Commentary on Political Economy

Sunday 31 July 2011

French Sensibilities - Michel Rocard and "the Fracture"

By far the sharpest recent analysis of "the Great Financial Crisis" to have appeared anywhere is this one by the ex-prime minister (President du Conseil) of France, Michel Rocard. The drawback is that it is in French, so I will have to take the non-French readers briefly through it for them to benefit.

Many of our friends will recognise in Rocard's "perceptive" analysis many of the analytical themes that we have developed on this site from a more "theoretical" standpoint. Rocard lacks the theoretical tools for a proper analysis, but his "perceptiveness" is impeccable (that's what we are saying). After decrying the inability of the G20 to deal decisively with the "crisis", Rocard magnificently draws the focus of this "failure of inter-national co-ordination" precisely on the fact that it is impossible for global capitalism to remain "global" while its "member countries" fail to agree on the role and function and structure of the "collective capitalist" (the nation-state) in the overall control and leadership of the "cycle", of the "crisis".

Not only, says Rocard, is there disagreement between capitalist States, but there is even greater disagreement "within" them! With the consequence that we have a rapidly growing "fracture" (something we have analysed here - see our othe entries) between and within national capitalist elites about precisely this requisite "role" of the capitalist State in what is "notionally" or "supposedly" a "private capitalist national and world economy"!

Rocard zeroes in on a particular "theme" of analysis - one that we have explored at length on this site: and that is, the role of central banks in ensuring strict monetary control of inflation, whilst at the same time "private capital" accumulated profits from the "emerging economies" that could not be "re-cycled" in the West except through "asset-price inflation"! The consequent spiral of speculative investments has led nation-states "to rescue" the systemic risk posed by "private" corporations that have grown "too big to fail" on the back of this "dynamic". And finally we find that nation-states are now indebted precisely at a time when the "old logic" of raising interest rates to restrain the role of the State in the "private" economy threatens to send both the State and the "capitalist system" bankrupt!

This is the "logic" that the Fed is trying to avoid in the US, but the ECB and the Chinese and Brasilian and Indian central banks have no choice but to enforce. Now, it is precisely this "logic" that is driving the global capitalist economy "to the edge" - and that no amount of "debt-ceiling negotiations" can fix! Cheers to all.

Friday 29 July 2011

Reclaiming Theory from Bourgeois "Syrens"

We wanted rapidly to draw three articles to our friends' attention that manage to do two useful things: inform us a little more on the "debt ceiling" situation, and remind us of how our commentary here is far superior to anything that even the brightest (and we mean that sincerely) pundits on financial matters can manage!

First of all, the Lex Column from the FT on the US dollar - you can see how 'Lex' does not understand the main reason for "the conundrum" that global capitalists buy more dollars even as "ratings agencies" prepare to devalue US debt!

Secondly, John Cassidy and especially James Surowiecki resort to fellow-bourgeois game-theoretic analyses from that charlatan-in-chief called Jon Elster and from the even greater "dog" called Thomas Schelling! We ought to remind our James Surowiecki (truly a fine gentleman) that with friends like these two, who spin miserable apologies for the status quo in the guise of "theory", we do not need enemies! So stop quoting them except to expose their infamy!

Adam Smith, Rousseau and Durkheim - and "the Fracture"

We wanted to reward our friends with a quick adaptation of some "sociological" reflections from the "Civil Society" chapter of our forthcoming work, Krisis, that can be applied ready-made to the current "government debt crises" unfolding in all major capitalist economies, China included, of course.

Lucio Colletti (in Ideologia e Societa') reports that Adam Smith once pointed to Jean-Jacques Rousseau as a glowing example of the florescence of sociological studies in France when compared with their dessication in Britain. Smith referred in particular to an essay by Rousseau in which he drew a sharp distinction between the "egoism" predominant in "modern society" and that noticeable in "primitive society". The difference, according to Rousseau, was that in primitive society we can also find aspects of "egoistic" behaviour, but that unlike "modern" (he meant "bourgeois") society, this "egoism" did not have such disastrous impact on the lives of other members of society.

We know that Adam Smith places the "natural propensity of human beings to truck, barter, and trade" at the very origin of the "market economy" (in chapter two of Wealth of Nations) - but he guards well from making it "essential" to the very survival of its "members". In other words, Smith sees "exchange" as an option, as a choice, that is an "excrescence" of pre-existing individual "specialisation", but does not see (what is in fact the case), that "specialisation" or "the division of social labour" is absolutely essential (!) to the survival of any human "society"!

Put in other words, it is not the propensity to exchange that allows human beings "to exchange" the pro-ducts they make; rather, it is the necessity of the division of social labour to our very "survival" (physical and mental) that allows the development of a "market society"!

This is precisely relevant to the "fracture" that we see in US society and in the European - indeed in all capitalist economies right now! - between those who understand that it is not possible to have a "society of individuals" whose "egoisms" will simply tear it apart, and those who fail to see this.

And I need not tell you which side "must" prevail! Because without the division of social labour, which is what "the collective capitalist", the State, guarantees, we simply cannot have a society at all! The French sociologist Emile Durkheim must have followed the steps of Rousseau: because in his La Division du Travail Social he does two things that make him extremely relevant to the current "crisis":
First, he speaks of "social labour" and not (!) of the "social division of labour" - so in other words Durkheim understands that there is no "labour" as such, there is only "social labour".
Second, Durkheim interestingly calls the division of social labour in "primitive" societies mechanical and that in "modern" societies organic.

Now, you and I would think that he had it the wrong way around - in the sense that there were no "machines" in primitive societies - so therefore how can their solidarity (or co-operation) be "mechanical"? And instead we have lots of "machinery" in modern societies - so how can our solidarity be "organic"? After all, we are as "inorganic" as any societies have been in human history!!

But you can see what Durkheim meant: - the "solidarity" of modern advanced industrial capitalist societies is "organic" because the degree of "inter-dependence" is such that just about every aspect of our "division of social labour" becomes "systemically risky"!!

Now, if you can explain this to a Tea Party yokel - those who would have us return to "the days of horse and buggy" or, again with FD Roosevelt, who would have us "fear fear itself" (!) - but of course you can't. So you will have to make them see it... if we are to have any "society" at all!
Cheers to all.

Thursday 28 July 2011

A Summary of the Situation

It is truly astounding to see so many pundits fumble and grope in total darkness in the most stupefied incomprehension while we witness the most astounding, significant "crisis" in the history of capitalism since the 1930s. And remember: "crisis" means "trans-formation", it means "innovation" - that is what Schumpeter taught us - and not just State "intervention" (Keynes).

The "debt crisis" that we are witnessing is only a "development" of the "great financial crisis" whereby Western governments, or "collective capitalists", were forced to take over the "bad loans" and investments made by "private capitalists" so as "to guarantee" the "profitability" of those investments - even though, with so little profits available, it is government bonds (treasuries and gilts) that are at least ensuring the return "of" capital to investors rather than any "real" retutn "on" capital.

The problem is that with States (collective capitalists) so indebted now, their "guarantee" of the capital that they hold and that they "force" banks to hold as "security" for their loans, there is a lot of "fictitious capital" washed around so that it becomes impossible to tell who is a "genuine" capitalist and who is not, what is a "profitable" investment and what is not.

Even at high levels of unemployment, the "availability" of workers to work at "reasonable wages" in the West is waning. And even China, for twenty years the source of cheap labour, can no longer supply human fodder for exploitation.

The result is that States are forced into "financial repression" - that is, forcing "private capitalists" to holf government debt at very low rates and actually "negative real" rates of return, so that inflation will eat up their capital and reduce the government debt until it can be repaid at a huge discount. Yet all the while the "weight" of the State in the economy grows because governments need to ensure a politically tolerable level of unemployment - with the result that soon it is projected that the US government will have a debt equal to 100% of GDP! In other words, you can forget about the "private capitalist economy": it is an entirely "public" one!

But this does not stop the huge corporations that are virtual monopolies in their branches of investment from further "concentration" so that essentially they become "systemically risky" for the entire reproduction of our society - and "too big to fail" in the process! So these corporations (especially the "financial" ones) have got some governments by the throat and are able to blackmail the body politic!

How long can this go on? Something must give. And that is why we have all these "debt ceiling" arguments between and among members of the bourgeoisie and between and among capitalist nation-states that cannot agree on who and how is going to bear the burden of this "crisis". The US Administration, for its part, is sick and tired of absorbing the exports of all other bourgeoisies - especially the "dictatorships" in China and Germany and Japan and Korea and Taiwan. Its policy of "malign neglect" is now to export inflation to the rest of the world by simply printing greenbacks. And far from "weakening" the dollar - which in any case is beneficial to US employment and exports - every time there is even the remote "chance" of renewed "crisis", the dollar and treasuries actually strengthen!

This should not surprise, except idiots such as FT commentators and Bill Gross, who simply cannot see the "logic" in all this! But we can. And you can find it in the analyses (some of them more "academic") that we have published here. Cheers.

Wednesday 27 July 2011

"On Passing-By" David Pilling's Imbecillity On the Financial Times

Wittgenstein famously wrote that what is "unspeakable" we must "pass over in silence". Nietzsche shook off his "monkey" in Zarathustra in an aphorism titled "On Passing-By". Should we also "pass by" the ineptitude and sheer callous inveterate stupidity that David Pilling puts on display with his laughable "weltanschauung" every time he "covers" China? (By the way, after sustained criticism from Joseph Belbruno he had lately stopped doing so [Anderlini does a far better job now] - but he is now "stealthily" wriggling his way back.... from "South-East Asia"!)
Why does he say that the US is "stealthily" making its way back into regional politics when, in actual and devastatingly evident "fact", the China Sea region has been "policed" by the US since World War Two even more than "Checkpoint Charlie" in Soviet-Era Berlin?
And why-oh-why should the US try "prissily" and "timorously" not (in Pilling's creative parlance) "to ruffle China's feathers"? Is it not a "fact" - or have we missed something - that the Chinese dictatorship is losing ground, influence and now even "face", not only in the world, not only in the "region", but also and above all.... at home! with its own people! as each new "disaster" from inflation to "train-wrecks" (prophesied, alas, also by Belbruno) begin to occur each day that .... "passes by"...????

