January 31, 2008


Filed under: Self indulgence, Self reproach — duncan @ 8:16 pm

I’ve lost my mobile phone. Since I was stupid enough not to get it insured, I’ve still got to pay for the bloody thing, in monthly instalments, until 2019 or something. (Note to economists: consumers are not rational. Many of them will not buy insurance even when they’d be idiots not to. This is why John Edwards’ health care plan is better than Barack Obama’s. [1]). Since my phone was (bar internet cafes) my only access to the web, I’ve pretty much got bugs crawling under my skin, the withdrawal symptoms are so bad. It turns out I did a simply ridiculous amount of reading on that gadget; now my eyeballs are popping out into the information void.

Some advantages mobile phones have over computer-based browsing.

1) You can read academic articles in public without looking like a freak. Everyone in the world (everyone in south London, anyway) spends their waking lives staring at their phones. I guess they’re reading text messages or something. But it means I can happily read whatever I want (provided it’s on line, which most everything is) and not look like a maniac. Try reading an economics textbook at the bus stop, and see the kind of looks you get.

2) It enforces a certain kind of attention. I find it pretty difficult to read stuff on a computer screen – the urge to skim (which I rarely feel when reading actual physical paper books) is almost irresistible. (Not entirely clear why that would be; something to do with your distance from the screen, your inability to physically hold the thing you’re reading, a certain discomfort or lack of bodily engagement? Who knows…) On a mobile phone, you have to scroll down all the time – you can only read a small portion of text at any one moment – so you have to pay full attention to every word, even when you’re reading casually. I find this helpful.

3) Plus, of course, you can just carry a mobile phone around with you. Even if you’re only got a minute and a half to spare, you can pack in a small amount of self-education or pointless blather. For those of us whose actual lives are mostly distractions from reading, this is good.

No mobile phone for me now, though. My Google Reader account is piling up bile and analysis from around the world. Unreachable! Unread! This blog is soon going to get radically less well-informed – which I didn’t think was possible.

Maybe I should buy an internet connection of some kind. Or – I’m thinking outside the box here – another mobile phone… I’m just not sure I can bear to pay for two monthly contracts.

That buzzing sound you hear is the world’s smallest violin, on mute.

[1] Though neither is exactly unimprovable. This debate is one of those things I just don’t understand. Why wouldn’t you have a progressive-tax-funded, single payer, universal coverage health care system? What’s to dislike?

January 27, 2008

The bubble bursts, immiseration begins

Filed under: Economics, Politics — duncan @ 6:43 pm

Let me try to see if I’ve got this right. The Fed’s remorseless cutting of interest rates whenever the American economy began to slow has fostered and perpetuated a series of bubbles. The technology bubble of the nineties was replaced by the housing bubble of the noughties – consumption was never brought back down to earth after the collapse of internet stocks, because Americans were encouraged to treat their properties as sources of easy income. Low interest rates were one half of the policy package that enabled this – the other half was deregulation. ‘Financial innovation’ ensured that the whole world and his dog could take out mortgages – increasing demand for housing, which increased house prices, which perpetuated the illusion that you couldn’t lose by taking out a mortgage, even if under normal circumstances, without rapid house price inflation and easy credit, you wouldn’t have been able to afford it. The consumption that kept the economy going was based on credit; increasing availability of credit was based on a bubble; and now the bubble’s burst we’re going to see declining living standards for large sections of America’s population. To say nothing of the rest of the world.

Plus, what’s true of the average American consumer is also true of America as a whole. America’s prosperity since the 1980s has been partly based on massive borrowing from the growing Asian economies. But the ability to borrow is premised on the supposed ability to repay; and if American growth is based on consumption based on this same borrowing, it’s kind of unclear where the money’s going to come from. Hence the decline in the value of the dollar – the massive global imbalance of America’s current account deficit is being reduced by the market’s revaluation of America’s currency.

