Capitalism, Socialism and Democracy

In Capitalism, Socialism and Democracy by Joseph Alois Schumpeter, Marx's Law of Value is dismissed by a simple wave of the hands.

I think this is important because the current economic crisis has arisen because of this fundamental rejection of Marx's law. A flawed theory of value is the cause.

Schumpeter writes:

1. Marx fell in with the ordinary run of the theorists of his own and also of a later epoch by making a theory of value the corner stone of his theoretical structure. His theory of value is the Ricardian one. I believe that such an outstanding authority as Professor Taussig disagreed with this and always stressed the differences. There is plenty of difference in wording, method of deduction and sociological implication, but there is none in the bare theorem, which alone matters to the theorist of today.² Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard. Both encounter the threshold difficulties incident to this approach similarly (that is to say, Marx encounters them as he had learned to do from Ricardo). Neither has anything useful to say about monopoly or what we now call imperfect competition. Both answer critics by the same arguments. Marx’s arguments are merely less polite, more prolix and more “philosophical” in the worst sense of this word.

Everybody knows that this theory of value is unsatisfactory. In the voluminous discussion that has been carried on about it, the right is not indeed all on one side and many faulty arguments have been used by its opponents. The essential point is not whether labor is the true “source” or “cause” of economic value. This question may be of primary interest to social philosophers who want to deduce from it ethical claims to the product, and Marx himself was of course not indifferent to this aspect of the problem. For economics as a positive science, however, which has to describe or explain actual processes, it is much more important to ask how the labor theory of value works as a tool of analysis, and the real trouble with it is that it does so very badly.

To begin with, it does not work at all outside of the case of perfect competition. Second, even with perfect competition it never works smoothly except if labor is the only factor of production and, moreover, if labor is all of one kind.³ If either of these two conditions is not fulfilled, additional assumptions must be introduced and analytical difficulties increase to an extent that soon becomes unmanageable. Reasoning on the lines of the labor theory of value is hence reasoning on a very special case without practical importance, though something might be said for it if it be interpreted in the sense of a rough approximation to the historical tendencies of relative values. The theory which replaced it—in its earliest and now outmoded form, known as the theory of marginal utility—may claim superiority on many counts but the real argument for it is that it is much more general and applies equally well, on the one hand, to the cases of monopoly and imperfect competition and, on the other hand, to the presence of other factors and of labor of many different kinds and qualities. Moreover, if we introduce into this theory the restrictive assumptions mentioned, propertionality between value and quantity of labor applied follows from it.⁴ It should be clear, therefore, not only that it was perfectly absurd for Marxists to question, as at first they tried to do, the validity of the marginal utility theory of value (which was what confronted them), but also that it is incorrect to call the labor theory of value “wrong.” In any case it is dead and buried.

---

² It may, however, be open to question whether this is all that mattered to Marx himself. He was under the same delusion as Aristotle, viz., that value, though a factor in the determination of relative prices, is yet something that is different from, and exists independently of, relative prices or exchange relations. The proposition that the value of a commodity is the amount of labor embodied in it can hardly mean anything else. If so, then there is a difference between Ricardo and Marx, since Ricardo’s values are simply exchange values or relative prices. It is worth while to mention this because, if we could accept this view of value, much of his theory that seems to us untenable or even meaningless would cease to be so. Of course we cannot. Nor would the situation be improved if, following some Marxologists, we took the view that whether a distinct “substance” or not, Marx’s labor-quantity values are merely intended to serve as tools by which to display the division of total social income into labor income and capital income (the theory of individual relative prices being then a secondary matter). For, as we shall see presently, Marx’s theory of value also fails at this task (granted that we can divorce that task from the problem of individual prices).