Tuesday 26 July 2011

Crisis, Fragmentation, Fracture - Totality

May I be allowed, in characteristic 'mystical' fashion, a few reflections to help place current 'developments' in some context. Nietzsche once said that the best way to ensure the acquiescence of workers - was to make sure they were busy working! The 'compulsion' of work engenders its own 'regimentation'. And 'specialisation' ensures also that social agents remain 'divided' in terms of 'sectoral' interests (trade unions, for instance) and also in terms of their inability to have a 'vue d'ensemble', what Georg Lukacs called "the totality" of social life.
Add to this the fact that the bourgeoisie - the capitalist elites that 'own' the social resources and are charged with 'employing' them - has an 'interest' in ensuring that social life remains 'fragmented' and that society itself remains 'fractured', and you begin to understand why so few people (experts included) seem to have any 'clues' about what is happening all around them.
As I have argued repeatedly, this fragmentation and fracturing of our society is exacerbated by the need the bourgeoisie has to erect and glorify 'competition' as the overriding "common interest" of the society itself! The principal reason why governments are so heavily 'indebted' is that they have had (to adopt Gavyn Davies's own description) "to socialise" the losses that "private capital" incurred as a result of the wave of "privatisations" engineered during the Great Moderation. It is "curious" therefore that so many "experts" should insist now that the answer to government debt is... (guess!) "privatisation"! The question is not whether social resources are "private" or "public" - the question is how little "democratic" our society is!
And there is the rub! Governments are "indebted" because they have had "to socialise" what were "notionally private losses" and turn them into "notionally public debt" (this time the phrase is Martin Wolf's). - Which goes to demonstrate that the current "undemocratic" ownership and utilisation of "social resources" is incompatible with the pursuit of TWO objectives at the same time:- employment of those resources, on one side, and "profitability" on the opposite side. There is a contra-diction, a conflict between the two objectives. And it is a conflict - a "fracture" - that is now extending to the entire social structure!
This is where, to come to a conclusion, few "experts" seem to have a full grasp of "developments". The "crisis" that began as a "great financial crisis" cannot be given a "technical" solution because, as becomes each day more devastatingly clear, it is a "political crisis" - one that involves the very conception of the role of the collective capitalist, the State, in the reproduction of society itself as a "capitalist" society. The fact is that "profitability" is inconsistent with the "democratic" utilisation of social resources. One of two things: either we regress to the kind of social conditions that Western bourgeoisies enjoy in "emerging economies" (China and South East Asia, perhaps also India and Latin America) - or else we truly democratise the use of social resources! And by the way, it is not at all clear that "the Asian myth" has any truth to it at all!

Thursday 21 July 2011

KEYNES AND SCHUMPETER: Cycle, Crisis, Growth (Part II)

[As a reward to our loyal friends I publish here some "notes" on Keynes and Schumpeter that were written to form part of the final chapters of "Krisis".]

"Grasshoppers" and "ants. Consumers and workers. Investors and Savers. The dichotomy between Investments and Savings is what "the rate of profit", reflected ultimately in the rate of interest, is what links the two. As Carol Wilcox reminded us with her "fallacy of composition", Keynes could see that what is reasonable for the individual capitalist firm is not reasonable for the capitalist class "as a whole" because while the individual capitalist wishes to depress the wages of 'his' workers, 'he' wants to raise the wages of all other workers. This engenders a deflationary spiral of lower wages, lower prices and lower output and employment that ONLY the "collective capitalist" (the State) can stop and reverse.

Once the State has re-established the identity between Investments and Savings, Keynes concludes that Say's Law (or "the laws of classical economics") function normally. Equilibrium is reached and the Law of Value according to which "output" is properly distributed to each factor of production - profit, interest, rent and wages - can finally operate in accordance with economic theory.

The ESSENTIAL point here is that Keynes could see "Equilibrium" and, unlike the classical political economists (Smith, Ricardo, Say), HE COULD SEE "crisis". CRISIS was the "inequality" of Investments and Savings brought about by the "DOWNWARD RIGIDITY" of nominal wages - that is to say, by the antagonistic "resistance" or "composition" of workers AS A CLASS to the lowering of wages and conditions.

TO COME OUT of the "crisis" required the intervention of the State so as to bring the economy BACK to full OUTPUT and FULL EMPLOYMENT. Keynes could certainly SEE "crisis" in capitalism. And he could see GROWTH intended as "expansion of OUTPUT". What Keynes could NOT see was GROWTH AS DEVELOPMENT - in other words, Keynes could not see that "Crisis" could bring about NOT JUST "growth" as "full employment".

RATHER, as SCHUMPETER discovered (!), capitalism could overcome "Crisis" THROUGH GROWTH-AS-DEVELOPMENT.....through GROWTH-AS-INNOVATION!!

WHEREAS in Keynes capitalism was always prone to STAGNATION (as we saw earlier), and "technological innovation" was seen as an "exogenous factor", as a factor EXTERNAL to capitalist relations of production -  IN SCHUMPETER "growth-as-innovation" is an ENDOGENOUS FACTOR, a factor INTERNAL to capitalism. For Schumpeter "Innovation" is THE VERY ESSENCE of capitalism! (For all this, see Business Cycles.)

For Keynes, “technology”is purely a “scientific”, “neutral” process, a process completely independent of the social relations of production, a process standing OUTSIDE the wage relation and INDEPENDENT OF and AUTONOMOUS FROM the process of production. The neo-classical economic theory to which Keynes subscribed for its notion of “general equilibrium” NEVER STRAYED from the concept of an “INDEPENDENT PRODUCTION FUNCTION” under which the “economic system” GREW” from one “equilibrium” to the next in the quantitative terms of OUTPUT.

BUT, as Schumpeter discovered, in this neo-classical concept of “output” and “growth” THERE IS “crisis” but THERE IS NO “DEVELOPMENT”, there is “EXPANSION” but there is NO “INNOVATION”. In Keynes there is “control of Growth” but no “LEADERSHIP-as- development”, there is “growth of CONTROL” but no ‘Active domination of the productive process”, “active LEADERSHIP” through Innovation. There is a “bureaucratic” STATE-PLAN to come out of the “Crisis” but there is no understanding of how the process of production itself, the Rationalisation of Technology can serve as POLITICAL LEADERSHIP, as DOMINATION.

Keynes sees the NEGATIVE aspect of working-class antagonism in the “rigidity” of wages. But Schumpeter sees the “resistance” to Innovation! He sees the workers’ antagonism to “new technologies” that are UNDEMOCRATIC, AUTHORITARIAN forms of COMMAND over “living labour”!! (Cf. Business Cycles.)

THAT is WHY for Keynes the “collective capitalist”, the State can intervene to provide the “aggregate demand” that individual capitalists cannot supply. Keynes can see how the “rigidity” of the wage relation can be MASTERED by the State to bring about “full employment” and “higher output” or “GROWTH”. But Keynes – the “bureaucratic” Treasury official, Cambridge don, close to “aristocratic” circles - NEVER poses himself the problem of whether a “crisis” can be answered not just with “aggregate demand” or “growth of output” BUT RATHER with a “technological trans-formation” of the antagonism of the wage relation through the ENTREPRENEURIAL “revolutionary” or, in the words of Schumpeter, “creative destructive” transformational POWER OF INNOVATION!

THIS is the POWER of Schumpeter’s “ENTREPRENEURIAL SPIRIT” or “Unternehmergeist”! Schumpeter accepts the theoretical usefulness of neo-classical “equilibrium” analysis because of its “metaphysical” qualities of justification or apology for capitalist “market” relations of production arising out of the “FREE market”, out of “FREE exchange” in a “SELF-REGULATING MARKET” in which the participants “FREELY EXCHANGE” their original “ENDOWMENTS” – as in Walras’s system (not for nothing Schumpeter considered Walras the greatest economist).

But neo-classical equilibrium, Say’s Law and the LAW of Value can ONLY result in a “circular flow” (Theory of Econ. Devlpmnt.) – a STERILE “circularity” that ultimately will tend to the STAGNATION of “pure competition”. Indeed, for Schumpeter the “EC-CENTRICITY” of capitalism, its “CENTRI-FUGAL” quality IS NOT “exogenous”  - IT IS THE VERY NATURE OF CAPITALISM!! For Schumpeter, “Crisis” is not just a temporary “dis-equilibrium”, an “anomalous” IM-BALANCE in the system – NO! For Schumpeter “Crisis” is the NATURE of the capitalist economy, its very HEART AND SOUL, its empirical, visible “actu-ality” -  and, as we will see, the antagonism of workers is its MOTOR.

TO MOVE OUT (!!) of ….this “CIRCLE” (!!), the capitalist MUST TRANS-FORM the means of production! Capitalism must USE THE ‘CRISIS’ brought about by the antagonism of workers – MUST DOMINATE the ‘crisis’ – by introducing NEW PRODUCTIVE TECHNIQUES, through the process of “Research AND DEVELOPMENT” to bring about MORE than “quantitative Growth of OUTPUT”.

Schumpeter seeks to “hide” the political force of this concept behind its purely “consumerist” effects (consumers are “passive”, in Bus.Cycl.). He hides the political antagonism of the wage relation behind the POSITIVE responses of the ‘Unternehmegeist’ – the “Spirit” of the entrepreneur -, the “innovative” aspect of “CREATIVE destruction” (shopferische Zerstorung). BUT his ENTIRE “evolutionary” account of capitalism and its intrinsic endogenous “CRISES” (taken straight out of Marx’s notion of “accumulation” through the reduction of production time through technological innovation) and “theoretical” relation to Bohm-Bawerk’s “roundaboutness” (itself the enucleation of Schopenhauer’s Entsagung or “Renunciation” or “Self-denial” as the Askesis at the origin of PROFIT -  cf. again Weber’s Protestant Ethic) BETRAY the clear unstated purpose of the “Will to Conquer” NOT JUST in the sphere of distribution but PRE-DOMINANTLY in the sphere of PRODUCTION!!