One of my favourite d-squared posts is about the collapse of the Russian economy in the wake of its neoliberalisation. D-squared asks the question – exactly why would a botched privatisation program, which placed Russia’s assets in the hands of a small group of oligarchs, reduce GDP by 42% and starve a million people to death? “Terribly unfair and corrupt or not, handing over ownership of a factory from this bunch of gangsters to that bunch of gangsters doesn’t stop the wheels turning.” The really stupid neoliberalisation policy, d-squared says, was the imposition of foreign exchange and capital markets, which enabled the oligarchs to stash all their wealth overseas, converting it into dollars. Result: a catastrophic reduction in domestic liquidity and, therefore, demand – i.e. depression.

D-squared’s post ends with a nasty little twist. “Note that most of the bad effects of the kleptocrats took place because they converted their (local currency) profits of theft into dollars, draining the economy of hard currency. Because of this, we can credibly hypothesise that there is one case in which you could hand the entire economy over to robber barons and it wouldn’t really matter at all. That would be the case in which the local currency is the global reserve currency, so that the kleptocrats are happy holding their wealth in the local currency. In other words, the one country which has literally nothing to fear from becoming a gangster state in the United States of America.”

Unfortunately, the Bush administration is in the process of proving that hypothesis wrong. In the short term there’s no drain on domestic liquidity from the ruling elite’s theft of ordinary people’s wealth. But this only holds so long as the dollar remains the world’s reserve currency – and the dollar is only the reserve currency because of America’s economic credibility. Because the money the ruling elite has been stealing isn’t actually America’s money, the status of the dollar as the world reserve currency is under intense strain.

American policy since the eighties has been driven by the desire to further enrich a tiny fraction of the population: massive tax cuts go hand in hand with attacks on the earning power of labour. If the economy is to keep growing, however, American consumers need to keep spending; and that’s hard to achieve when wages stagnate, or are reduced. The ruling class’s solution was to generate workers’ incomes through debt, rather than wage increases. The credit bubble was a way of upwardly redistributing America’s wealth, without a short-term decrease in consumer spending. A systematic robbery has taken place, hidden by debt, and only now are Americans discovering how much of their real wealth has been confiscated.

Furthermore, the borrowing from Asian economies that was necessary to fund a level of national consumption higher than the level of national income allows the ruling class to appropriate that money, too. And when the other shoe drops, the ruling class are not the ones who are indebted – ordinary Americans are. You can’t get a much clearer example of conflicting class interests. America’s ruling class has got rich beyond the dreams of avarice by undermining the prosperity of the nation the interests of which they’re supposed to be representing.

America resembles those bond insurers we’ve been reading so much about. Just as the insurers’ AAA rating allowed them to make a mint by guaranteeing subprime debt, so the dollar’s status as reserve currency allowed America to engage in the most incredible financial recklessness, secure in the knowledge that everyone would still have confidence in its long term solvency. But confidence can only withstand so much recklessness. The subprime mortgage fiasco is now destroying those AAA ratings, and, for the same reasons, the dollar’s status as reserve currency is looking weaker by the day.

At any rate, this is what George Soros suggests in his recent FT article: “the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency.” Soros foresees “a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.” Will this crisis be the tipping point in which the Yuan replaces the dollar as the world reserve currency? Is this the end of American economic hegemony? I have no idea – I don’t know what I’m talking about. But I’ve picked an interesting time to try to understand economics.

[NB: Of course, what the above neglects is that much ‘American’ wealth, appropriated from ordinary Americans by the ruling class, is itself already appropriated from poorer countries through American economic hegemony. Plus – much of what is said here of ‘America’ could be said with equal justice of ‘the developed world’ in general. Like I say – I don’t know what I’m talking about.]

The Return of Say’s Law

Filed under: Economics — duncan @ 6:39 pm

Even I can tell that this is extraordinary bullshit.

