Commentary on Political Economy

Saturday 13 April 2013

The Minsky Moment: How Paul Krugman Fell Into His Own Liquidity Trap (Revised)

This is a revised version of various interventions on Paul Krugman's political economy that have now jumped to the top of the Google Search charts.

This paper by Krugman and Eggertsson (both of Princeton University - though the latter currently at the NY Fed) offers a clear illustration of what we have been arguing here is the utter and complete stupidity of even the most enlightened bourgeois economists. We have already examined Eggertsson's "Paradox of Toil" (search this site), so we will not trouble with that particular specimen of exemplary idiocy.

Just take a look  at this, friends, and tell us if Paul Krugman is not the greatest imbecile south of the Hudson River!

Here is the paper:

And here is the incriminating evidence.

Krugman (and Eggertsson, who is the junior clown in this comedy sketch) starts with a "general equilibrium model" (which we will call "the Muddle") in which in an economy at equilibrium there are two kinds of producers, "the impatient" and "the patient" producers. Now, anyone will tell you that what Krugman means is that "the impatient producer" is really "the greedier" capitalist who wants to make more "profits" by "borrowing" social resources (it should be "money", but Krugman is still fumbling with "natural interest rates"!! So this is a barter economy after all!) from the "patient" capitalist, who is either less greedy or less a speculator than the "impatient" one. Here is Krugman:

1.Debt and interest in an endowment economy

Imagine a pure endowment economy in which no aggregate saving or investment is possible, but in which individuals can lend to or borrow from each other. Suppose, also, that while individuals all receive the same endowments, they differ in their rates of time preference. In that case, "impatient" individuals will borrow from "patient" individuals. We will assume, however, that there is a limit on the amount of debt any individual can run up. Implicitly, we think of this limit as being the result of some kind of incentive constraint; however, for the purposes of this paper we take the debt limit as exogenous.

Note how Krugman substitutes "individual" for "capitalist" - this tendency is precisely what we have been exposing in our series on "Origins of Bourgeois Individualism". So in other words for Krugman the "motive" for capitalist investment is not the political need of capitalists to retain and expand command over the living labour of workers - that is, to accumulate capital - but rather a simple matter of "difference in patience"! Well done, Paul! I always thought you were a great friend of workers!

The second thing to notice (most important) is that Krugman takes "the debt limit" for the "impatient capitalist" as "exogenous". In other words, Krugman cannot see a "limit" to the amount of debt that "impatient" capitalists can "borrow" from the "patient" ones - for the simple reason that his "economy" is an unreal one in which "debt" is quite simply a "quantity" that can expand indefinitely and infinitely on a nominal basis depending on the "patience" of individual capitalists! If indeed "debt" is only a matter of more or less "patience", then (just as with Keynes's "animal spirits") there is indeed no "limit" (political or material) to the amount of "debt" that capitalists can "lend " or "borrow" to one another!!

And that is why Krugman simply "must" make "the debt limit...exogenous" because his general equilibrium economy is one that is built on psychology and not on the real needs of real workers and capitalists confronting one another over the use of social resources!

Now, because the debt limit is "exogenous" - because "debt" for Krugman is merely a psychological matter as vapid and imaginary as Keynes's "animal spirits" - it follows that this "debt leveraging" could proceed forever ad infinitum were it not for....(you guessed it!) an equally exogenous "deleveraging shock"!!! A "Minsky Moment" in which both the lender ("patient capitalist") and the borrower ("impatient capitalist") finally realise that theirs is sheer "speculation" and that the "profits" they anticipated from production are not going to materialise because there is only so much that you can squeeze out of living labour and then turn into more political command (what we call "value")!! Here is Krugman again!

2. The effects of a deleveraging shock

We have not tried to model the sources of the debt limit, nor will we try to in this paper. Clearly, however, we should think of this limit as a proxy for general views about what level of leverage on the part of borrowers is "safe", posing an acceptable risk either of unintentional default or of creating some kind of moral hazard.

The central idea of debt-centered accounts of economic instability, however, is that views about safe levels of leverage are subject to change over time. An extended period of steady economic growth and/or rising asset prices will encourage relaxed attitudes toward leverage. But at some point this attitude is likely to change, perhaps abruptly – an event known variously as the Wile E. Coyote moment or the Minksy moment.

In our model, we can represent a Minsky moment as a fall in the debt limit from D
high to some lower level Dlow, which we can think of as corresponding to a sudden realization that assets were overvalued and that peoples’ collateral constraints were too lax. In our flexible-price economy, this downward revision of the debt limit will lead to a temporary fall in the real interest rate, which corresponds to the natural rate of interest in the more general economy we’ll consider shortly.

But rather than a "Minsky Moment", Krugman is having a "dumb episode" because nowhere does he explain why our dear capitalists should have...."a sudden realisation that assets were overvalued"!!!!!