³ The necessity for the second assumption is particularly damaging. The labor theory of value may be able to deal with differences in quality of labor that are due to training (acquired skill): appropriate quota of the work that goes into the process of training would then have to be added to every hour of skilled work so that we might, without leaving the range of the principle, put the hour of work done by a skilled workman equal to a determined multiple of an hour of unskilled work. But this method fails in the case of “natural” differences in quality of work due to differences in intelligence, will power, physical strength or agility Then recourse must be had to the difference in value of the hours respectively worked by the naturally inferior and the naturally superior workmen—a value that is not itself explainable on the labor-quantity principle. In fact Ricardo does precisely this: he simply says that those different qualities will somehow be put into their right relation by the play of the market mechanism so that we may after all speak of an hour’s work done by workman A being equivalent to a definite multiple of the work done by workman B. But he completely overlooks that in arguing in this way he appeals to another principle of valuation and really surrenders the labor-quantity principle which thus fails from the start, within its own precincts, and before it has the chance to fail because of the presence of factors other than labor.

⁴ In fact, it follows from the marginal utility theory of value that for equilibrium to exist each factor must be so distributed over the productive uses open to it that the last unit allocated to any use produces the same value as the last unit allocated to each of the other uses. If there be no other factors except labor of one kind and quality, this obviously means that the relative values or prices of all commodities must be proportional to the numbers of man-hours contained in them, provided there is perfect competition and mobility.

pp.23-25

Italics in original
Emphasis Mine

Marx said that there are two (2) types of value:

1. Use Value which is an entirely personal thing. It is a personal measure of how much I value something at point in time. The use value of object can fluctuate wildly over time without any essential change in the nature of the object. (Think of a child and their toys).
2. Exchange Value which expresses the equivalence between different types of objects and activities.

Note that Use Values are qualitative in that they express preferences. The best you can extract from Use Values is a ranking order because these values express preferences.

On the other hand, Exchange Values are quantative as they express the ratio of quantity of things and activities to each other. And these values are directly observable - I can exchange my ten (10) oranges for your twelve (12) apples. When we do this, we are literally comparing apples and oranges. Other people can see that we are saying that the Exchange Value of ten (10) oranges is twelve (12) apples at this point in time and at this place.

Note that there is no price mentioned in this example. Prices have nothing to do with Exchange Values. Nor is their any mention of labour time. The amount of labour time is irrelevant to Exchange Values.

Who profited by this exchange? With respect to Exchange Values, nobody is any better off because we have agreed that their Exchange Values are equal by exchanging apples for oranges.

However, with respect to Use Values, we are both better off because we got rid of something we did not prefer as much for something that we prefer more. Otherwise, we would not have done the exchange. So, qualitatively we are better off, but quantitatively, we are no better off.

Now that I have twelve (12) apples, what is their Exchange Value? The answer is ZERO (0)! What? I just exchanged ten (10) oranges for them. Shouldn't they be worth ten (10) oranges? No, until someone gives me something for those twelve (12) apples, I have no idea what their Exchange Value is. I can have a reasonable expectation, but that is all.

Now, along comes Jim with a bag of apples. After some haggling, we exchange seven (7) apples for five (5) oranges.

Has the Exchange Value for one (1) orange gone up? A meaningless question because no one has exchanged one (1) for anything.

All we can say after these two (2) exchanges is that nineteen (19) apples were exchanged for fifteen (15) oranges. This is the opinion of three (3) different people. Now, I can say that, on average, the Exchange Value of one (1) orange is 15/19 apples. As more exchanges take place between people with apples and oranges, the better idea that I can get about what could be the average Exchange Value of one (1) orange relative to apples.

The problem with the marginal utility function is that it tries to compare Use Value with Exchange Value. Hopefully, you will see that, under Marx's Law of Value, this is not possible.

Read more!

Crossing the Chasm

In Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, there are several ideas that could be useful to Communists. The Wikipedia article gives a summary of the ideas.

Primarily, I think the application of these ideas is relevant because Communism is a disruptive technology (way of doing things).