“Macroeconomics is like astrology or Freudian psychology, in that a lot of people used to believe it, and a lot of people still do, but many with a scientific bent tend to stay away from it… Once you accept the notion that jobs can be scarce, you can turn the rest of economics upside-down as well… Keynes was part of a general intellectual trend which culminated [sic] in socialist experiments prior to World War II in Russia, Italy [sic!], and Germany [sic!!!] and after World War II in Western Europe as well as the Soviet Sphere… The Great Depression converted many economists to the view that market economies are subject to involuntary unemployment [shurely not…] that should be relieved by government policy… Classical economics [by contrast] does not allow for such a thing as a ‘general drop in demand for goods and services’… [I]n classical economics, we have unlimited wants. There is never a need to increase demand. Moreover, classical economics says that there is nothing that government can do to affect demand… My current view is that what we call ‘cyclical’ unemployment is in fact a severe version of structural and/or frictional unemployment… Given this theoretical outlook, I would be inclined not to forecast a severe recession in 2008… [T]he main ‘crisis’ motivating ‘stimulus’ is the fact that this is an election year.” !!!!

It shouldn’t need saying… why does it need saying?… a child could tell you this… but “demand” does not equal “wants”. The fact that we have “unlimited wants” does not mean that “[t]here is never a need to increase demand” – because demand = wants + money. If there’s a collapse of liquidity, like the one currently wreaking havoc in the world economy, then “wants” are neither here nor there. Wants without purchasing power = no demand. Hence the need for economic stimulus through the creation of liquidity. Of course Keynes advocated deficit-financed government investment in public works, rather than tax cuts, as a stimulus package. But it takes all sorts.

Is it possible that Arnold Kling is really as stupid as this article makes him seem?

Is It Still Schadenfreude If You Suffer Too?

Filed under: Economics, Sarcasm — duncan @ 6:31 pm

The loathsome Slate describes the loathsome Larry Summers (via the loathsome Greg Mankiw). Summers has been complaining about sovereign wealth funds at Davos. “It’s the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives… When there’s no assurance that value maximization is being pursued, there is a potential question… [S]uppose that a country ran an active trading operation… Would we be comfortable with the concept that the nation of X had decided that nation of Y’s currency was overvalued and launched an attack? There should be some kind of understanding that that won’t happen. Also, the SWF of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?”

Yeah, Larry – God forbid that finance and politics should become intertwined. God forbid that investment should be used to serve narrow political ends. As former U.S. Secretary of the Treasury and ex chief economist of the World Bank, I think you’re in an ideal position to make this complaint.

Kristin Halvorson, Norway’s minister of finance, listened patiently, and was unruffled. “It seems you don’t like us, but you need our money.”

January 24, 2008

David Harvey on China

Filed under: Economics, Politics — duncan @ 6:00 pm

From ‘A Brief History of Neoliberalism’ (2005), pgs 141-142:

“China has massive labour surpluses, and if it is to achieve social and political stability it must either absorb or violently repress that surplus. It can do the former only by debt-financing infrastructural and fixed-capital formation projects on a massive scale… The danger lurks of a severe crisis of over-accumulation of fixed capital… The Chinese banking system, which is at the heart of the current deficit financing, cannot currently withstand integration into the global financial system because as much as half its loan portfolio is non-performing. Fortunately, the Chinese have a balance of payments surplus that can be applied, as we have already seen, to wiping the banks’ slates clean. But it is at this point that the other shoe is liable to drop, because the only way the Chinese can afford this is by piling up balance of payments surpluses against the US. A peculiar symbiosis emerges, in which China, along with Japan, Taiwan, and other Asian central banks, fund the US debt so that the US can conveniently consume their surplus output… Chinese economic dynamism is held hostage to US fiscal and monetary policy. The US is also currently behaving in a Keynesian fashion – running up enormous federal deficits and consumer debt while insisting that everyone else must obey neoliberal rules. This is not a sustainable position, and there are now many influential voices in the US suggesting that it is steering right into the hurricane of a major financial crisis. For China, this would entail switching from a politics of labour absorption to a politics of overt repression. Whether or not such a tactic can succeed, as it did in Tiananmen Square in 1989, will depend crucially upon the balance of class forces and how the Communist Party positions itself in relation to those forces.”