A sudden realisation!!! HHHeeellloooo Paul! You are a patented MORON! No! YOU are the "Wile E. Coyote" in this caricature of intellectual rigor that you have engaged in here!! Of course, Krugman, like the perfect bourgeois economist he is, has not even realised that he has fallen into the most abysmal trap or bottomless canyon (like Wile E. Coyote) simply by admitting that the mysterious "sudden realisation" is based on the "fact" that "assets were OVER-VALUED"!!

But Paul, WHAT DOES "OVER-VALUED" MEAN?? It means that the whole business of "borrowing" and "lending" has NOTHING to do with "patience and impatience" and EVERYTHING to do with VALUE, with PROFIT!! Bur value and profit represent precisely the "command" of capital over living labour - which is what you wish to avoid talking about!!

Addendum to Krugman on Minsky Moment

Now that our review of Krugman's treatment of "the Minsky Moment" has jumped to the top of the "Google Search" list, let us reflect a moment on the significance of Krugman's monumental lapse of reasoning skills. You will recall that Krugman begins his article with an "endowment economy". An "endowment economy" is the basis and foundation - the very raison d'etre - of all bourgeois economics because it "assumes" that "individuals" in a society "start" operating in that economy with a "given" set of "endowments". This means that bourgeois economics takes for granted what any "economic science" even remotely worthy of the name should explain!! And that is how and why the "economy" that it analyses reaches the stage where individuals have "endowments" and how and why these "endowments" are measured. If one begins with the assumption that Steve Jobs was endowed with "genius", it follows that everything he did in his rotten life was..."genial"! Bourgeois economics assumes what it needs to explain: and that is - how and why certain "individuals" in the economy it analyses have acquired their endowments!!

In this regard, one must immediately acknowledge the heuristic superiority of the New Institutional Economics (from Coase to Williamson through Douglass North and Demsetz - also reviewed on this site - just search using "search" facility) because at least it acknowledges that capitalist "endowments" have a lot to do with "the institutions of private property of capitalism", which allows to inquire about how, when and why "individuals" came to be either "capitalists" or "workers" and not just "individuals"!

But Krugman has not even reached this "critical" point. His "goody-goody", "conscience-of-a-liberal" type of "humanism" has not reached that far. Instead, he starts with "individuals" who are either "patient" (lenders) or "impatient" (borrowers). But the question we must ask is: - "patient" or "impatient" for what??!! WHAT IS IT that these "individuals" are striving for? WHY do they "lend and borrow"? WHAT do they "lend and borrow"? And then it turns out that they are "patient or impatient"....TO MAKE PROFITS!!

So. WHAT these "individuals" lend and borrow is....CAPITAL! Capital that is "invested" in the hope that it will realise "profits" out of which both the patient lender and the impatient borrower will be able to accumulate more value or capital - which is the entire aim of the game!! And more "value or capital" means more political control and command over living labour and over social resources!!!

This is the bit that Paul Krugman does not wish to admit or acknowledge - unless we "extract" it from his mouth just like a dentist would extract one of his teeth! (You see, all these Princeton professors like to sound "enlightened", and so they throw us "rabble" some crumbs of wisdom while they indulge in their "enlightened divine serenity"! - Well, we say "Pikes to that!") But Krugman simply "has" to confront this problem - and he does, as we saw, when he acknowledges that "debt-deleveraging" (or Fisherian debt-deflationary) "shocks" occur when our dear "patient and impatient" capitalists "suddenly realise" (shock and awe!!) that the assets they have been investing in - and therefore the capital they have lent and borrowed, respectively - are....(wait for it!)....OVER-VALUED!! OVER-VALUED!! (This is the so-called "Minsky Moment" or "Wile E. Coyote Moment". For the incorrectness and self-contradictory nature of Minsky's underconsumptionist approach, search our site for "Minsky".)

But hang on a minute, Paul!! Professor!! Nobel Prize "genius"!! What is this new "thing" you mention: VALUE??!! Our answer is what Krugman will never admit or allow: Value is political command and control (historically and institutionally acquired - not "endowed"!!) on the part of capitalists over social resources that allow them to reproduce and expand their political command over the living labour of yours truly, US WORKERS!!

In our next intervention we will look at how this "endowment economics" is presented to us as a "science of choice" in the "society of capital".

Capital And Technology - Toward an Alternative Individuality


As we just saw in our fierce but devastating short critique of Krugman and Eggertsson below, bourgeois economics simply does not allow us even to mention the notion of "profit" or (worse still) "value". Because in bourgeois economic "science" there is no concept, let alone explanation, of "value and profit", even "progressive economists" such as Paul Krugman have to present capitalist crises as the result of "exogenous shocks". In other words, the present crisis of the capitalist "system" is not and cannot be due to the social antagonism intrinsic to the wage relation and therefore "endogenous" (indeed at the very "core and centre") of capitalism. Instead, any "crises" must be the result of "disturbances" that are external to the "market mechanism" because this mechanism is seen as a simple "distributive device" for the pure exchange of "endowments" that "individuals" possess at the start of the "exchange". Note here how bourgeois economics pre-supposes the existence of "endowments" prior (!) to the beginning of the market exchange that will determine and fix the relative "prices" of the goods to be exchanged on the market in accordance with the "free choice" of the "individual consumers".