This is substantiated also by his AWARENESS that “crises” are brought about by wage antagonism (as in Keynes, the tendency to monopoly and stagnation) ESPECIALLY in his later re-statement of the theory of “Innovation” where it is no longer the “individual” entrepreneur that originates the process but rather the monopolistic firm itself (!) that now subsumes the entire process of “innovation”. At this juncture the distinction between “Individualitat” and “Monopol” or “bureaucratic Rationalisierung” (cf. reference to Weber at start of Ch.2 of ‘Theorie’) is DISSOLVED: capitalist innovation is seen in its full and bare guise as naked “Will to Power” as “domination” over living labour.

The Entrepreneur MUST INNOVATE or “create” NEW “technologies” in order to DOMINATE the antagonism of workers by “DESTROYING” the current methods or OLD “technologies” of production SO AS TO “EXTEND” or “DEVELOP” its POWER over workers IN THE WORKPLACE and in the SOCIETY OF CAPITAL!!

Schumpeter must have been aware of this POLITICAL dimension of his ‘Theorie’ of “Development” because as soon as he states it he proceeds immediately (Ch. On ‘Capital’) to reassert at great length the “innovative” and “creative” motive of the “entrepreneurial Spirit” (in both the individual AND in the monopolistic firm) by seeking to interpret and explain away the “accumulation” motive in his account of “CAPITAL” as simply an “instrument”, a means-to-an-end (‘Innovation’) for the capitalist “entrepreneur” (individual or monopolistic firm) and not as AN END IN ITSELF!

Schumpeter specifically and explicitly DISTINGUISHES between “invention” which is part of “scientific research” and INNOVATION which is a GUIDED, INSTRUMENTAL, POLITICAL WILL-TO-POWER (he called it “Will to Conquer”, see Intro to Th. Of Econ. Devlpt.) apt to “dominate” THE MARKET” so as to establish a NEW MONOPOLY that can control the market. BUT this “control” is NEVER STATIC, NEVER ABSOLUTE – because the “Spirit” of capitalism, the “Entrepreneurial Spirit” is ‘to dominate through technology”. (Cf. Audi’s motto, “Vorsprung durch Technik”).

(One could summarise the difference biographically by saying that Keynes loved to sip tea with aristocracy, whilst Schumpeter’s ambition was to become the greatest horse-rider of his time! See Skidelsky above.)

Schumpeter’s conception of capitalism is “evolutionary” but in a “revolutionary” way – he sees “technological trans-formation” or “Innovation” as an evolutionary “MUTATION” of the process of production and distribution, of capitalist social relations of production, of “domination” over “living labour” or workers.

While “technological Rationalisation” makes this political process ENDOGENOUS, it is always the CHARISMA, the “leitender Geist” of the Entrepreneur that is needed to push the process FORWARD. Therefore the Entrepreneur MASTERS or DOMINATES the workers by SUB-ORDINATING the “technological Rationalisation” to the TASK or GOAL of DOMINATION – THIS IS   I-N-N-O-V-A-T-I-O-N!!! (Schumpeter promoted the study of “economic sociology” in this regard.)

But the rise of “trustified capitalism” leads to the “deadening” of this function and eventual “tendency” (as with Keynes) to STAGNATION. The link between “oligopoly” and “technological innovation” and tencency to “stagnation” has been studied in a “Keynesian-political” key by Sylos-Labini. S-L’s conclusions are extremely interesting because whilst on one side they place much emphasis on Keynesian “psychological/irrational” elements in investment decisions leading out of ‘stagnation’ (cf. K’s “animal spirits” and of course S’s “Unt’geist”) on the other side it deepens the analysis of the role of “technological innovation” or less in the concentration of firms (oligopoly) and its consequences for both investments and employment. S-L concentrates especially on oligopolistic control of ‘market share’ and profits as well as on the related skewed distribution of income giving rise to the contraction of overall consumption (aggregate demand). This is very close to Minsky once S-L turns to the effect of loose monetary and fiscal policies (to alleviate unemployment) on the inflating of asset ‘bubbles’ and ‘financial pyramids” by “financial oligopolies” – see BNP paper in ‘Favorites’).

Paolo Sylos-Labini covers many of the themes contained here regarding “oligopoly and technical progress” and particularly the different stances of Keynes and Schumpeter. Like us, he stresses Keynes’s concern with “full employment” and the tendency of his “equilibrium” analysis to lead to “stagnation” (same as the Kreislauf in Schump). A whole section of the book is dedicated to “Stagnation”.

S-L is also like Minsky concerned about the “debt structure” and the role of “oligopolies” in ensuring that “full employment” does not occur by introducing “innovations” (and by ‘resisting’ competitive ones) and also by avoiding “haircuts” (in the case of “financial oligopolies”).

(Conclude with hint to Grundrisse and “the limit to capital”.)

(Please DO NOT misunderstand our analysis as some “late-Romantic” opposition to “Technology” similar to Mary Shelley’s depiction in “Frankenstein” or Herbert Marcuse’s “One-Dimensional Man”. FAR FROM IT! What we are doing is exploring the ways in which “undemocratic” science and technology become “INSTRUMENTS or tools of DOMINATION”.)

Wednesday 20 July 2011

New "wittgenstein" post at FT's Gavyn Davies Blog

Having long fought for the recognition of the fact that "economics is a concentrate of politics", it would be remiss of me not to comment on Gavyn Davies's "opening" to political matters - especially one as "gravid" of meaning and importance as "the nation-state" - in this Blog. Even Martin Wolf felt impelled to chime in!
So I certainly welcome Davies's implicit acknowledgement that there is more to economics than what most "economists" would concede.
I would add a couple of "precis", however. The first is that one ought not to get the impression that the "political" (which includes "cultural") factors that impede a full European union are what "stand in the way" of the operation of "economic fundamentals". One gets the impression in this piece that Davies is "angling" for just such a position: "the laws of economics" are not in question; the European crisis is due entirely to "political" disagreements over how "to distribute" wealth in Europe.
Now, this would be "theoretically" the kind of Neo-Ricardian position taken by people like Kalecki and Sraffa, and even Minsky. The problem with this "position" is that it leaves intact the fact that economic "facts" relate above all to social relations (hence, yes, "politics")..... "of production"!! In other words, we cannot stop just at "distribution"; we must consider also how "wealth" is "produced"! All the old categories of "economics" are affected by this "critique".
So when we consider the European "crisis", we must be aware that first and foremost what is put into question is, yes the "politics" and the inability of the European bourgeoisie to agree to a new institutional asset to obviate the "economic disequilibria" or "im-balances" in Europe. But part and parcel of these "dis-equilibria" are precisely things such as "exchange rates" that are "fundamental" (that [!] is the word!) - "fundamental" [!] to the very "economic laws" that now come prepotently into contention!
What I am saying is that the EU started with EMU - with "fixed exchange rates", precisely because the European bourgeoisies agreed that EMU would "force them" into a "transfer union" at a later stage! If now that "the march of events" leads them to the "unavoidable conclusion" - of finally abandoning fiscal independence for their crumbling and ever more irrelevant "nation-states" - that is still an "economic" question! Indeed, it is THE economic question par excellence (at this stage any how)!
But once again, kudos and encouragement from me to Davies for displaying yet again his "ecumenical" intellectual penchant!

Tuesday 19 July 2011

This comment just appeared at the FT's Gavyn Davies Blog

A brief clarification on a comment Gavyn Davies made below. First, he is entirely right about the dollar 's reserve currency status not explaining why world capitalists are flocking to treasuries. If anything, it is the fact that capitalists flock to treasuries that... indicates why the dollar has reserve currency status! So we need to look at "why" treasuries are considered to be a "haven". We will not go into that here - we have done it below and in other posts here.
The next question is "the loss of confidence in the dollar in the early 70s". At the time, the dollar was emerging from the Bretton Woods system or Gold Dollar Exchange Standard with FIXED exchange rates, which meant that the greenback was badly over-valued and the US were financing the Vietnam war and its balance of trade deficits through "benign neglect".
Of course, that is not the case now! Exchange rates are "flexible" and the US dollar is already at a level where any "loss of confidence" in US monetary and fiscal policies would ALREADY be reflected in its exchange rate!!
This is not to say I disagree with Davies - not at all. But it is a very important point to bear in mind. Cheers.
(Incidentally, has a short piece on exchange rates today.)

Exchange Rates and The Current Crisis

To pursue this notion of 'value' I have followed the politico-economic 'trajectory' of 'capital' from its objectified phase (industrial capital) to its 'liquid' phase as 'finance capital' and to its need for MOBILITY, as 'capital flows', across national boundaries. In its 'flight' from country to country and currency to currency, finance capital tends..."to vote with its feet". In other words NOT ONLY does finance capital go where 'investment' or 'profit' opportunities are, BUT ALSO it penalises those countries or nation-states that offer the less favourable conditions for capital accumulation.

AS A RESULT, freedom of capital movement allows capital TO UNDERMINE individual nation-states and to limit their political autonomy and power. Finance capital has maximum leverage in a regime of fixed exchange rates, because its 'flight' forces nation-states into fiscal contraction with immediate consequences for employment, wages and growth.

THIS is what happened under the Gold Dollar Exchange Standard of fixed exchange rates erected at "Bretton Woods". This system collapsed because the ability of the US to meet its burgeoning deficits by printing dollars ("it's our currency and YOUR problem") meant that other participants (Europe and Japan) were left with imported inflation.

It was the collapse of 'Bretton Woods' in 1971 that resulted in a new regime of flexible exchange rates occasioned by violent 'finance-capital' speculative movements of 'hot money' that demolished fixed exchange rates whose RIGIDITY did not allow 'nation-states' to adopt flexible economic policies within their national boundaries.

AND HERE IS THE CRUNCH! The collapse of fixed exchange rates - that is, the fixed ratio of exchange between CURRENCIES - raised the entire question of whether the NATIONAL TERRITORIES over which 'nation-states' exercised 'sovereignty' through their 'currencies'....were 'OPTIMAL' in terms of the POLITICO-ECONOMIC EFFICACY or APPROPRIATENESS of national economic the face of "hot money" capital flows and 'speculation' against those currencies!!

To make this all-important point EXPLICIT, the question arose of whether 'nation-states' ought not to RE-DRAW THEIR BOUNDARIES to avoid monetary and financial crises!!

