Commentary on Political Economy

Saturday 4 September 2021


Krugman gets it wrong on the Austrian School. His objection to the Austrians’ theory of “mal investment” is that if a crisis is caused by the transfer of resources to fixed capital, the it should occur while that transfer is happening, not after. He forgets that the transfer takes place through “credit” facilitated by easy monetary policies, not by subtracting investment in consumer industries.

In other words, the Austrians look to the effect malinvestment, the diversion of investment to capital goods production, has on the equilibrium of the economy. By contrast, Keynes objected that “in the long run we’re all dead” and that fiscal measures have to be taken now to avoid mis allocations arising from nominal wage rigidity (which Krugman is quite right to discuss).

But Keynes insisted on “fiscal”, NOT MONETARY, expansion (he said lowering interest rates was just “pushing on a string”). So, Krugman is wrong on two counts: the arguments and theory of the Austrians, and the Fed’s policies, which are not “Keynesian” because the Fed is not the Treasury (it does monetary, not fiscal, policy). By keeping the tap open, the Fed is drowning capitalism… in the long run. - Which is where I think Schumpeter and Hayek are right. 

Just generally, there can be no doubt whatsoever that theoretically the Austrians were far more profound and more learned people than the Cambridge lot, from Keynes to the Robinsons and Kahn and Kaldor and so forth.

Krugman indirectly adverts to the time difference in the Austrian and Keynesian frameworks:

“Hayek and Schumpeter were adamantly against any attempt to fight the Great Depression with monetary and fiscal stimulus. Hayek decried the use of “artificial stimulants,” insisting that we should instead “leave it to time to effect a permanent cure by the slow process of adapting the structure of production.” Schumpeter warned that “any revival which is merely due to artificial stimulus leaves part of the work of depressions undone.”

Note here that Schumpeter is more pragmatic and less categorical than Hayek (who was quite doctrinaire in that early period). Again, Schumpeter especially would be far more concerned with interventionist monetary policy, whereas Hayek was even more adamantly opposed to fiscal policy: for him, the State (and Marxism) was the equivalent of Satan, whereas Schumpeter was far more ecumenical and indeed sought to emulate and improve on Marx in his own work.

 Further to the distinction between the objectionable “affirmative” or “Darwinist”interpretation of “the survival of the fittest”, and the more negative empirical “Darwinian” sense of “adaptation”, this is what I wrote on the subject some time ago:

The notion of progress indeed contains within itself by implication the linearity of the changing forces of production in both a quantitative and a qualitative sense – a growing perfection of these forces (a defecto ad perfectionem). And in turn, this linear perfectibility of the forces of production implies the univocal ability of human beings to adapt to their environment and to transform it in a suitable manner. Yet, this Marxian “scientific” belief in the progress of the forces of production – a belief in what he considered a scientific discovery of Darwinian proportions - is precisely what Weil calls into question, and with justifiable reason! For not only does the human transformation of the environment inevitably raise the possibility of its irreparable degradation, but also, and consequentially, this degradation calls into question the linearity of human adaptation both in terms of conscious human agency and in terms of perfectibility in the sense that this adaptation cannot be determined, judged or least of all measured ex ante, but can only be determined, if at all, ex post facto! This is why Weil insists on disabusing Marx about the “Darwinian” basis of his social theory: as Weil rightly points out, Marx’s social theory is in truth “Lamarckian” in that it relies on the principle that “the function shapes the organ”. But Lamarck’s functionalist, or better, interventionist theory of evolution runs directly counter to, where it does not contradict, Darwin’s genetic theory of evolution! For Lamarck, just as for Marx, it is the positive activity of a species that leads to the physiological development of organs that are most fitted to its surviving the existing environment. This interventionist or functionalist theory is founded on the twin premises that (a) a species pursues actively a function to which it is pre-disposed, and (b) this active pursuit then brings about the organs or instruments that will lead to the function’s fulfilment. Quite to the contrary, for Darwin, “the survival of the fittest” occurs not through active physiological adaptation by a species, but rather through its genetic pre-disposition to adapt to a changing environment!