My assessment of the current state of Communism in Australia is that we are in the Innovators part of the Technology adoption lifecycle. And as such, we have been unable to bridge the First Crack (p.17):

... The first is between the innovators and early adopters. It is a gap that occurs when a hot technology product cannot be readily translated into a major new benefit - something like Esperanto. The enthusiasts love it for its architecture, but nobody else can even figure out how to start using it.

I say this because all of the Communists I have met have been keen enthusiasts about how good Communism would be for Australia. We have been quite successful in several types of ventures: political parties, newspapers, conferences, and mass rallies.

We seem to have captured the Innovators: The Technology Enthusiasts (p.30) segment. Classically, the first people to adopt any new technology are those who appreciate that technology for its own sake. ... (p.30)

On the other hand, the Early Adopters: The Visionaries ... are that rare breed of people who have the insight to match an emerging technology to a strategic opportunity, the temperament to translate that insight into a high-visibility, high-risk project, and the charisma to get the rest of their organization to buy into that project. ... (pp.33-34).

There are three (3) problems with the early market (pp.39-40):

1. The company simply has no expertise in bringing a product to market. Very true in Australia as there has been no revolution.
2. The company sells the visionary before it has the product. Is our product the party program or the general concept of Communism?
3. Marketing falls prey to the crack between the technology enthusiast and the visionary by failing to discover, or at least failing to articulate, the compelling application that provides the order-of-magnitude leap in benefits. I do not know.

I think the party should now involve itself in setting up a business consultancy to enable workers to take over failed businesses and keep them running so that they can have jobs. We will need to mobilise our accountants and lawyers to, at least, consider the venture. Given the approaching economic storm, we will have more than enough opportunities to demonstrate the superiority of worker-run firms.

Read more!

Global CFO Survey: Recession in 2008, no relief until 2009

Both Tanta and Barry Ritholtz had read the same Global CFO Survey: Recession in 2008, no relief until 2009 (from Duke University). Tanta's opinion is that CFO Survey: No Economic Recovery Until Late 2009, and Ritholtz's opinion is CFOs: Recession has already started.

The summary of findings is:

• 54 percent of CFOs say the U.S. is now in recession, and 24 percent of the remaining CFOs say there is a high likelihood of a recession this year. CFOs do not expect the economy to recover until late 2009.
• Optimism reached its lowest point since the optimism index launched six years ago. Pessimists outnumber optimists by a nine-to-one margin, with 72 percent of CFOs more pessimistic and only 8 percent more optimistic about the U.S. economy than they were last quarter.
• Weak consumer demand and turmoil in the credit and housing markets are the top macro-concerns of CFOs. The high cost of labor ranked as the top internal concern.
• Credit conditions have directly hurt 35 percent of companies, through decreased availability of credit and higher interest rates (up 118 basis points on average). Sixty percent of firms have postponed expansion plans in response to credit market unrest.
• Capital spending is expected to increase only 3.3 percent. Price inflation is expected to rise 3 percent over the next 12 months.

Emphasis Mine

The US firms will reduce wages while keeping CapEx just ahead of inflation. So, there will no employment growth either in Department I or Department II, with a strong possibility of unemployment increasing as jobs are lost.

This is going to be a big shock to Generation Y. All of those perks will be seen as expenses and have to go in order to save costs.

Concerns in the US are:

Concerns about weak consumer demand, credit markets, housing market fallout and high fuel costs top the list of CFO macro-concerns about the U.S. economy.

High labor costs, the cost of healthcare, and supply chain risk are among the top concerns related more directly to their own companies.

Emphasis Mine

So, US firms could be amenable to socialisation of health-care costs as this would take the cost off their books and onto the tax-payers while deflecting some of the anger over the coming lay-offs. The health-care mafia could in ahead of this to minimise losses on their part, but they won't.