And THIS is where Robert Mundell (with timing and geniality reminiscent of Keynes) came up with his epochal studies on "optimal currency areas" (OCAs). Mundell's theoretical reflection was the most insightful, genial and supreme monument to the newly-asserted POWER of "financial markets"....TO DEMAND NEW BOUNDARIES FOR NATION-STATES, that is to say, TO DETERMINE THE FORM OF POLITICAL COMMAND OVER FORMERLY 'NATIONAL' TERRITORIES!!

I AM SURE YOU WILL ALL(!!) AGREE that IF this thesis is CORRECT or merely plausible, it revolutionises the entire way we interpret capital flows or financial markets! I will continue with a brief conclusive reflection on OCAs and "international co-ordination" in my final contribution when I will attempt to link all this back to....the beginning. And 'the beginning', of course, is always...VALUE.

Monday 18 July 2011

PS: This article by Simon Johnson at 'Project Syndicate' argues what we argue below: - that there is no alternative to higher US government deficits (which then "socialise" and "politicise" the use of social resources).

The Chinese Politburo and US Treasuries

The kind of idiocy that passes for analysis (one could call it "intelligence", as in "secret service") is abundantly on display in this NYT article on Chinese Poliburo treasury holdings (it is not "China" that buys US bonds; it's the Communist Party!).
The writer is suitably ecumenical - in fact, the piece is positively "anodyne" with its innocuous "journalese" and, above all, the tiresome mantra about "too big to fail". Essentially, it argues that the US and "China" are now in a symbiotic relationship (I would say "parasitical", with the CPA as the parasite): it is "Mutually Assured Destruction" all over again - if the Chinese murderers pull out, the US collapse, and if the US collapse, the Chinese economy goes down with them.... and so on. The value of the article is all in stressing that the Chinese bandits have nowhere else to stash their loot except in the US. Its weakness is that it does not explain why this is so, except to state the obvious: that the US financial markets are the only ones big and deep enough to absorb the vast mass of capital flowing into them. Yes, but..... Yes, but this begs the question: why can't the Chinese dictatorship develop its own money and capital markets? WHACK!!
THAT is the crunch! Because the Chinese "bandits" cannot be trusted with the world's capital! Indeed, the Chinese leadership do not even trust "one another" - they do not trust the Chinese government! - with their "hard-earned money"! To be able to trust their country, the Chinese fascists would have to build and enable a far more egalitarian society! But then, if they did that, much of the "profitability" of Western capitalist multinationals (everything from LVMH to BHP and Rio to Volkswagen and Siemens) would surely collapse! So you see in what kind of bind capitalism finds itself at this juncture! (Incidentally, the article correctly dismisses the European and Japanese markets as receptacles for global capital.) Indeed, one could argue that if the Chinese executioners began selling treasuries, there would be plenty of buyers from elsewhere ever more desirous to protect their capital from just the kind of "shock" that Chinese selling of treasuries entails!! Chinese Politburo selling would be.... a "self-defeating prophecy"!
But let me abandon this argument and raise one more, far deeper question: if indeed greater capitalist "investment" (use of social resources) is not possible because it is not "profitable" to employ and produce for people, may it not then be said that we have reached the ultimate "barrier" for capital? The one at which social resources cannot be utilised because with higher incomes available.... workers would cease to work? In other words, is not "work" as defined in capitalist society the ultimate "barrier" to capitalism itself? Cheers.

Sunday 17 July 2011

Capitalist 'Tractatus'

This comment just appeared on the Gavyn Davies Blog:
wittgenstein | July 18 5:08am | Permalink
PS: Let us "cursorily" decipher "wittgenstein"'s post below, in the style of the 'Tractatus'.
1. The US are the "core" (the political guarantor) of the capitalist world market and the US State is the guarantor of the world market for "private investors".
1.1 A "crisis" threatens that world market because private investors cannot invest "profitably".
Corollary: The US State needs to guarantee profitability for "private" investors and also its own political legitimacy by maintaining both investment and employment.
2. Any expansion of "employment" results in higher wages and lower "profitability" for "private" investors.
2.1 So as to secure both investment and employment, the State needs to take over the role of emoloyer and investor either directly or by "guaranteeing" profits to private investors that are "illusory" and inflate asset prices.
2.2 So as to maintain the "fiction" of "private investment", the State prints money and "borrows" from private investors so private investors can "delude themselves" that they are making "profits".
3. Normally, inflation should raise the cost of government "borrowing" (debt), but because the US State is the only "safe place" where private investors can deposit their capital, interest rates on public debt actually go "up" in the capitalist periphery but come "down" in the US "core".
4. As "private" investors scramble to secure "profitability" competitively between themselves, they seek to exploit "gaps", and by so doing widen those "gaps", in the capitalist system of investment entitlements (otherwise known as "markets", especially "financial markets").
Corollary: As a result, the entire method or system of "calculating entitlements" and "profits" begins to unravel and collapse. US treasuries become the absolute only "safe haven" for capital.
5. As the role of the State necessarily expands via the growth of "public debt", the entire "system of entitlements" becomes ever more "politicised" so that the entire "rationale" of capitalism (profits reflect the efiicient use of social resources) begins to unravel and collapse.
CONCLUSION: We need a better way of determining how to use social resources than that provided by capitalist institutions, viz. "the market", "corporations", "banks", "private investments", "the State" in its present undemocratic form. Cheers.

"Fundamentals" Idiocy

Yet again we have to remark on the appalling lack of "comprehension" of the extent of the "crisis" that is happening and widening all around us like one of those bottomless abysses that one can see only in Walt Disney cartoons! I will refrain from using epithets that would be indelicate in the direction of those toward whom one should point not Wittgenstein's hot poker, but rather a bazooka!
I really have little time to indulge rank stupidity, but I will invoke Galbraith's apocalyptic allusion to "the march of events" that now threatens to run underfoot the bourgeois pygmies that stand in the way.
Here are a couple of clues. First, Clive Crook's Column on the Republicans which, as I have argued (too often!), exposes their own peculiarly insane brand of "in-comprehension" and that will soon consign them to the dustbin of history where they belong. Here is Crook:
You will note that Crook clearly perceives the "untenability" of the Republican position on the debt ceiling and - therefore! - the fact that "the fracture of the Crisis-State" will have to be remedied by a fresh "New Deal" without which capitalism will simply have no future.

The other illustration (even better) comes from Munchau who, rare among the pundits, has a keen sense of the "political" and of how absolutely and devastatingly "dependent" on "the political" and on its "timing" (!!) all this nonsense about "markets" and "bond vigilantes" and (most indecently imbecilic of all) "fundamentals" (!!) - how idiotic all this is. Just listen to Munchau and tell me if this is not exactly what we have been screaming for months now - first, in the sense that there is a "dys-synchrony" and "dis-connection" between the institutional and political asset of capitalist regulation "at the European level" and the functioning of European capitalist industry; and second, about how US monetary policy (Bernanke's Fed) is ruining the EU via exported inflation. Just read here: (Munchau on the euro)
“It is hard to comprehend why markets decided to panic over Italy at this particular time. There was a trigger, for sure, but Italy’s problems are not new. The country needs to grow by 2-3 per cent a year in the long run to be able to remain in the eurozone. Or it needs lower interest rates. The markets understand that Italian politics makes the first difficult, and German politics makes the second tough. If you accept the constraints of eurozone membership, low productivity growth, and high interest rates as given, Italy is insolvent. One of those constraints will have to give.”
If anybody, after having read all this, still comes back to me about "fundamentals", I will be sure to kick their "fundamentals" very hard indeed!! Cheers.

Saturday 16 July 2011

The Crisis-State And Central Banks

It is exceedingly obvious, and we have argued this below, that the real effective cause of the current ‘crisis’ was ‘INTERNAL’ to capitalist social relations. The fact that it was not due to ‘external’ or exogenous causes raises the broader question of what REMEDIES are available to deal with the causes and with the consequences of the crisis.

We have seen that finance capital, in response to social antagonism and its wish to avoid it, needs and uses its own ‘liquidity’ and ‘mobility’ as well as its ‘fungibility’ (that is, its ability AS MONEY or MONETARY EQUIVALENT to take any PHYSICAL shape or form that WEALTH can take) – finance capital uses these ‘properties’ TO FORCE upon ‘nation-states’ conditions that it deems to be favourable to its accumulation (both through ‘speculative’ or ‘industrial’ investments) or indeed to its ‘mobility’ and ‘liquidity’ as well.

“Nation-states’ and ‘regions’ RAVAGED by these ‘capital flows’ seek TO PROTECT themselves through a variety of strategies. There are capital controls and financial market regulations. One other strategy is for different ‘nation-states’ to seek ‘to co-ordinate’ economic policies. Of course, for reasons that we canvassed below, some members of the European Community decided to embark on a European Monetary Union with a common currency.

Once again, it is important to note that these developments ARE NOT ACCIDENTAL but they are predictable institutional consequences of the social relations that we have described below. The construction of a ‘State-form’ at the level of the European Union gives us a unique opportunity to observe the complex forces that go into the formation of a STATE, much as the formation of a new galaxy gives us an insight in astrophysical science.

“FINANCIAL REPRESSION” is a misnomer, of course. What is “repression” to financial capital is “protection” to the rest of ‘society’, from industrial capital to workers. What we need to do is NOT to divine or guess what measures ‘nation-states’ will adopt. Rather, the overriding task is to com-prehend  the STRATEGIES that capitalist States will DEPLOY to ensure the survival of the “SYSTEM”.

In the antagonism of the wage relation capital stands to individual workers as the only social power, because it is a CONDITION of the wage relation that the worker ‘exchanges’ living labour (that is, political and social freedom) for a ‘wage’, or the monetary equivalent of objectified, past, dead labour with which to keep alive.

As capitalists compete for a greater share of ‘value’ (of command over living labour), the antagonism of the wage relation forces capital into a movement of greater CONCENTRATION leading to ‘monopolies’ or ‘oligopolies’; but at the same time capital is forced to use TECHNOLOGY to defeat the political composition of workers asking for better wages and conditions.

THE COMBINATION of capitalist “concentration” and “technocracy” we will call “RATIONALISATION”. Through this process of “rationalization” capital becomes MORE than a social force, MORE than even “the most important” social force – no! capital BECOMES SOCIETY!