The most fundamental and imprescindible condition for the existence of capitalist social relations of production, of the capitalist "system", is that there be workers that provide the living labour for the capitalist to exploit and that these workers be absolutely "free from" (!) any social or other "bond or link" from either the means of production or the pro-duct of living labour itself. Note how this "freedom" is defined in purely "negative" terms: the workers are "free from" all links and bonds and "rights" that may interfere with their "alienating" or "selling" their living labour - their "positively free living activity", which is the birthright of every human being - to the capitalist "individually" (not as a "class" or in union with other workers through "social labour"). That is why capital understands "freedom" in this purely "negative" sense - as utter destitution, as absolute poverty -, and also "individualism" in this purely formal sense, of the human being totally separated and alienated both from the means of production ("endowments" he does not possess) and from the pro-ducts of his living labour - which he can only purchase as a "free consumer" on the "free market".

But how "free" is the worker as a "consumer" in choosing to re-purchase from the capitalist the pro-duct of his own living labour which now, in the form of a "money wage" paid to him, stand in opposition to him as an alien power that is "dead, objectified labour"? Let us recall that the worker is not "free" to decide what he produces in the labour process or when or how. This is because "before" the worker gets to re-purchase the pro-ducts of his living labour it is the capitalist (!) who decides what the worker can "consume" (the product) and how he produces it (what means of production in the shape of machinery and technology are utilised in the production process) and how the worker "consumes" the product of the worker's living labour. (That utter beast that went by the name of Steve Jobs is perhaps the most illustrious and horrid recent example of how the capitalist completely arrogates to himself the right to make all these decisions - all the while exploiting millions of workers in China and winning accolades for being such a "genius" in the process!)

So, not only is the not worker "free" to decide "what" he produces; he is not therefore "free" to decide "how" he produces! And that is because (remember) the means of production - the machinery and technologies and materials used in production - are all "owned and designed" by the capitalist!! This is a point of paramount importance! The whole notion of "the captain of industry", of the "entrepreneurial spirit", of "capitalist innovation" from Schumpeter onwards depends on this! The reason why the capitalist - the entrepreneur - must retain control over the process of production is that the ability of capital to retain its violent command and usurpation over living labour depends on what is produced and how and where and when it is produced!!!

Put differently, the process of production, which includes both the "technologies" and the "products" that are ultimately produced for the "free choice of consumption" of the worker, must be controlled by the capitalist because they are of fundamental importance in determining the degree of control and command that the capitalist has and retains over the living labour of the worker!! Clearly, therefore, the entire concept of "innovation", of "creative destruction" developed by Joseph Schumpeter occupies a central role in the delineation and specification of a "Will to Power" on the part of capitalists against workers and - more precisely - in the "isolation" of living labour as the aggregate of "individual labours". It stands to reason that technologies and products that tend to emancipate living labour (workers) from the command and control of the capitalist - through the labour process and the "mode of consumption" - will be utterly deleterious to the reproduction of the capitalist's command over workers, in the workplace and in society at large!!

This thoroughly political and antagonistic aspect of capitalist industry is something that bourgeois economists wish to hide and to mystify with their dual trickstery in terms of, first, presenting the capitalist production as a "system" that equates mathematically or homogenises "quantities" or "existing realities" with one another; and, second, presenting the decision-making process of production as a function of subjective, individualistic "consumer choice" freely expressed in the marketplace, as if these decisions and choices that are ineluctably incommensurable could ever allow us to quantify (through “market pricing”) those “existing realities” that are in fact heterogeneous and incommensurable! What is in-com-mensurable (subjective choices) can never be used as a “measure” of anything else! The “quantities” of “economic science” are never “physical quantities”: they are “prices”! But “prices” apply only to “subjective choices” (the market mechanism) and can never “measure” the use or distribution of “physical quantities”!

One of the salient points we must make in this presentation is that the capitalist must always present the decision-making unit of the wage relation not as a "group of capitalists" utilising the full power and violence of State machinery against "individual workers", but rather - because of the essential need of capital "to isolate" workers individually - as decisions made also by "individual capitalists". The obsession of capitalist society, of the bourgeoisie, with the deification of "the free individual", of "the personality" - from Steve Jobs to Lady Gaga - lies entirely in this essential need. Were the bourgeoisie to encourage any form of social solidarity, any form of alternative "individuality", it would be digging its own grave because it would undermine the ground on which the wage relation stands!

In an imminent intervention we will seek to inquire into the possible "alternative individualities" that we can develop to oppose the rule of capital and to dissolve the wage relation.

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