Of particular concern to Australia, the Asian CFOs seem to be pretty happy:

CFO optimism fell dramatically in Asia, with 43 percent of respondents becoming more pessimistic about regional economic growth than they were last quarter, and 38 percent growing more optimistic. Domestic employment should increase 8 percent in 2008, and capital spending a strong 20 percent on average. Wages should jump by nearly 10 percent.

Seventy percent of Asian CFOs think the U.S. economy is in recession, and half think that this will have a meaningful negative impact on their firm’s earnings. Sixty-four percent expect own-country domestic demand to help replace U.S. demand, and 39 percent expect Pacific Rim demand to help.

Emphasis Mine

What the Asian CFOs are really saying is that they expect the Asian economies to start to decouple from the US economy. This is very good news for Australia.

Read more!

The Democratic Rollback

Larry Diamond bemoans the The Democratic Rollback: The Resurgence of the Predatory State (Foreign Affairs March/April 2008, pp.36-48, subscription required) without realising that the state exists to oppress people. I suppose the state becomes predatory when it preys on the wrong people.

Diamond complains that the recent eruption of democracy has been a sham:

Elsewhere in the developing and postcommunist worlds, democracy has been a superficial phenomenon, blighted by multiple forms of bad governance: abusive police and security forces, domineering local oligarchies, incompetent and indifferent state bureaucracies, corrupt and inaccessible judiciaries, and venal ruling elites who are contemptuous of the rule of law and accountable to no one but themselves. Many people in these countries - especially the poor - are thus citizens only in name and have few meaningful channels of political participation. There are elections, but these are contests between corrupt, clientelistic parties. There are parliaments and local governments, but they do not represent broad constituencies. There are constitutions, but not constitutionalism.

p.38

Emphasis Mine

And he could have been talking about the NSW State Government. We have the abusive police and security forces exposed recently during the APEC summit. We have the incompetent and indifferent state bureaucracies exposed recently with the RNS scandal and horse flu outbreak.

The local oligarchy is not that domineering or venal. The judiciary appears to relatively incorrupt and accessible.

Diamond then goes onto elaborate what he means by a true democracy:

For a country to be a democracy, it must have more than regular, multiparty elections under a civilian constitutional order. Even significant opposition in presidential elections and opposition party members in the legislature are not enough to move beyond electoral authoritarianism. Elections are only democratic if they are truly free and fair. This requires the freedom to advocate, associate, contest, and campaign. It also requires a fair and neutral electoral administration, a widely credible system of dispute resolution, balanced access to mass media, and independent vote monitoring. By a strict application of these standards, a number of countries typically counted as democracies today - including Georgia, Mozambique, the Philippines, and Senegal - may have slipped below the threshold. Alarmingly, January 2008 Freedom House survey found that for the first time since 1994, freedom around the world had suffered a net decline in two successive years. The ratio of the number of countries whose scores had improved to the number whose scores had declined - a key indicator - was the worst since the fall of the Berlin Wall.

Where democracy survives, it often labors under serious difficulties. In most regions, majoritories support democracy as the best form of government in principle, but substantial monorities are willing to entertain an authoritarian option. ...

p.39

Emphasis Mine

What is left unsaid is that democracy can be managed by controlling access through funding, registration, monitoring, and varous bureaucratic hurdles (such as the twelve month lead time for parties to be registered before they can contest an election, or the 750 active member rule for a party to keep its registration).

I think Diamond falls for the fallacy that existence of parties implies democracy. I would argue that the ability of independents to contest and win elections would be a far greater measure of democracy because it expands the choices available.

Even then, independents can be controlled through mass media access and campaign costs.

Now, Diamond comes to the real reason that is concerned about his version of democracy:

... Without significant improvements in governance , economic growth will not take off or be substainable. Without legal and political institutions to control corruption, punish cheating, and ensure a level economic and political playing field, pro-growth policies will be ineffective and their economic benefits will be overshadowed or erased.

p.42

Emphasis Mine

In other words, the Capitalist cannot compete with significant state intervention. There is no invisible that naturally gives rise to optimal economic conditions. Individuals without guidance and control from their betters are little better than wild animals.