January 21, 2008

“The Acrid Smell of Fear…

Filed under: Uncategorized — duncan @ 6:41 pm

hangs over the City. I’ve never seen fear like this.”


January 18, 2008

Perfect Competition and Profit

Filed under: Economics — duncan @ 9:50 pm

In a theoretical ideal market, competition between sellers would drive down the price of a commodity until it exactly equals the cost of its production. In a perfect market, there are no profits.

That in itself should tell us that something is amiss in the idea of ‘perfect competition’. Because, of course, the raison d’etre of capitalism is the generation of profit. (You don’t have to be a Marxist to believe that…)

There are at least two meanings bound together in the idea of ‘competition’. On the one hand, competition reduces profits – it moves profitability towards the ideal zero state. On the other hand, competition is the attempt to maximise profits – capitalists compete to make more money than their rivals, by whatever means necessary. The latter is supposed to be the mechanism by means of which we approach the former – and this theoretical, unachievable utopia in which the two meanings coincide allows economists to claim that they coincide at all times, everywhere. Thus: the maximisation of profit benefits us all.

We need to destroy this claim in every one of its manifestations. No one should be able even to think this thought without being overwhelmed by retributive shame.

January 12, 2008

The Silence of the Lambs 1

Filed under: Literature — duncan @ 9:37 pm

A while ago, for reasons best know to my subconscious, I became fascinated by Thomas Harris’s novel ‘The Silence of the Lambs’. (In my defense, this fascination is clearly fairly widespread; the book was a bestseller, after all. But still, it can’t be altogether healthy.) I spent a bit of time reading academic essays on ‘Silence…’ (of which there are, believe you me, plenty), with the vague idea of working my thoughts up into some sort of essay. That never happened, partly due to general inertia, and partly because I found it very difficult to get my thoughts into an intelligible shape. The book’s extremely dense, and I found it difficult to structure my comments in such a way that they a) weren’t unbelievably repetitive and b) didn’t presuppose ideas that I hadn’t yet got round to formulating. Anyway, for whatever reason, the essay died the death.

Now I’ve got this lovely blog, I thought I’d take the opportunity to post up some ‘Silence…’ comments. This is the first in a very occasional series. I’ll put up thoughts when I get sick of writing about economics, or whenever the infrequent mood strikes me. These posts are probably going to be even more rambling and disastrous than my usual ones. But you don’t have to read them. And, you know, maybe they’ll be fun. (Not much chance of that… ) (more…)

January 7, 2008

The Dominance of the Pleasure Principle

Filed under: Economics, Philosophy, Self indulgence, Vitiated by Ignorance — duncan @ 8:18 pm

Roger, at the always outstanding Limited Inc, has been posting for several months now on the theme of ‘Happiness Triumphant’ – he’s working towards a (presumably fucking long) essay on the genealogy of the modern idea of happiness. If I understand him right, Roger believes that the idea of happiness as the fundamental aim of life, and the meaning of ‘happiness’ that goes with this idea, is a relatively modern phenomenon. He thinks that our habit of locating our emotions on a linear scale – the habit evoked in our talk of ‘positive’ and ‘negative’ emotions – is the product of all kinds of contingent historical forces, and he’s attempting to excavate the origins of this inclination. (If you’re reading, Roger, please tear to pieces whatever I’m getting wrong. Everyone else, it’s worth checking out the posts themselves, which are unsummarisable and erudite and just well worth spending time with.) Above all, this talk of happiness is connected to the rise of capitalism: it’s not a coincidence that as capitalism starts to theorise itself we also see the emergence of utilitarianism; and economics remains bound to utilitarianism, despite the latter’s partial fall from philosophical grace. Personally, I find it hard to imagine a modern economics that doesn’t owe a profound debt to utilitarianism – though this may say more about my inadequate reading than anything else.