In other words, we reach a stage where the success or failure of capitalist enterprise  becomes either the GROWTH of “society” or its RECESSION or even DEPRESSION. We have now reached what we can call “THE SOCIETY OF CAPITAL”.

So-called “financial repression” is simply the attempt by “society”, mainly workers but also industrial capital, TO PROTECT themselves from the RAVAGES of “finance capital” once ‘speculative activity’ has reached a stage where it poses a SYSTEMIC THREAT to “the society of capital” AS A WHOLE!

Once capitalist control over the means of production and distribution poses a “systemic threat” to the very survival and viability of “society”, it is “THE COLLECTIVE CAPITALIST”, that is, THE STATE that has to lead “society” POLITICALLY out of the mess – NOT “technocratically”, but “politically”!

Past economists, from Smith and Ricardo to the neo-classics and the Austrian School, even Marx himself, treated the capitalist economy as first and foremost a “market” that is virtually “self-regulating” unless there is some “external interference”. Either through the “law of value” or through “equilibrium” the so-called “market mechanism” manages to function.

BUT the obvious experience of “CRISES” is that the market does not and cannot “regulate” itself and that WHAT ENSURES THE SURVIVAL of the capitalist economy is in reality a POLITICAL MECHANISM. In other words, at the END of the capitalist movement to “concentration” and “technological” control – or “rationalization” – there must be a MECHANISM that allows the State to ensure the survival of this system; a mechanism that warns the State when the social level of antagonism is rising too high and “the system”, “the society of capital” is in danger.

It has become abundantly clear through this ‘crisis’ that that mechanism is MONEY and the CONTROL of money, through the “technocratic” functioning of the central bank, is the single most important gauge of social conflict and antagonism in the society of capital. More specifically, it is INFLATION (or even its “possibility” or “likelihood”) that functions as a “thermometer” to detect how “critical” the capitalist patient is. Money is the “safety valve” of capitalist governments, the difference between “growth” and “depression”. The control of the monetary medium therefore is the VITAL CLUE as to the “space of manoeuvre” (in the words of Max Weber in ‘Parlament und Regierung’) that is still available to the “SOCIAL BRAIN” of capital – the State.

THIS IS WHY the whole study of central bank policy and its interaction with the State and the financial system (a question raised with uncannily good timing by Martin Wolf) is THE KEY to understanding where the society of capital is likely to lead us.

THE QUESTION IS NOT what “technical measures” the State will adopt to e-merge from the “crisis”. The question is what “political strategies” will the State adopt TO RE-CAST the “economic growth” and “legitimacy” of the capitalist economy and, with it necessarily, of the wage relation.

Friday 15 July 2011

Financial Times Plays 'Cat-and-Mouse' (they are the mice!) With Belbruno

We must have a secret admirer somewhere in the world! Entirely by chance, a certain "Wittgenstein" wrote in at the FT's Gavyn Davies Blog the following:

wittgenstein | July 16 7:28am | Permalink
@ iduende Taking up your point about the international or geopolitical considerations in the choice of economic policies particularly in the US, which is the hegemonic capitalist country - the one that guarantees the political as well as economic efficacy of the world capitalist order -, I would agree with you entirely. Actually, I would also point out that the tendency of capitalist industry is to develop what may be called "the world market" - which entails not just "free trade" between nations, but also "free capital flows" and therefore relatively "flexible exchange rates". What this means, in turn, is that the degree of conflict between capitalists and national working classes is then "homogenised" or "homologated" across national boundaries!
In other words, it is impossible for national bourgeoisies to make economic policy decisions without paying all the attention possible to what OTHER national bourgeoisies are doing!! The whole idea of capitalist "market competition" consists precisely and entirely of this: - that class conflict is "internationalised" because capital will "flow" to areas where "profits" are politically "easier" to realise!

May I point out, incidentally, that the present writer ("Wittgenstein") has nothing to do with "revolutiononline", who as of yesterday has also been "banned" by the FT. Of course, it would be quite ironic and flattering if people began to write in saying that "Joseph Belbruno is Wittgenstein" the same way they did with "revolutiononline"! In a week when the FT (Martin Wolf in particular) has made much show of criticising the Murdoch Empire, it would indeed be ironic if the freedom of the press were to be so brutally curtailed.

Wholly incidentally, as a brief appendix to this comment, let me point out to FT readers that since Belbruno has been "on the beat" the following improvements to the FT have occurred:
first, the FT has shut out comments to the Christopher Caldwell Column;
second, David Pilling is no longer writing on China (Jamil Anderlini is);
third, Martin Wolf has been more critical of China (and espoused many of Belbruno's ideas);
fourth, even Fukuyama has been more restrained on China (witness his latest article in the FT);
fifth, Professor Michael Pettis has received greater attention as a commentator on China.
Not a bad list of achievements - n'est-ce pas? "

Perhaps we ought to add to this list also the fact that "The Economics Forum" at the FT has been discontinued (possibly because the contributors could not bear the burden of incurring Belbruno's vitriolic wrath), Niall Ferguson has disappeared from the FT - and possibly many other "improvements" not visible to the naked eye.

Socking it to Bill Gross

 I trust, friends, that you will not begrudge me the especial pleasure of socking one right into the left eye of Bill Gross, who this week threw in the towel after I warned him the best part of at least five months ago that his "bearishness on bonds" was going to rebound on him like the mythical Nemesis - and it has done so, spectacularly. Here is the story from the FT (I love it - treasuries at 2.81% - and the Chinese murderers threaten to sell!!) -
Which leads me to the last thought for the day: Bernanke may have doused QE3 speculation today - but in the "double-" and "triple-speak" of central banking nowadays the very fact that he "re-kindled" speculation only the other day has already had.... the desired "announcement effect"!!

The Fed's "Geopolitics"

Not much else worth commenting on in the FT today (I do not wish to use my credits to render homage to Martin Wolf's noble defense of free information in his Column, and El-Erian manages only some home-spun platitudes on the EU sovereign debt) - so I will seek briefly to bolster the arguments concerning the Fed's conduct of monetary policy with an eye to the "domestic" and "geopolitical" developments. Starting with the latter first, this story in the FT neatly summarises the precise extent to which Fed policies of "malign neglect" are hurting export-dependent economies (usually recent or present dictatorships) - in the instant case, it is South Korea ( but the argument is virtually identical when extended to China, Brazil, Taiwan, Japan, and even Germany.
In a nutshell, the higher won and soaring inflation have forced the South Korean central bank to raise interest rates yet again just as its working population is flagellated with higher import prices. The consequence is that the big conglomerates (like SOEs in China) that have access to their own or cheap capital are doing fine whereas the SMEs are close to collapse - and all this while the Chinese economy grew at 9% which (as the krafty James Mackintosh reminds us in the latest 'Short View'), far from being a beacon of hope, should serve as a further warning that the Chinese dictatorship (with inflation on pork running at 57%!!) has really and truly lost all control of this train-wreck approaching from the other end of the tunnel!
In other words, Bernanke's QE is working wonders for US exports and manufacturing, at least in "relative" terms (in terms that is of how greater the damage would be without it and of the fact that the Chinese trade surplus expanded only because imports fell more than exports because of high interest rates - and there are clear signs of "hot money" flowing into China as the dictatorship attempts to extend its power by "internationalising" its currency - good luck with that!).
Domestically, of course, Bernanke only "worries" about "inflation" because he needs to pay lip-service to "stable prices" - and he knows that the quickest way to shoot down speculation in commodity markets is to wreck the Chinese economy - which, as we said earlier, he is achieving with remarkable "resolve". Again, we must not underestimate this "geopolitical" target because the Chinese military-industrial complex was beginning to pose a serious challenge to the US in the South China Sea especially. The Politburo has overplayed its hand and the US Administration has decided that it is high time those export-dependent economies (Germany in particular) were taught a lesson. And so say all of us... though the pain is being felt first of all in the EU "periphery".
Domestically, I simply cannot believe how little people (pundits and analysts) understand the full extent of this "crisis" on the self-understanding of the capitalist elites in terms of what the role of the State (the collective capitalist) should be in "controlling" social relations of production that are now threatening the very survival of the society of capital. I will not go into that here - those who are interested can always join us at where I am posting a series of short studies on the topic of "the Crisis-State". Cheers to all.

Thursday 14 July 2011

INTEREST OR INTER-EST (The Fracture of the State-Plan)

For what else is “sovereign debt”? It is an “obligation” owed by the whole “society” to certain of its “individuals”. Sovereign Debt is an obligation incurred by the “totality” of the community to a “sector” of itself, to a “fraction” of the community….and that is why sovereign debt is the “Fracture” of the State-Plan. What is at stake here is the “separation” of the interests of “society” as re-presented by the “State-Plan” from the interests of the various “fractions” of society, the “particular” or “individual” interests that are owed this “obligation” by the State.

As it turns out, the “obligation” on the part of the State is in the legal shape of “bonds” that yield a certain “interest” to “bond holders”.

And this is where the “fracture” is: the fracture of the State is reflected in the fracture of society between those who will “pay” the interest and those who will receive the interest paid. The vital thing to remember is that the “bond holders” now demand that the State respect and observe its “obligation” to pay the interest on the debt. But this “obligation” is a “legal” obligation and, as such, can only be “enforced” by the State. So what the State is being required here is to respect an “obligation” that “separates” and “divides” its “society” or “community”, an obligation that sets one class of citizens against another class for the sake of maintaining BOTH the “unity” of the “comm-unity” AND the “inter-est” (being in common) of its “fractions”!

It is quite obvious that this circle simply cannot be squared. Because here the “morality” of the State respecting its “debt obligations” under its own laws to pay “interest” to one “sector” or “fraction” of its society is simply incompatible with the very financial and economic survival of the State. And if the State cannot survive “financially and economically”, if the State cannot survive “fiscally”…then it becomes a non-State, it becomes a “failed State”….and the “fracture” of the State becomes the “factionalism” or “fractionalism”, the “separation”, the “non-inter-est” of “society” or of the “comm-unity”.

“Sovereign debt” indicates that point at which the “individual interests” of the members of “society” become incompatible with the “inter-est of the comm-unity”. The failure of the State is the fracture of society.