The difference between the two theories could not be starker. Whereas for Lamarck’s theory, the survival of a species is due – in line with what Marx theorized for the human species - to a process of active and, in the human case even conscious, adaptation, for Darwin instead this process is entirely passive in the sense that survival of a species or of some of its members is due entirely (a) to changes in the environment, and (b) to reproductive competition between its members! In neither case, however, can a species change its genetic make-up actively to ensure its eventual survival – because both conditions are constraints external to the collective activity of the species. In other words, for Darwin, and contrary to Marx’s thesis, no species can ensure its survival ex ante: for Darwin, and again contrary to Marx, “survival of the fittest” is an attribute that can be assigned only ex post facto – after the event, not beforehand!

The epistemological and, above all, deontological and therefore practico-political repercussions of this fundamental reversal of our understanding of our relation to our natural environment are quite earth-shattering because, forcefully put, they invert the order of our understanding of how human action affects the natural environment and, consequently, also our understanding of how human beings should conduct themselves with regard to that environment. The universal attitude or orientation of humans toward the environment is that it is a passive “tool” or inert “recipient” of human activity. But seen from this novel perspective, it turns out that “nature”, far from being a passive or inert receptacle and quarry for human activities, is in fact a very active or at the very least “reactive” agent in our complex interaction with the world.

When I first came to Taiwan, if I saw someone with a smartphone or other screen, they were... studying. NOW, whenever I see someone staring at a screen - child,  teenager or adult - ... THEY ARE PLAYING GAMES! 

Progress for you... brought by "Big Tech"...

There has been a literal explosion in the sexualization of teen behavior here. 20 years ago, it was absolutely impossible to see teens (forget about children or adults) even holding hands in public. Now, what has saved the day is... THE CHINESE VIRUS! Because of restrictions and masks, people are normal again. You may well imagine with the impossible crowds here (never! catch public transport on a Friday evening - it is strictly taxi or nothing!), you had to change carriages, albeit only occasionally. 

It's a case of "the boiling frog": behaviors change slowly and people don't notice and can't trace the causes... But degradation is absolute. It stays.  Alas, it gets gradually worse. - Which is why one has to be extremely discerning choosing places to visit, let alone where to live!

I like Katie Martin at the FT: this is her latest.

Europe’s markets regulators are worried. About everything 

Excess of risk-taking in markets is not obviously healthy behaviour

A businessman checks stock market data on a mobile phone

Esma said: ‘Concerns about the sustainability of current market valuations remain’ © Getty Images/iStockphoto


September 3, 2021 9:51 am by Katie Martin

Before the summertime tans had even faded on the continent, the cheerful souls of the European Securities and Markets Authority dropped a 110-page report, dedicated in part to outlining risks to investors based on observations from the opening half of this year.

Most bears have already thrown in the towel, chucked away their prognoses of doom and learnt to love, or at least accept, a rally in risky assets that seems impervious to grim news, patchy data and elevated valuations. Esma seems less willing to gloss over the cracks.

“We expect to continue to see a prolonged period of risk to institutional and retail investors of further — possibly significant — market corrections and see very high risks across the whole of the Esma remit,” it said. 

Most market predictions come from people with skin in the game: investors wittingly or otherwise talking up their book, analysts at banks wedded to house views from which it is awkward to diverge, and so on. So it is useful to entertain analysis from a body disinterested in the direction of stocks, bonds or whatever, as long as market participants play by the rules and the financial system functions properly. With that in mind, here goes.

Esma of course has noted the obvious. The first half of this year brought a stunning continuation of the recovery in risky assets that started after the initial Covid shock in 2020. The global economy has bounced back, pumping up commodities prices.

Valuations for stocks in the EU have pushed above the levels that prevailed before the pandemic hit, and even riskier “high-yield” corporate bonds are flying high, despite a rise in borrowing by companies. Such bonds arguably need a new name given their average yield of 2.4 per cent in Europe, according to an index run by Ice Data Services covering debt with a duration just over three years.

But threading this all together is the ascent of not-obviously-healthy risk-taking behaviour, most evident in episodes like the GameStop retail share-trading frenzy in the US at the start of this year and the ups and downs of the cryptocurrency market. 