A society should be governed in such a way that it is capitalist enough without it being too capitalist.

Diamond then goes on to explain the natural state of the state:

... For thousands of years, the natural tendency of elites everywhere has been to monopolize power rather than to restrain it - through the development of transparent laws, strong institutions, and market competition. And once they have succeeded in restricting political access, these elites use their consolidated power to limit economic competition so as to generate profits that benefit them rather than society at large. The result is the predatory state.

p.43

Emphasis Mine

No shit, Batman! Who would had thought that a bunch of greedy bastards would band together to steal from other people? I had never realized that it was possible!

The sole purpose of the state to defend the interests of the ruling class (or elite) against everyone else. That has always been its purpose and will be its purpose until all classes are abolished.

A society divided into classes requires the existence of the state so the ruling class can prey on the other classes. A ruling class rules for its own benefit. Any benefit that the other classes get is purely a secondary effect.

Diamond really pummels those predatory states:

The most egregious predatory states produce predatory societies. People do not get rich through productive activity and honest risk taking; they get rich by manipulating power and privilege, by stealing from the state, extracting from the weak, and shirking the law. Political actors in predatory societies use any means necessary and break any rules possible in their quest for power and wealth. ...

p.43

Emphasis Mine

This is a pretty good description of the current economic mess in the USA, and what is going on to try to fix it.

Diamond then goes on to describe some wishy-washy plan for good governance to be imposed through international institutions. Once that is done, democracy can flourish to give the right outcomes for US foreign policy.

True democracy requires the participation of everyone in every decision that affects them. This includes government as well as the workplace. In other words, true democracy can only exist in a Communist society.

Read more!

How Large Is the Housing Wealth Effect? A New Approach

I have had a quick read of Carroll, Otsuka, and Slacalek, How Large Is the Housing Wealth Effect? A New Approach (October 18, 2006). The model is essentially curve-fitting over historical data for the Marginal Propensity to Consume (MPC).

The conclusion of the paper is:

Housing price fluctuations apparently have substantial effects on consumer spending. The immediate (first-quarter) impact is likely to be relatively small (the immediate quarterly MPC in our preferred model is about 2 cents on the dollar), but over a time span of several years it probably accumulates to the 4–10 cent range. These figures are consistent with evidence from micro data and the experience across US states. Whether the housing wealth effect is substantially larger than the stock wealth effect is more uncertain; while the bulk of the evidence seems to point in that direction, the estimated size of the differences is not large enough (in US aggregate data) to yield confidence in the conclusion. For monetary policy purposes, these results suggest that it is important to keep a close eye on developments in housing markets separately from equity markets, since even the possibility of a significantly higher MPC out of housing wealth can shift the balance of risks in a macroeconomic forecast. Such a perspective, for example, could have helped in understanding and interpreting the surprising strength of the US consumption and residential investment spending in the early 2000s even as the stock market suffered a historic decline.

More importantly, the risks of the opposite experience are also worth noting. While in most places there seem to be good fundamental reasons for the rise in housing wealth over the last few years, the housing price dynamics in some areas might be driven by bubble components. If these components grow large and decline abruptly, our results suggest that consumption will be affected substantially.

Emphasis Mine

My ignorant opinion is that the choice of MPC as the model output and forms of wealth as the model input produces a substantial bias in the model.

MPC assumes smooth changes around a central value. That is, the actors rationally adjust their behaviours to changed conditions in a predictable. They would do more or less of the same things they had been doing before (habits). There is no edge to a MPC where the actors start changing their habits.

The use of forms of wealth as model input is unreliable because it ignores the reasons for consumption:

• Labour reproduction - immediate (food, accommodation, transport costs, rest, clothing, tools, medical, etc.)
• Labour reproduction - long-term (children, education, preventative health-care, etc.)
• Capital reproduction (investment, debt servicing, etc.)
• Luxuries (anything else)

The sources of income to satisfy these different consumptions is wages, interest payments, rents, and profits. These do not arise directly from the various forms of wealth. As Marx wrote, capital that is not involved in the production process, is dead capital. This paper only considers dead capital. It is the living capital that drives the economy.