Anyway, Roger’s genealogical excavations are taking him way back into the half-forgotten corners of eighteenth and nineteenth century literature; stuff that I know basically fuck all about. And I find myself wondering, as I read, about the relation between happiness culture and one of the most powerful twentieth-century ways of understanding our mental processes: psychoanalysis. With apologies for trespassing on someone else’s project (leaving empty beer cans in the living room, cigarette burns on the carpet, and half-digested reading in the sink) I wanted to throw out a few thoughts on the relationship between psychoanalysis and the idea of happiness, or pleasure (which are, of course, by no means the same thing… but let’s leave that, unforgivably, aside) as the one and only aim of human life. (more…)

January 5, 2008

“an indifference curve between money and bereavement”

Filed under: Economics — duncan @ 5:41 pm

Sometimes I worry that I’m misrepresenting economics. The discipline’s orthodoxy can’t really be as bad as I ignorantly imagine. Maybe once I get past the superficialities of first year undergraduate textbooks, everything makes a lot more sense.

But then I come across stuff like this [via Economist’s View], and my worries shrivel and die. It’s an article on ‘Vox’ (‘Research-based policy analysis and commentary from Europe’s leading economists’): ‘A New Approach to Awarding Compensation in Courts’. I never got round to commenting when it was first published; but now I’ll quote just a few choice snippets.

“[M]ost judges are left to their own devices in awarding compensation packages they think would make sense in court, and they do so by using rules of thumb that have no conceptual foundation based on solid, scientific findings…. From a scientific point of view, this raises a question of whether we can develop a systematic method for calculating a reasonable compensation package that would closely reflect the genuine damages generated by bereavement.

Our approach to answering this question focuses on the use of surveys of happiness to estimate compensation that would ceteris paribus make up for the average well-being gap between those who had experienced the loss of loved ones and the rest of the sampled population. In other words, our approach involves empirically tracing out a form of indifference curve between money and bereavement…

In our empirical analysis, we use two different measures of subjective well-being – a seven-point-scale life satisfaction (1 = very dissatisfied… 7 = very satisfied) and a twelve-point scale record of a person’s mental health status in the general health questionnaire (GHQ) – in the long-run British Household Panel Survey (BHPS) carried out annually by the University of Essex…

Using the two measures of subjective well-being, we are able to estimate how much happiness can be gained on average by a higher income of X thousand euros, and how much happiness is lost by the death of loved ones. We then calculate the ratio of the two, which will give us a satisfactory statistical measure of a marginal rate of substitution between the pleasure of money and the pain from the death of a loved one.”

Oswald and Powdthavee deploy this method to reach some “solid, scientific findings”:

“Losing a partner is extremely damaging to subjective well-being and requires on average a compensation package of £114,000 (E160,000) in real income to make the person feel indifferent about the situation.”

I really don’t think there’s any point in discussing this in detail – or even satirising it. As Tom Lehrer said: “I gave up satire the day Henry Kissinger won the Nobel Peace Prize.” Most of the all-too-obvious objections can be found in the Economist’s View comment thread. But I will mention one thing the commenters failed to bring up. Since, as we know, money, like everything else, is subject to the law of diminishing marginal utility, it follows that one Euro is worth less to the wealthy than it is to the poor. And since the paper’s authors aim to calculate the amount of compensation that would provide happiness equal to the loss of happiness created by the death of a loved one, it follows that the poor should receive less money than the rich when family members die. If Oswald and Powdthavee believe their own arguments, they should supply a formula for the judge in question to calculate the appropriate amount of compensation, based on the bereaved individual’s wealth and/or income.

Of course, the paper doesn’t advance this idea. But that’s just another example of the way in which economics covers up the utter inhumanity of its fundamental axioms.

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