Given the naked pursuit by market neophytes of upward-sloping important-looking charts, it is hard to believe that either meme stock trading or fizzing crypto excitement can end well. But Esma name-checks victims of excess in the wholesale market too: supply-chain finance firm Greensill, which filed for administration in March, and private investment house Archegos, which imploded in the same month.

Taken together, these episodes “raise questions about increased risk-taking behaviour and possible market exuberance”, Esma said. “Hence, concerns about the sustainability of current market valuations remain, and current trends need to show resilience over an extended period of time for a more positive assessment.”

The issue here is that Esma has answered its own question. These trends have indeed shown themselves to be resilient all year. Fund managers can easily find red flags around every corner, and it is a worthwhile endeavour for regulators to keep an eye on them, but none of them matter — yet — as long as markets just keep motoring higher.

It is not alone in these warnings, naturally. Also this week, Richard Bernstein, chief executive of Richard Bernstein Advisors described the current market environment as “maybe the biggest bubble of my career”. 

“So when is the bubble going to burst? The answer is nobody knows. Our portfolios remain focused on the conservative side . . . energy, materials, financials, industrials, and smaller capitalisation cyclicals. The entire market doesn’t necessarily seem at risk, but momentum strategies focused on the market’s bubble leadership seem very risky to us,” he said.

Despite an inflation scare at the start of this year, slowing growth, the Delta variant of coronavirus, a disruptive clampdown on foreign-listed stocks by Beijing and a rewrite of US foreign policy, the S&P 500 benchmark index of US stocks has dropped by more than 2 per cent in a day a grand total of three times this year, and not at all in the past four months.

Central banks, led by the Federal Reserve, have made it clear they are alert to the risks of inflation rushing above target levels and staying there, but they are in no hurry to withdraw monetary support unless they are convinced the economic data demand it.

Some investors are growing a little more nervous. The use of borrowed money to juice up returns from bets in the US has declined for the first time since the pandemic shock last year. Exchange traded funds designed to do well in tougher economic or market environments have drawn in unusually robust demand. Now institutional money managers are also increasingly writing options on their own holdings or portfolios, allowing others to bet that stocks can keep marching higher. Essentially, this is a method for fund managers to say they do not want to sell, but they also think the quick gains are in the rear view mirror.

But this is mostly tinkering around the edges. The more cautious voices are shouting in to the void.

Note in Martin’s piece the quote:
“It is not alone in these warnings, naturally. Also this week, Richard Bernstein, chief executive of Richard Bernstein Advisors described the current market environment as “maybe the biggest bubble of my career”. 

Peggy Noonan at WSK is always worth reading : 

The Afghan Fiasco Will Stick to Biden
It hit at his reputational core. He no longer comes across as empathetic, much less serious.

By Peggy Noonan
Sept. 2, 2021 6:23 pm ET

President Biden answer questions in Washington after remarks on the U.S. service members killed in the Afghanistan withdrawal, Aug. 26.

August changed things; it wasn’t just a bad month. It left a lingering, still head-shaking sense of “This isn’t how we do things.”

We don’t make up withdrawal dates that will have symbolism for photo-ops with the flinty, determined president looking flinty and determined on the 20th anniversary of 9/11; we don’t time epic strategic decisions around showbiz exigencies. We wait for the summer fighting season to pass; we withdraw in the winter when Taliban warriors are shivering in their caves. We don’t leave our major air base in the middle of the night—in the middle of the night—without even telling the Afghan military. We don’t leave our weapons behind so 20-year-old enemies can don them for military playacting and drive up and down with the guns and helmets. We don’t fail to tell our allies exactly what we’re doing and how we’re doing it—they followed us there and paid a price for it. We don’t see signs of an overwhelming enemy advance and treat it merely as a perception problem, as opposed to a reality problem. You don’t get the U.S. military out before the U.S. citizens and our friends. Who will protect them if you do that?

WSJ Opinion Potomac Watch
The Last Troops Exit Afghanistan. Now What?