I think the paper is a relic of its times and will not be useful over the coming economic crisis before the actors are going to have to change their habits drasticly in order to survive. And these forms of wealth (housing and stocks) will be exposed truly as dead capital.

Read more!

The impact of Declining House Prices on Consumption

Tanta discusses The impact of Declining House Prices on Consumption. She thinks that ... the recession will not be severe (unemployment will not rise to 8%), although I do expect the slowdown to linger, and the recovery to be sluggish ...

Here are two rough methods to estimate the impact of declining house prices on personal consumption expenditures (PCE). The first uses Mortgage Equity Withdrawal (MEW) and estimates the portion of the "Home ATM" that is consumed. The second is an estimate based solely on the changes in house prices (See: Carroll, Otsuka, and Slacalek, How Large Is the Housing Wealth Effect? A New Approach October 18, 2006).

...

Imagine house price declines of 10% in a given year. With total household real estate assets of approximately $20 Trillion (Fed's Flow of Funds report, Table B.100, line 4), a 10% decline in house prices would reduce household wealth by $2 trillion. Using Carroll's long run estimate of 9 cents per $1 change in the marginal propensity to consume, gives a drag on PCE of about $180 billion.

...

Although the impact on PCE from declining house prices will probably be significant, the size of the impact is not huge when compared to the overall U.S. economy. This is one of the reasons I think the recession will not be severe (unemployment will not rise to 8%), although I do expect the slowdown to linger, and the recovery to be sluggish (because housing will not be an engine of recovery this time).

Emphasis Mine

My own ignorant opinion is, (without reading Carroll, et.al. (2006)), is that the analysis assumes a uniform application of decrease in PCE and there is minimal multiplier effect. If there was a uniform decrease of 10% across the whole US, then the US economy would probably behave as Tanta concludes.

However, the nature of this bursting bubble is that it is so non-uniform with multiple modes with a high degree of auto-correlation. The collapse of a bubble at one mode increases the likelihood of a collapse at another mode because of the panic of the actors.

This auto-correlation of panic plus the integration of the US economy would suggest a very high multiplier effect of a decrease in PCE. Less money spent means less sales means less profits and wages which means less money to spend and invest. This downward spiral increases in intensity as more money is withdrawn from circulation to guard against the day there is no money in circulation.

Read more!

The thing about 'free'

Seth Godin does a short analysis of The thing about 'free'.

I found this interesting especially with regards to the selling of the party newspaper, Green Left Weekly. For years, people have been asking why we did not give it away like The Epoch Times (Monthly from Falun Gang) or MX (Daily from News Limited). Our response has always been that the cost of the newspaper implies a commitment. In this regard, Mr. Godin would agree.

Mr. Godin writes:

...

That got me thinking about free music, free samples and other free interactions. They're different. Paying a dollar for a song isn't expensive to anyone who pays $3 for a cup of coffee. The dollar isn't about expense, it's about selection and choice and commitment.

There is no commitment, one way or the other, for free. If applying to college were free, the number of schools people would apply to would approach infinity--yet the cost of the application is trivial compared to the cost of tuition.

...

As you think about your web service or your newsletter or the sales calls you go on, consider this: could you charge for it? What would happen if you paid for it? Time share folks have been paying people to endure a sales call for years. My guess is that this is because it works. And trade shows charge people to attend what is essentially a large loud sales call show floor. (Important note: 'charging' doesn't always mean cash money. Giving you large amounts of attention or privacy or data counts too).

...

Emphasis Mine

In our case, this last point would refer to getting the contact details, and having a long political discussions with people on the street. And a person's willingness to be seen publicly with us indicates a large degree of commitment because of the anti-terror laws. They are putting their livelihood and liberty at risk.