But the most telling point of all is that the State itself in a capitalist society finds its only rationality and inter-est in the “individualism” of its members! And this is the very “interest” (the debt obligation) that is “fracturing” and threatening the very existence of the State – the debt interest that is bankrupting the State!

THIS is “the fracture of the State-Plan”. This is the dilemma that the State is called to resolve: either it pays the “interest” and so fractures the “comm-unity” or it upholds the “inter-est” to maintain the hope of uniting the community.

Wednesday 13 July 2011

The Meaning of Quantitative Easing - Bernanke on Bucephalus!

Participants will recall that as recently as a few weeks ago (my posts on this Blog bear witness - until the FT "martyred" me - relax, it's only a play on the Greek word for "witness"!) I predicted that Bernanke would come charging back (to belabour Gavyn Davies's "cavalry" metaphor) with the might and fury of Alexander the Great on Bucephalus and a fresh dose of "quantitative easing". But Davies is entirely right to stress, as I did before, that "monetary policy alone" cannot fix US unemployment. Indeed, the point I was stressing earlier is that Bernanke is more interested in the "geopolitical" effects, in the "strategic uses" of monetary policy. What he wishes to do is to utilise monetary (and non-monetary) instruments to lower the greenback, create a healthy dose of reflation in the US to lower the "real" cost of government debt - and all the while destroy the economies of the likes of China, Germany, Brazil and India and so forth: and, hey! is he succeeding or what??
Bernanke knows, as Davies valorously suggests, that greater liquidity goes straight to inflate asset prices and speculative investments, that is, in the "carry trade" that drives up the exchange rates of yuan and euro and real alike, forcing these countries into a deep loss of "competitivity" with "System-Amerika": THAT is what "Rooseveltian Resolve" is, at bottom. And that is what we are getting! So, to reward our friends who have rewarded us with visits to our site, I will post here a brief (more "theoretical") explanation of the deeper underlying causes behind current events, one that tackles frontally the "politico-economic" meaning of the US deficit in the capitalist world order and the Fed's attempts to achieve what Carmen Reinhart brilliantly styled as "The Liquidation of Government Debt" [3]. Of course, this "liquidation" is possible only because of the "pivotal" role that US capitalism plays in the "capitalist world order" to which we just referred. (We discussed the Reinhart paper in an earlier Davies Blog.) Here it is:
THE MEANING OF “PUBLIC DEBT” (or Why the State-Plan has become a Crisis-State) – a re-statement.
I would request all participants to read the following extract from Schumpeter’s great student Paolo Sylos-Labini which encapsulates the “fracture of the Keynesian State-Plan”: -
“Public expenditure, if productive [profitable], has a double positive effect on national product: one positive that consists in the growth of production, and the other temporary…in that by increasing demand it creates investment opportunities for private enterprise. Unproductive [unprofitable] public expenditure, instead, has only this temporary effect that lasts only as long as it [unproductive expenditure] lasts. If the proportion of unproductive expenditure on total expenditure grows, it is probable that the rate of growth of public expenditure will exceed the rate of growth of national product: and this….cannot last indefinitely,” (p.255, “Oligopoly &Technical Progress”, 1982).
And here is the crunch. Because what we have witnessed since the start of the “State-Plan” with its “aggregate demand management” (which Keynes clearly intended as a “temporary” stimulus) is that the rate of growth of “unproductive” (that is, unprofitable) investments has far exceeded that of “profitable” investments mercilessly and inexorably. But the State-Plan has been able to disguise this by “privatising” capitalist investments and allowing the private sector to book profits that were entirely dependent on expansionary fiscal and monetary policies from the State-Plan. Yet this “privatisation” of apparently “productive” investments was “profitable” only in appearance because it was based in large and catastrophic part on the inflation of “asset bubbles” and speculative investments that finally exploded in the Great Financial Crisis!
Keynes in the General Theory was so focused on the short term that he underestimated the theoretical-political limits of public expenditure and so failed to reflect on the impact of these “limits” on his theory. Even Roosevelt’s New Deal Administration was very cautious (too cautious for Keynes) in taking up “profitable” direct investments for fear of trespassing on “private enterprise” territory.
With the benefit of hindsight, we can see that “the Keynesian State-Plan” was never viable as a strategy for sustained capitalist growth. As Minsky and Sylos-Labini (scholars of Keynes and Schumpeter respectively) have shown, the whole edifice of the State-Plan was built on a doomed “pyramid of credit”, a “Ponzi-like scheme” that was bound to collapse. And collapse it has done in dramatic fashion. (See links below.)
The “fracture” of the State-Plan and its trans-formation into a “Crisis-State” consists precisely in this: that to the extent that the State-Plan tries to maintain social “stability” it can only do so by maintaining public expenditure even under the guise of “private investment”, but this “private investment” is “profitable” only in a diminishing sphere of capitalist activity controlled by large oligopolies or else through “speculative” activities. In both cases, faced with growing social antagonism, “private enterprise” assumes such a scale and control over global capitalist investments that it poses “systemic risks” to the society of capital. Once these “systemic risks” come out into the open, the State-Plan is then obliged to take over the fiscal burden of this “phantom profitability” in the form of “public deficits” which the State-Plan either seeks to honour, only to face bankruptcy, or else tries “to inflate away” through hyperinflation, which clearly “de-stabilises” the capitalist system.
[1] (Minsky’s Financial Instability Hypothesis)
(Sylos-Labini on Prospects for World Economy)
Finally, may I remind everyone that this is Bastille Day: - "Le jour de gloire est bien arrive'"!


The classical liberal State-of-Law that prevailed in the nineteenth century was brought down by the parallel capitalist processes of corporate “concentration” (external to the firm and leading to “oligopolies”) and of “rationalisation” (internal transformation of the labour process and of the managerial structure of the firm) producing goods for consumption in a “mass market”. These developments in capitalist industry led to the corresponding transformation of the whole of “society” into a “society of capital”, that is to say into a “social factory” where the old “liberal” “State of Law” (Rechtstaat) became a “Social State” (Sozialstaat) or “State-Plan” able to mediate effectively the relationship of the capitalist class with a “massified”, Taylorised, politically homogeneous and compact working class (politically represented by social-democratic or ‘labour’ parties).

The old liberal State-of-Law could still be theorised by Classical Political Economy and Liberal Political Theory as being a neutral, autonomous, “independent guardian” State watching over a “self-regulating market mechanism” responding to the “Law of Value” and tending to “equilibrium” with national monetary systems regulated under the Gold Sterling Exchange Standard. But it was the profound and irretrievable collapse of this liberal “State-Form” in the Great Depression under the weight of the capitalist developments we just described that led Keynes and Roosevelt to respond with the “New Deal Settlement” and the subsequent establishment of the new Gold Dollar Exchange Standard at Bretton Woods after World War Two. (On all these themes the supreme account is still K. Polanyi’s “The Great Transformation”.)

This Keynesian-Rooseveltian “State-Plan” was supposed to remedy the “crisis” created by the inability of “social capital” to deal with and contain the antagonism of the new political composition of the “mass worker” by providing a “bureaucratic” and “parliamentary” system of mediation of this antagonism through the upkeep of “aggregate demand” and social and welfare “planning”. – Hence, “State-Plan”. (The New Deal literature is vast. Search Prof. CS Maier’s work for a superb review.)

Keynes’s analysis was always aimed at State economic policies (fiscal and monetary) that would return the economy to full-employment “equilibrium”. Hyman Minsky had already drawn a clear distinction between different “capitalisms” or stages of capitalism, in order to stress the inherent “financial instability” of this latest “type” of capitalism (please refer to the links provided). Yet Minsky, in my view, failed to theorise the “dynamic” elements of this analysis and to go beyond a superficial “Keynesian” emphasis on “financial instability” and “disequilibrium” without seeking to enucleate the much more important antagonistic forces behind the process of capitalist “rationalisation” (technological and managerial innovation) designed as a specific “capitalistic USE of ‘crises’”. Neither Keynes nor Minsky considered a point at which the State-Plan could no longer mediate and remedy capitalist “crises” but would itself occasion a rising wave of fiscal crises, “systemic risks”, of “black-swan events” that have trans-formed it into a mere tool for “crisis management” – a “Crisis-State”: - which is precisely the condition of “fracture of the State-Plan” that I have described in this ‘wolfexchange’. (Please refer to my “Phantom” and “Inter-est” contributions.)[1],[2]

In sharp contrast to Keynes and Minsky, and in an inverted way (from the point of view of capital!), Schumpeter chose instead to focus precisely on this capitalistic USE of “crises” to re-launch capitalist industry toward an expansion of its command over living labour through “economic growth” and “technological development” by emphasising the “evolutionary” aspects of capitalist “crises” and “business cycles” as intrinsic features of capitalism.[3]

What Keynesians seem to fail completely to com-prehend is the blindingly-obvious, utterly irreparable “crisis of the Keynesian State-Plan”, of this “New Deal Settlement” which has been brought about not so much by Minskian “financial instability” (which is an effect rather than the cause) but by the growing antagonism of the wage relation that the “State-Plan” left unresolved and could never resolve. Indeed, there can be little doubt that Keynes himself was entirely pessimistic about the ability of the State-Plan to resolve class conflict and to avoid the tendency to stagnation of the capitalist economy “in the long run” (remember his aphorism, “in the long run we’re all dead”).

If you like, the problem with “Keynesian” approaches to the current “crisis” is that they approach it as just another “crisis”, another episode in the same chain of identical capitalist “crises”. Therefore, they fail to grasp what is “new” in “this crisis”, what sets it apart from the others, and what needs to be done to confront this “novelty”. Keynesians have forgotten (to put an ironic and reproachful twist on the recent book on “debt crises” by Rogoff and Reinhardt)….that “This Time IS Different”! This is the failure that I will attempt to remedy in the near future. Kindest Regards.