The president’s people think this will all just go away and are understandably trying to change the subject. But the essence of the story will linger. Its reverberations will play out for years. There are Americans and American friends behind Taliban lines. The stories will roll out in infuriating, sometimes heartbreaking ways. The damage to the president is different and deeper than his people think, because it hit at his reputational core, at how people understand him. His supporters have long seen him as soft-natured, moderate—a sentimental man famous for feeling and showing empathy. But nothing about this fiasco suggested kindliness or an interest in the feelings of others. It feels less like a blunder than the exposure of a seamy side. Does he listen to anyone? Does he have any people of independent weight and stature around him, or are they merely staffers who approach him with gratitude and deference?

What happened with U.S. military leadership? There’s been a stature shift there, too. Did they warn the president not to leave Bagram Air Base? Did they warn that the whole exit strategy was flawed, unrealistic? If the president was warned and rejected the advice why didn’t a general care enough to step down—either in advance to stop the debacle, or afterward to protest it?

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Did they just go with the flow? Did they think the president’s mind couldn’t be changed so what the heck, implement the plan on schedule and hope for the best? President Biden’s relations with the Pentagon have been cool at best for a long time; maybe some generals were thinking: I can improve future relations by giving the president more than he asks for. He wants out by 9/11, I’ll give him out by the Fourth of July. It is important to find out what dynamics were in play. Because it’s pretty obvious something went wrong there.

The enlisted men and women of the U.S. military are the most respected professionals in America. They can break your heart with their greatness, as they did at Hamid Karzai International Airport when 13 of them gave their lives to help desperate people escape. But the top brass? Something’s wrong there, something that August revealed. They are all so media-savvy, so smooth and sound-bitey after a generation at war, and in some new way they too seem obsessed with perceptions and how things play, as opposed to reality and how things are.

There has been a lot of talk about Mr. Biden and what drove his single-minded insistence on leaving on his timetable. Axios recently mentioned the 2010 Rolling Stone article in which Gen. Stanley McChrystal and his staff made brutal fun of Biden. Former Defense Secretary Robert Gates wrote in his 2014 memoir that President Obama told him, “Joe is over the top about this.” Mr. Obama himself, in his presidential memoir, wrote of Mr. Biden warning him the military was trying to “jam” him, “trying to box in a new president.”

What Might Have Been at Tora Bora August 26, 2021
What Biden Can Still Save in Afghanistan August 19, 2021
Covid Anxiety and Fear of the Base August 12, 2021
New York’s Capital Is Crazytown August 5, 2021
The Jan. 6 Committee Carries History’s Weight July 29, 2021
People have been rereading George Packer’s great 2019 book on the diplomat Richard Holbrooke, “Our Man” (great not only as history but as literature). Holbrooke met with Vice President Biden one day during the first Obama term and they argued about Afghanistan. Mr. Biden dismissed Holbrooke’s arguments for protecting Afghan women’s rights as “bull—.” Their discussion was, according to Holbrooke’s diary, “quite extraordinary.” Mr. Biden said Holbrooke didn’t understand politics, that the Democrats could lose the presidency in 2012 in part because of Afghanistan, that we have to get out as we did from Vietnam.

There was politics in President Biden’s decision, and frustration. Mr. Biden had spent years in Afghanistan meetings, in the Senate during the Bush years, and later in the White House as vice president. He would have seen up close more than his share of military spin—contradictory information, no one with a sustainable strategic plan, and plenty of that old military tradition, CYA.

Afghanistan was emotional for him, for personal reasons. This would be connected to his son’s service in Iraq, and the worry a parent feels and the questions a parent asks. And maybe the things Beau Biden told him about his tour.

And I suspect there was plenty of ego in it, of sheer vanity. A longtime friend of his once told me Mr. Biden’s weakness is that he always thinks he’s the smartest guy in the room. I asked if the rooms are usually small, and the friend didn’t bristle, he laughed. I suspect Mr. Biden was thinking he was going to be the guy who finally cut through, who stopped the nonsense, admitted reality, who wasn’t like the others driven by fear of looking weak or incompetent. He was going to look with eyes made cool by experience and do what needed doing—cut this cord, end this thing, not another American dead.

History would see what he’d done. It would be his legacy. And for once he’d get his due—he’s not some ice-cream-eating mediocrity, not a mere palate-cleanser after the heavy meal of Trump, not a placeholder while America got its act together. He would finally be seen as what he is—a serious man. Un homme sérieux, as diplomats used to say.