Yes, we do give the newspaper away for free at times. Usually to the homeless (not very often), and we give away last week's edition to anyone who wants to see what the paper is about. I even let people browse through the newspaper for free.

There is no hard and fast rule. If they are walking by and ask for a free newspaper, I would say no because they have minimal commitment. If they stop and argue, and then ask for a free newspaper, I would have still said no. But after reading Mr. Godin's post, I would now consider saying yes because they have demonstrated a degree of commitment that is opening a channel for communication.

Read more!

Martin Wolf Reads Too Much Roubini and Freaks Out

Yves Smith reports that Martin Wolf Reads Too Much Roubini and Freaks Out. It would appear that Nouriel Roubini estimates that the losses from the current financial crisis could equal the US GDP.

The normally sober and measured Martin Wolf of the Financial Times is getting worn down by reading too many bearish forecasts, particularly those of Nouriel Roubini. And although Wolf would like to dismiss Roubini's estimates as extreme, his track record in calling this downturn makes him loath to do so.

From the Financial Times:

...

Most of the losses will fall not on the financial sector but elsewhere. As Prof Roubini notes, a 10 per cent fall in house prices (relative to the peak) knocks off $2,000bn (14 per cent of gross domestic product) from household wealth. The first 10 per cent fall has already happened. What he sees as a likely 30 per cent cumulative fall would wipe out $6,000bn, 42 per cent of GDP and 10 per cent of household wealth. Already, falling prices are showing up in declining net household wealth. Prof Roubini also talks of a $5,600bn decline in the value of stocks and the possibility of additional trillions of dollars in losses on commercial property. Total losses might even equal annual GDP.

The principal direct effect of such losses will be on spending, particularly residential investment and household consumption. In the third quarter of last year, personal savings were a mere 2.4 per cent of GDP, while the financial balance of the personal sector (the difference between its income and expenditure) was minus 2.1 per cent. These patterns do not make sense when asset prices are falling. But a sharp rise in household savings would ensure a deep and durable recession.

...

Suppose, then, that Prof Roubini were right. Losses of $2,000bn-$3,000bn would decapitalise the financial system. The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses. While the US government could afford to raise its debt by up to 20 per cent of GDP, in order to do this, that decision would have huge ramifications. We would have more than the biggest US financial crisis since the 1930s. It would be an epochal political event.

Emphasis Mine

And this is just another Capitalist crisis! Wait until the real panic starts!

Read more!

Bear Stearns

Socialism for the rich continues unabated! Apparently, Bear Stearns has got a helping hand from the US Federal Reserve.

Barry Ritholtz says so in Bove: Fed Rescue for Bear Stearns:

Pretty wild stuff -- $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.

And the market's reaction: Dow up 3.55% (417 points), Nasdaq +4% or more than 86 points, S&P500 up 3.7% or 47 points

Ain't Socialism grand?

Emphasis in Original

However, CNN Money is reporting an UPDATE: Fed Action May Have Targeted Bear Stearns: Analyst who is Brad Hintz, an analyst at Bernstein Research.

Still, the Fed's move doesn't help banks and brokerage firms reduce their exposure to mortgage securities, collateralized debt obligations and other troubled assets like leveraged loans, Hintz said.

It "will do nothing to help this daisy chain of de-leveraging," he wrote.

The Fed is helping banks and brokers borrow money more easily, which will help them finance these exposures for longer. But the central bank isn't helping them sell these securities, Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business, wrote in an email on Tuesday.

"This is precisely the wrong type of bailout," he said. "The Federal Reserve is warning of capital deficiencies in the banking sector, which cannot be fixed with loans."

So, the US Federal Reserve is doing what sensible bankers and pawnbrokers won't do.