[1] (Minsky’s FIH)
[2] http://www.lesecho...s-cygnes-noirs.htm (on the rise of “systemic risks”, “black swans”)

Comment on Martin Wolf's latest Column -

At the cost of sounding as if we are blowing our own trumpet, the major themes that Wolf reviews in this Column have been raised over at least the past year by Joseph Belbruno, first at the Martin Wolf Exchange and then at the Gavyn Davies Blog and (to a lesser extent) the Economists' Forum in the FT. (We will be posting some of these "interventions over the next few days at
Wolf is perhaps not as "dramatic" as Belbruno who has coined the phrase "Crisis-State" to describe the process whereby (as Wolf quite acutely and properly stresses) the role of the "collective capitalist" (the Crisis-State) has grown since Roosevelt's New Deal through larger budget deficits and government debt (something that Hyman Minsky was among the first to highlight), and whereby the line between "private capital" and the collective capitalist has been blurred to the point where clearly now it is the Crisis-State that, in attempting to ensure the control of economic growth, needs to expand or "grow" its control over most aspects of economic life.
The attempt by the Crisis-State "to reverse" this process with a massive manoeuvre of "privatisation" in the late 1980s (the Volcker revolution) and the 1990s (aided by the Great Moderation) resulted as we all know in the catastrophe of the Great Financial Crisis, whose latest developments Wolf summarises here. In other words, social capital cannot survive, let alone "grow" in any shape or form, except by "politicising" the process of this "growth" and thereby making it ever more "systemically risky" every time it seeks to re-introduce the "laws of the market".
And this is what Wolf means by "fiat justitia": In reality, it is not some pedantic atavism to "justice" that the Conservatives in the US and Europe hanker after: what concerns them above all is "the justice" of the laws of market capitalism, of private enterprise, that are collapsing before their eyes. All "progressive forces" need to be prepared for the coming Deluge - "pereat mundus".

Tuesday 12 July 2011

Explicatory Note On the Krugman Criticism Below

PS: For those friends who are entirely innocent of economic studies, perhaps a further word of explanation on the Krugman criticism below is warranted. Orthodox (bourgeois or capitalist) economic theory cannot explain the very "existence" of money except as a "means of exchange", as the result of "frictions and imperfections" (Krugman's idiotic description below) in the process of "exchange" of utilities that - were ot not for these "frictions and imperfections" - would be "frictionlessly and perfectly" described by the Walras-inspired Walrasian general equilibrium analysis in the homonymous work by Gerard Debreu and Kenneth Arrow ("Debreu-Arrow" as indicated by Krugman below).
Capitalists know that their essential aim is to make their "investments" profitable in "monetary" terms - so that at the end of the investment cycle they end up with more "money" than they had at the beginning. Yet because they cannot admit to themselves, and most of all to their workers and the rest of society, that "more money" means simply more "political" control over social resources, they delude themselves and seek to delude us that the entire purpose of production is the "pure exchange" of goods and services (or the "utility" contained in them) so that capitalist production serves to maximise the use of available social resources in the most efficient manner "economically" possible.
As a result, there is absolutely "no role whatsoever" that money can play in this "exchange" - except "to facilitate" the exchange itself! (Arrow put it in terms as simple as these.) The problem is, however, that every "exchange", taken in isolation, can be described ONLY in terms of "relative prices" (one orange equals half an apple) - but NEVER in terms of "A COMMON MEASURE OR STANDARD OF VALUE" for all the "exchanges" that take place in the capitalist economy!
It is precisely because in a capitalist economy there are NO such "relative prices" but rather a "common measure or standard of value".... that MONEY IS NEEDED! As Don Patinkin once put it, quite insightfully, in a capitalist economy (one of generalised exchange) goods buy money and money buys goods: but goods DO NOT buy goods!
So what Krugman, like every good bourgepois economist, is trying to do here is TO DENY THE EXISTENCE OF VALUE, that is, to deny that the aim of capitalist enterprise is not and never was and never will be simply "to exchange" goods with goods! Rather, it is "to accumulate money as a store of value" soas to be able "politically" (through the process of production in the workplace and sale in the "market") to control increasing quantities of social resources - chief among them the "living labour" of workers! It is this "deception" (self-inflicted in Krugman, but moreoften malicious in other "economists") that prompted us to expose Krugman's intellectual failings here. Cheers to all.

Monday 11 July 2011

Krugman (Not) On (The) "Money"

You will forgive the reminder that Joseph Belbruno had been "vaticinating" about the recent "developments" in the world economy for a while - his ostensible, if ostentatious, aim being to invite us all to greater understanding - a "theory" - with which to transform our world. So I know that Davies will not mind if we indulge in short "theoretical excursus" pro-voked by Krugman's latest entry in his own Blog. (You can follow other "leads and hints" at

Please read very carefully below from Krugman

"July 11, 2011, 8:33 am - Monetary Rage

We had dinner last night with Margaret Ray and Dave Anderson, the authors of the AP adaptation of our textbook (which is terrific, by the way). Over our $350 $22 bottle of wine, we talked about various issues involved in trying to explain economics — and everyone agreed that monetary economics is where people are most likely to get not only confused, but furious.

There’s something about money, it turns out, that sends many people into blind rage — usually of the kind Margaret described as “Ron Paul plus”, but there are other versions too, some of them coming from the left.

So what is it about money? I don’t have a full explanation, but here’s a thought: monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections; thus floating exchange rates may be a good idea (and how sensible Milton Friedman now looks!) to deal with the reality that it’s hard to change nominal prices.

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply. They want to believe in perfect markets, delivering perfect outcomes if only the government would stay out of the way. And so they want to believe that money too can be perfect if only we take it out of human hands, and make it good as gold, literally.

And when you point out that it doesn’t work that way, that money is a social convention meant to deal with an imperfect world, and that dealing with that imperfect world sometimes means that central banks need to take exceptional action, they fly into a rage.”

Of course, you and I know that this pathetic imbecility must be unequivocally wrong! Because it is precisely during a “crisis” – that is when economic “activity” is at its lowest and therefore, according to Krugman, money would be needed least “to facilitate transactions” – it is precisely in times of economic “crisis” that economic agents need “money” (or “cash”) the most!!! “In God we trust, everyone else pay cash!” goes the saying: for the simple reason that “money” (whether in banknotes or bonds or bank credits) is the most “liquid” form of “value”, even though it has no other “use value” whatsoever (unless it is gold or silver that have limited uses in production).

Krugman stupidly (perhaps stupefyingly) confuses "money" as a means of exchange as the only or predominant reason for the existence of "money" - and totally forgets that "money" is above all else A STORE OF VALUE!!

If Krugman were right, “money” or “cash” would be needed LEAST at times of deflation and economic “crisis” when economic “activity” was at its lowest!! Yet the OPPOSITE is the case!! Because it is precisely at times of economic “crisis” that all economic agents are most in need of “cash” – of “money” as a STORE OF VALUE! According to Krugman, instead, this should be the time when capitalists renounced “money” more than the devil – because they would not need it for “transactions” in a “liquidity trap”!!

This is yet another example of how the bourgeoisie avoids the notion of “value” – the real political social relations behind all capitalist production and institutions – like the Black Plague!

So next time you think of Nobel Prize winners in bourgeois “economics” – just think of stupidity personified! Ciao.

Themes of the European Sovereign Debt Crisis

There are a few themes that ought to be made consonant in the analysis of the European "crisis" and that go way beyond the "technical" financial solutions that may be available "to resolve", if only temporarily. They are themes that Leontaridis raised below and on which I should like to expand a little because they are crucial to a proper understanding of the aetiology and diagnosis of this "crisis" (remembering that this is a medical term that refers to that point in a patient's condition where he or she may either survive or die).
The first point is that what lies at the origin of this "crisis" is the attempt by social capital (in its "institutional guise" as Finanzkapital) to elide and avoid its confrontation with producers at the point of valourisation (the production process) and of realisation (the consumption process) by seeking to realise profits out of "speculative" investments that can be classified (along with Hyman Minsky) as "Ponzi finance". In other words, a low-interest environment achieved through the avoidance of class conflict through "emerging-country" investments (mainly in China and India) is channeled speculatively in the overpricing of existing assets in Western core capitalist economies, giving rise to the Great Moderation, and the creation of fictitious capital whose value is destroyed catastrophically once the "contracted returns" fail to materialise (the mortgage-debt debacle in the US, bad loans to PIIGS in Europe).
The "crisis" thus originated has been "exacerbated" by the in-decision and inability of European bourgeoisies to agree on a method of "sharing the burden of adjustment" both internally (given the common currency and impossibility to adjust exchange rates) and externally (given the decisive resolve of the American authorities not to bear this burden by accommodating Germany with domestic fiscal austerity and thereby exporting inflation to the German-led eurozone).
Amidst this "in-decision" it has been possible for "financial markets" to speculate against EU peripheral country sovereign debt. It is essential to realise that this in no way shows that "private investors" rule the roost: what it means is that Finanzkapital, which is "privately owned", will exploit any indecision and paralysis in the political determination of collective capitalists (the nation-states) to intervene decisively to bridge the gap between existing institutional arrangements and the necessary "adjustments" to those arrangements that will block Finanzkapital from exploiting speculative opportunitites - which in turn aggrravate the "crisis".
And here comes what is perhaps the most important point: the "systematic riskiness" or the "systematicity of the risk" posed by this very political in-decision and power-lessness. Because what this "crisis" reveals above all is how national bourgeoisies, which live or die by the "ideology of competition" whose only aim is "to destroy the competition", then find it impossible to justify to themselves and to their populations the necessity of "solidarity" needed to resolve the "crisis"! In other words, there is a literal "contra-diction" between the rationale of capitalist enterprise and the reality of capitalist social relations of production that increasingly require the "socialisation" of the use of social resources!!
(Participants who read Gavyn Davies's latest Blog will see our discussion of these matters there - and Davies's final concession of this "socialisation" process. Further analyses in this direction are being posted by us at Cheers to all.)

Sunday 10 July 2011

Review of Bernanke and Gertler Paper - Part of Draft 'Krisis' Chapter titled "Notes on Minsky"

In this paper on “Financial Fragility and Economic Performance” ( ) , Bernanke and Gertler identify the "ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth, the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease, but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the second is that each successive "crisis" brings about a series of "mergers and acquisitions" whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system. (See this FT story on M&A activity following GFC ) And finally, the growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel "centrality" of State authorities in "crisis management", mean that central banks become "lenders of first (not last) resort".