And then, when it turned so bad so quick, his pride and anger shifted in, and the defiant, defensive, self-referential speeches. Do they not see my wisdom?

When you want it bad you get it bad.

This won’t happen, but it would be better for his White House not to scramble away from the subject—Let’s go to the hurricane!—but to inhabit it fully. Concentrate on the new reality of the new Afghanistan, the immediate and larger diplomatic demands, the security needs. Get the Americans out, our friends out, figure out—plan—what you would do and say if, say, next November there is a terror event on U.S. soil, and a group calling itself al Qaeda 2.0 claims responsibility, and within a few days it turns out they launched their adventure from a haven in Afghanistan.

Don’t fix on “perception.” Focus on that ignored thing, reality.

This Bloomberg piece by Andrew Browne is quite accurate and insightful : 

It’s no coincidence that an edict barring kids in China from playing online video games for most of the week came as the education ministry introduced a new subject to the national curriculum: Xi Jinping Thought.

As the academic year gets underway, students from primary schools through colleges and university are immersed in lessons from “Grandpa Xi.” The message could hardly be clearer: the Chinese Party-state wants to mold young minds with correct ideology, not distract them with online fantasies. To underscore that point, authorities are cracking down on “fan culture.”​ All mention of Zhao Wei, a billionaire actress, has been scrubbed from the internet.

Is this a new Cultural Revolution?

President Xi Jinping​ addresses party officials at​ the CPC Central Committee National Academy of Governance on Sept. 1. Photographer: Xinhua News Agency
This Week in the New Economy
Russia has a serious gas problem, and winter is coming.
Eskom’s CEO says carbon capture is being considered in South Africa.
India’s state oil company excluded by Norway’s wealth fund.
Fraying relations with China are hurting Australia’s economy.
Turkish inflation unexpectedly quickens on food prices.

What began as a regulatory takedown of Jack Ma, the flamboyant Alibaba co-founder, quickly grew to an assault​ on tech platforms–including those, like Tencent, that offer online gaming.

Now, as the campaign picks up speed, it’s adopting some of the iconography of the Maoist era. Along with​ the cult of personality, the effort is​ building a militant commitment to “struggle” against domestic and foreign enemies along with a “rectification” campaign to instill socialist values and combat decadence.

Authorities are also challenging the​ extravagant pay common in the entertainment world. And in a more sinister vein, they’ve called for a boycott of what the government has described as effeminate male celebrities.

What many foreign investors have yet to understand is that a regulatory crackdown that’s erased $1 trillion off Chinese equities goes well beyond reining in digital monopolies and forcing delivery companies to pay gig workers more. Xi is arguably unleashing political forces that haven’t seen the light of day for decades. In a widely published essay, a leftist blogger who goes by the name Li Guangman writes that China is in the throes of a “profound revolution.”

A video recording of Jack Ma, co-founder of Alibaba Group Holding, on Jan. 20. His takedown was just the beginning of Bejing’s wide-ranging campaign.
Just over half a century ago, Mao plunged China into a decade of chaos by launching an attack on “capitalist roaders” within the Party who he believed had hijacked his revolution to restore the old society.

Xi is assailing actual capitalists, some of them party members such as Ma, as symbols of yawning wealth disparity. Billionaires are being squeezed for charitable contributions to uplift the rural poor left behind by China’s fast-faced growth. Alibaba has pledged to donate $15.5 billion to charity through 2025.

Some of this is about raw power. Mao attempted to destroy his own Communist Party–“bombard the headquarters!” he instructed his young Red Guard zealots–to preserve his own legacy. Many China experts believe that Xi is laying the groundwork for a bid to remain in office indefinitely.

There is a crucial difference, though. The Cultural Revolution was a bottom-up movement that set loose popular fury against the establishment. In the end, rival Red Guard factions were blasting away at each other with machine guns, mortars and tanks, and Mao had to bring in the army to restore order.

Xi’s revolution is top-down: the last thing he wants is chaos on the streets.