1. You take along an IOU from Aunt Gladys (sub-prime mortgage for Bear Stearns) to your local bank manager.
2. You produce a letter from Uncle George saying that the IOU is good (Bear Stearns would point to the AAA credit rating).
3. The bank manager believes you (US Federal Reserve trusts Bear Stearns).
4. The bank manager takes the IOU and gives you the keys to his car (US Federal Reserve takes the mortgages and gives Treasury Bonds to Bear Stearns).
5. You take the car to the pawnbroker to get a loan (Bear Stearns offers the Treasury Bonds as security for more loans).

What could go wrong?

Read more!

Marx's Revenge

Meghnad Desai's book, Marx's Revenge: The Resurgence of Capitalism and the Death of Statist Socialism (Verso, 2004:UK) is mainly about attacking Keynesian Economics not Marxism. I found his ideas on the Law of Value, Imperialism, American Economic Philosophy, The New Deal, Markets, and the survival of Capitalism to be interesting.

Law of Value

On p.57, Desai writes:

Marx had therefore cracked the basic issue of providing a single theory of prices, wages, and profits. The separation of the exchange value and use value of labour-power, and their commensurate quantitative measurement, was central to his breakthrough.

And Desai goes on to completely misinterprets what Marx wrote. Marx's Law of Value simply states that there is no gain through exchange. One value of an item does not increase by being exchanged. This is what Marx called the Exchange Value in order to distinguish that value from its Use Value - how useful the item is to the owner.

The sum of the Use Values may well increase due to the exchange, but the sum of the Exchange Values will not. Furthermore, these two types of value are not comparable. This is where Desai fails - he writes that they are.

Imperialism

On pp.132-3, Desai writes:

By the late twentieth century, the imperialist episode of world history had passed. No one was able to predict that accurately, but the First World War was the last war between European imperial monarchies. Yet this reliance on irrationality as an explanation of imperialism and war did not fit in with the rational spirit of the age. ...

And yet, we are in another period of Imperialist Expansion: China into Tibet, Africa, South America, and Central Asia; Russia into Central Asia; India into Sri Lanka, and Africa; and USA over everywhere. Desai does not see economic control, or military intervention as Imperialism only direct political control as such. Yet these enforce the latter.

American Economic Philosophy

On p.139, Desai writes:

... But eventually, America stayed liberal and capitalist. Its politics continued to be an ideology-free zone, as they do to this day. This is not to say that there are differences among parties, but political theory - Marxist, socialist, fascist - has not had any lasting impact. ...

Except for Milton Freidman and the Chicargo School, and the Berkeley School, there is no economic philosophy. Hah!

The New Deal

On pp.166-7, Desai writes:

... But Roosevelt's interference with free markets was minimal, though it was novel enough to arouse great opposition. Nor - contrary to later impressions - did he deviate from fiscal orthodoxy. He demonstrated American power by taking over the task of fixing the price of gold in his US Treasury. Roosevelt's goals were to save democracy and capitalism by minimal tinkering. He reaffirmed the strength of the liberal order even as he mildly challenged it.

Markets

On p.177, Desai contends that

... the liberal school of thought forgot that the market and capitalism were not the same thing. Markets are ubiquitous in capitalism, but they work in the context of dynamic ever-changing disequilibrium. ...

Markets exists wherever exchanges of items take place. No exchanges, no markets.

Survival of Capitalism

On pp.185-6, Desai writes that

... Capitalism had survived its worst years. For a while, it was rescued by rearmament and war. But Keynes had given it the recipe for peaceful development in a non-totalitarian context. Never again would capitalism face a similar collapse. Never again could capitalism be said to be in terminal crisis. Lenin had lost his battle with capitalism - though few were able to see it in such a light, thanks to Hitler's invasion of Russia in 1941.

Now that we are entering into a period of great economic turmoil, these words ring very hollow. Capitalism may well survive this crisis and the next.

What the capitalists forgot is that surplus labour-power creates value. The capitalists thought that value could sponataneously arise, and they have been proved wrong.

Read more!