Indeed, Bernanke and Gertler zoom into this specific “chasm” or “lacuna” (Keynes’s “slip ‘twixt the cup and the lip”) seeking to determine what “factor” would trigger a debt-deflation implosion of the credit pyramid (remember: a pyramid of term contracts enabled by low inflation for prolonged periods). This is what they come up with at p88:

“In this paper we take a step toward an operational definition of
financial stability. We argue that financial stability is best under-
stood as depending on the net worth positions of potential borrow-
ers. Our basic reasoning is as follows: generally, the less of his own
wealth a borrower can contribute to the funding of his investment
"project," the more his interests will diverge from those of the
people who have lent to him. When the borrower has superior
information about his project, or the ability to take unobserved
actions that affect the distribution of project returns, a greater
incompatibility of interests increases the agency costs associated
with the investment process. We define a financially fragile situa-
tion to be one in which potential borrowers (those with the greatest
access to productive investment projects, or with the greatest
entrepreneurial skills) have low wealth relative to the sizes of their
projects. Such a situation (which might occur, e.g., in the early
stages of economic development, in a prolonged recession, or
subsequent to a "debt-deflation"') leads to high agency costs and
thus to poor performance in the investment sector and the economy
We illustrate this general point in the context of a specific
model of the process of investment finance. In this model individual
entrepreneurs perform costly evaluations of potential investment
projects and then undertake those projects that seem sufficiently
worthwhile. The evaluation process gives the entrepreneurs (who
must borrow in order to finance projects) better information about
the quality of their projects than is available to potential lenders. As
in Myers and Majluf [I9841 and others, this informational asymme-
try creates an agency problem between lenders and the entrepre-
neurs-borrowers. This agency problem (which is more severe, the
lower is borrower net worth) raises the prospective costs of invest-
ment finance and thus affects the willingness of entrepreneurs to
evaluate projects in the first place. We show that,, in general
equilibrium, both the quantity of investment spending and its

1. The term is due to Irving Fisher [1933]. See Bernanke and Gertler [I9891 for
an analysis.


expected return will be sensitive to the "creditworthiness" of
borrowers (as reflected in their net worth positions). Indeed, if
borrower net worth is low enough, there can be a complete collapse
of investment.

Now, the thing to be noticed instantly is that, unlike Mishkin who leaves the question of the precise “operation” of “asymmetric information” in the actual structure and function of capitalist enterprise might give rise to these “asymmetries”, preferring to attribute them to “exogenous factors” (listed above), B&G concentrate here on the structural “endogenous” factors that might “pre-dispose” the system to debt-deflation and find (or hypothesize) that it is “the net worth position” of the borrower that is determinant. This would seem to support our initial hypothesis that the “functional” predisposition of the “lending” aspect of capitalist investment is to reduce risk, even at the cost of sacrificing profit maximization. This stands to reason because maximizing profit is never the real goal of capital – it is merely the pursuit of safe profit above what is called “the risk-free rate of interest” which merely represents the interests of “social capital”.

Note (!) that B&G look at “fragility” from an “ex post” position, that is, “after” a debt-deflation” has occurred and therefore what they mean by “fragility” is the inability of the investment cycle “to re-start” owing to the low net worth of entrepreneur-borrowers. But in fact it can be argued that this situation can arise even “ex ante”, that is, that instability increases “before” debt-deflation. A surfeit of capital in the sense of either excessive liquidity vis-a-vis actual “productive activity” (note that B&G themselves refer to “productive [!] investment projects” and fail to specify what they  m e a n  by this!) and therefore the ability to find “productive investment projects” except those of entrepreneurs lacking the requisite skills… - either of these possibilities reduce the “net worth”, the “skin in the game” of the entrepreneurs selected by lenders for loans. – Hence the “fragility”  b e f o r e  debt-deflation occurs once the volume of investments reaches a “critical” stage. Again, Fisher’s “debt-deflation”, or Minsky’s “hypothesis”, only tackle the “implosion” of Ponzi finance – but not its “generation”!

They do this desultorily in the Conclusion:
“Putting aside the reasons for the increase in leverage, it still
may be asked whether the higher level of debt implies greater
financial fragility. Our answer is, "It depends." We believe that the
focus on debt versus equity ignores the primary determinant of [p111]
financial stability-the net worth of borrowers, or, as we may call it
for the purposes of this discussion, the "insiders' stake."z3 If the
insiders' stake is high, debt need not be harmful. For example, as
has been frequently pointed out, Japanese corporations have tradi-
tionally relied much more on debt than have U. S. firms. This has
not posed a problem for the Japanese, however, because managerial
decisions are tightly monitored by financial backers-banks or
parent corporations. Effectively, insider stakes in Japan are high;
among other things, this means that firms' finances can efficiently
be restructured when circumstances change. Thus, whether the
U. S. economy is in a financially fragile condition depends funda-
mentally more on the magnitude of insiders' stakes in the United
States than on the composition of firms' external liabilities.
There have been factors pushing insiders' stakes in both
directions in the United States during this decade. For example, to
the extent that the wave of takeovers and buyouts has represented
the seizure of corporate control by well-financed management
teams, there may have been an effective increase in insiders' stakes;
likewise, increased monitoring of management by takeover special-
ists and investment banks may have had a salutary effect. Working
in the other direction, increasing securitization (for example, the
greater reliance on junk bond financing a t the expense of commer-
cial bank loans4)has typically reduced the overlap between the
providers of financial capital and the insiders in the corporation;
greater use of "arm's length" financing trends to increase financial
fragility. Measurement of the effects of these countervailing forces
on the stability of the U. S. financial system is a difficult, but not
impossible, empirical challenge.”

So here we have an evident “divide” between “social capital” (capital as a whole represented by finance capital) and individual capitals. And when B&G remind us that the “creditworthiness” of borrowers is a function of their “net worth position”, then we know we are on to something extremely important. – Because this “net worth” will depend in large part not merely on the individual position of the borrower, but above all on the specific weight (weight!) that this individual capitalist plays in the capitalist economy, in terms of how “pivotal” it is to social reproduction overall and its specific role in a certain “sector” (or “market”, if you like) – in other words, on the degree of “oligopoly” (recall Sylos-Labini’s point on how “lollies differ from steel”!). B&G touch briefly on this at Part V on “debtor bail-outs”.

Indeed, the ultimate significance of State intervention in a “crisis” to restore the “flow” of capitalist activity threatened by the “disintermediation” of financial institutions and the emergence of the central bank as “lender of first resort” have to do with the impossibility at a certain level of debt-deflation of the monetary authorities to distinguish between liquidity and solvency and between “idiosyncratic” and “systemic shocks” or crises (p108), that is , to tell apart the “real” and the “fictitious” parts of capitalist activity or investment in terms of “use value” and of arms-length allocation of social resources between individual capitalists. In the end, it is the “systemically important” capitalist firms that simply must survive – they become “too big to fail” once a relevant degree of “oligopoly” is achieved. Mishkin, to be fair, had already insisted on the ability of large firms (oligopolies) to issue securities to finance themselves – an evident adoption of the B&G thesis on the importance of net worth for surviving debt-deflation. Worse still, each “crisis” simply tolls the death-knell for smaller capitalist firms (financial and industrial) that are then acquired and merge with bigger ones in a growing spiral of capitalist “concentration”. – Until, that is, the collective capitalist has to intervene “in first person”, through financial disintermediation, tighter regulation and supervision, and (in extremis) outright “nationalization” (anathema but nearly a reality in the latest US crisis!).

We find here a curious but undeniable and significant inversion or contra-diction of Schumpeter’s “entrepreneurial spirit”, in that the “trustification” of capital either saps and suppresses or at least “internalizes” the “Innovationsprozess” that he had singled out as the differentia specifica of capitalism. It is in this perspective or dimension that one must read Schumpeter’s late doubts about the very survival of capitalism as a form of social organization. Thus, here not only the process of innovation but also that of concentration – that is to say, the “internalization” of “information” within individual firms or “units of command” which the NIE had attributed (foolishly) to the reduction of “transaction costs” - become critically “subordinate” to that of wage-relation antagonism. It is the capitalist imperative to preserve the “private” character of the allocation of resources, the artificial “separation” of the social division of labour – the need of capital to avoid at all costs the “democratization” of the process of production in the face of its “re-composition” by workers (by “society”! even by “social capital”!) that leads inevitably to the “crisis”. And, in an apparent paradox, it is the higher level of social interdependence or integration of production – the very process of capitalist concentration – that provokes crises and necessitates ever-higher levels of State intervention to restore the broken “co-ordination”, to abolish the “asymmetries” that had emerged as a result of the peculiar “private” character (or Trennung) operated by capitalist private ownership of the means of production and their “separation” of workers from them and from one another.

Bernanke and Gertler have not ceased to surprise us with their insights, however. This one is at p89:

This paper also contains some novel policy results, not dis-
cussed in our earlier work. The most striking of these is that, if
"legitimate" entrepreneurs are to some degree identifiable, then a
policy of transfers to these entrepreneurs will increase welfare. We
show that a number of standard policies for fighting financial
fragility can be interpreted along these lines.”

We will look closer at what “legitimacy” means here. The central problem is that from being purely “friction” and relegated to “externalities” such as “transaction costs”, which together were bundled up in the “unification” of micro- and macroeconomic theory – just the embarrassing “fact” that money is central to a capitalist economy (Patinkin’s “you can’t buy goods with goods”; see also Wicksell on Walras in ‘IandP’, p22) -, now these “frictions” (impossibly “generalized” by Williamson’s “NIE” to the point of destroying any and all “economic theory”) come to the fore of the entire bourgeois “science” to the point that they “replace” the maximization of “welfare” as the sine qua non of economic activity and regulation. In other words, truly with Hayek we have shifted from an “economics of price” to an “economics of information”. (On all this, see the wonderful review by Klaes link here.

In his sweepingly devastating conclusion,

“While the folk history of transaction costs is often told as a story of
remarkable success, the historical sketch presented here, which focuses on the
transaction cost notion itself, suggests a rather different picture. The study of
the use of transaction costs in the literature of modern economics turns out to be
the history of the quixotic struggle of the discipline to endogenize one of the
most pervasive residual categories of the neoclassical heritage—the category of
institutional friction.” )