What does he intend, then? As my Bloomberg colleague Malcolm Scott reports, the pilot project for the economic future Xi imagines is Zhejiang province, one of the wealthiest parts of China (incomes there are approaching levels in southern Europe) and a hotbed of private enterprise. Zhejiang is also Xi’s power base; he was party secretary there before ascending to higher office in Beijing.

The Ningbo-Zhoushan port in the Zhejiang Province of China. Photographer: VCG/Visual China Group
The evidence from Zhejiang suggests that on economic matters Xi is not Mao, in the sense that he wants to redirect the energies of entrepreneurs, not eliminate them as a class. The emphasis is on state control. Xi is focused on manufacturing over online services, and labor over capital. Expect the state to have a greater say in setting prices of goods and services–and how profits are distributed. The latest crop of corporate earnings reports are replete with references to Xi’s “common prosperity” slogan.

Nor does Xi fully embrace Mao’s egalitarianism. On welfare, his top lieutenants are closer to neo-liberals than socialists; in their view, handouts to the poor only promote​ indolence.

As for the cult of personality, Mao’s was of a different order altogether. At its height, writes the historian Frank Dikötter, demand for plastic to cover Mao’s Little Red Book forced toy factories to scale back output, and the production of billions of Mao badges exhausted the country’s aluminum supplies.

Still, as the Economist​ points out, the last time hundreds of millions of Chinese school kids clutched books devoted to one man was during the Mao era. In that sense, at least, the Cultural Revolution lives on.

The crucial thesis is in these two paragraphs : 
"The evidence from Zhejiang suggests that on economic matters Xi is not Mao, in the sense that he wants to redirect the energies of entrepreneurs, not eliminate them as a class. The emphasis is on state control. Xi is focused on manufacturing over online services, and labor over capital. Expect the state to have a greater say in setting prices of goods and services–and how profits are distributed. The latest crop of corporate earnings reports are replete with references to Xi’s “common prosperity” slogan.

Nor does Xi fully embrace Mao’s egalitarianism. On welfare, his top lieutenants are closer to neo-liberals than socialists; in their view, handouts to the poor only promote​ indolence."

THIS THESIS IS CRUCIAL to my own position on "Big Tech". ULTIMATELY the "knowledge economy" must lead to PRODUCTION !  Capitalism was ALWAYS AND EVERYWHERE about subordination knowledge to material production !  Capitalist enterprise - industry! - always and forever will be either about the manufacture of "things" OR ELSE IT WILL ABOLISH ITSELF, because "knowledge" is not "production". 
The emphasis on "the knowledge economy" serves only to disguise the transfer of social wealth from PRODUCERS to the holders of monopolistic "rights" to "intellectual property"! But sooner or later the "doers" (laboratores) will have to hold the "high priests" (oratores) to account !  The "metaverse" will not save Mark Zuckerberg from having his scalp razed by... the Taliban among others!
As Peggy Noonan argued today in the WSJ, there is "reality" (from the Latin res, "thing") and there is bullshit (she hides the last four letters ).
Dad had an anecdote about the father who asked his young son training for the priesthood to show him his new skills by giving a sermon in the house garden. The son obliged. The father was impressed. When the son later tried the same in church, he was tongue tied and the sermon a miserable failure.  The father then approached the son for an explanation.  And the trainee priest confessed : "Father, broccoli are broccoli, and human beings are human beings ! "
You can bullshit vegetables.  It's much harder with people...

Big Tech - "the knowledge economy" - relies on two parameters :  symbolic manipulation (rearranging deckchairs on the Titanic) and data collection (how to manipulate people's behavior on the basis of what they do currently). Both "activities" are pure "directives" - essentially, giving orders or commands. The knowledge economy is the EXASPERATION of command over action: pure theft of living labour from "doers". What we are witnessing with asset inflation and swelling financial balloons or bubbles is the mounting UNTENABILITY of this late capitalist regime where the system no longer PRODUCES any... THING, or anything useful, but merely manages to shrink the human sphere of action to ... "cyberspace" or "the metaverse".
Yet, if Afghanistan proves anything,  it is that no amount of "knowledge" or "technology" can change the "reality on the ground", short of erecting a dictatorship so "totalitarian" that it defeats and annihilates the very thing it was supposed to preserve: a viable society.

Parole sacre:

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