much greater weight to human, social, and environmental priorities.

Many civil society institutions want the primary focus of reform to be on taming speculation, restoring the control of their economies to nations, and embedding economies in the wider society. They believe that if these policies are adopted there will be less need for large funding to deal with financial crises. There remains, however, the fact that such crises are occurring and will continue to occur for some time. The IMF is the only institution positioned to respond to these crises. Hence, even for those who sympathize with the goals of the civil society institutions, there is a strong argument for more financing for the IMF.

A world financial authority

A variety of public and private citizens and institutions have recently proposed the establishment of a World Financial Authority (WFA) to perform in the domain of world financial markets what national regulators do in domestic markets. Some believe it should be built upon the foundation of global financial surveillance and regulation that have already been laid by the Bank for International Settlements in Basel, Switzerland. Others regard it as a natural extension of the activities of the IMF. Still others are less interested in the precise institutional form it would take than in the clear delineation of the tasks that need to be done by someone.

Its first task probably should be to provide sufficient and timely financial assistance during crises to avert contagion and defaults. This r