Seven Billion Experts—Waiting to Be Heard!

Tom Peters rails against the Central Planners in favour of Seven Billion Experts—Waiting to Be Heard! He argues that the Development policies have failed.

Peters also has a link to a set of PowerPoint slides about this. These are worth viewing in order to see Peter's argument elaborated on.

The underlying assumption is that the development aid has failed. While this is true for the developing countries, development aid has worked wonders for the developed world by increasing the rate of exploitation.

One case in point is coffee. For years, the World Bank recommended that developing countries invest in coffee. So much development occurred that the price of coffee collapsed. And the developed countries benefited from cheap coffee.

So instead of growing food to support themselves, these developing countries now have loans to pay off with a cash crop that does not bring in enough cash.

Now these countries go off to the IMF to sort out their loans. And out comes the cookie-cutter of the Structural Adjustment Program in which the subsidies that make life somewhat bearable are removed and the economy is to be opened up for foreign investment which proceeds to gut the local firms. And now, these countries have a seething mass of angry people. So the governments then need weapons to stay in power. More debt! And more sales to developed countries. What a racket!

Anyway enough jumping on Tom Peters.

The theme of his slides is interesting for Communists especially in our United Front work. The important thing is not to control these organisations but to get people involved. For once people see that they can change little things through their own efforts, they might begin to open up to changing larger things in their life. And they can become more confident about analyzing the structure of society.

We Communists need to become accustomed to "Trying and succeeding on the 37th attempt". The churn of Party membership is mainly due to this continual failing as well as the search for the perfect Party Program.

In all, I think we should view the slides at least in order to refocus ourselves.

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Countdown to $200 oil meets Anglo Disease

Jerome a Paris descibes what happens when the Countdown to $200 oil meets Anglo Disease. He sees the current economic problems as an aberration.

One of the more interesting things about this Friday's economic news was the very obvious connection between the unemployment number and oil prices. What links the two is debt, the defining feature of what I have called the Anglo Disease, ie the highly unequal economy whereby the rich and the financial sector (almost the same thing these days) capture most of the income but hide it by providing cheap debt to the middle classes so that they can continue to spend.

Emphasis Mine

He expands this point further:

in today's economy, the cannibalistic sector is not oil&gas, but finance. Bankers, through debt, have the ability to convert future cash-flows into immediate profits. Such immediate returns attract more capital, talent and resources (which cannot go to other sectors) and impose an iron discipline on the rest of the economy: those that provide the debt want to ensure that the future cash-flows will indeed materialize, and move in to ensure a relentless focus, in the underlying activities, on profitability at the expense of all other criteria. The immediate contribution of the financial world to measured GDP and growth makes it a popular industry, thus reinforcing its influence - and spreading out its way of thinking, focused on monetary gains and financial "efficiency." So not only the rest of the economy gets squeezed for any extra drop of profitability, but the language of financial analysts becomes the dominant one of not only economic discourse but also political discourse;

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This is how Capitalism is supposed to work. Investments flow to the sectors of the economy that that show the highest rates of return. There is no other criteria for a Capitalist investment choice.

What then is supposed to happen is that the rate of return on these new investments is supposed to revert to the mean once sufficient investment has been made. Unfortunately, the inertia of investment decisions means that over-investment occurs and large losses are experienced.

In order to justify this new regime of investment allocation, the spiritual producers are called upon to cast their spells, and wave their wands. The punditocarcy exists only to serve. To Serve Man up to the insatiable demands of Capital!

The author then goes onto explain that:

in a nutshell, the debt bubble hid the class warfare waged by the rich against everybody else, conveniently trapping those that could not or would not live within their means in the system, by making their livelihood increasingly dependent on not rocking the boat.

So close! Class warfare is reemerging in the consciousness of people.

So far, the article is mainly a litany of complaints. And his solution is:

So there you have it: wage stagnation (Anglo Disease) and oil production stagnation (the fundamental driver of the Countdown diaries) combining in a perfect storm. But hey, the financiers are still sitting pretty, and will say that more "reform" and "deregulation" and tax cuts are needed.

Maybe it's time to stop listening to what is highly self-interested drivel, and take back what they grabbed: it's not theirs. And maybe it's time to actually worry about using lots less oil (and gas and coal).

And, wonderfully, a programme to invest in housing and vehicle energy efficiency, renewable energy, and infrastructure, paid for by massive tax hikes on the rich, will help solve the current recession and the oil crisis.

After all that, the only suggestion is to take the rich. A reformist approach! As if the rich would stand aside for the rabble to despoil their ill-gotten gains!

This is a start. The acknowledgement of class warfare is a significant step forward. But it is only one step out of a journey.

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"Who’s Afraid of Friedrich Hayek?"

Mark Thoma points to an article that asks "Who’s Afraid of Friedrich Hayek?" without any comment.

The original article is by Jesse Larner who asks Who’s Afraid of Friedrich Hayek? The Obvious Truths and Mystical Fallacies of a Hero of the Right. I think her main conclusion is:

In titling his individualist manifesto The Road To Serfdom, Hayek clearly was equating collectivism with a tendency to slavery. ...

She starts with:

Hayek was a surprise, in several ways. He’s nowhere near as extreme as his ideological descendants. He admits that there are a few rare economic circumstances in which market forces cannot deliver the optimum result, and that when these occur, the state may legitimately intervene. He recognizes such a thing as the social interest and will even endorse some limited redistributionalism—he goes so far as to suggest that the state ensure a minimum standard of living, an idea that surely embarrasses the good folks at Cato. Politically, Hayek is not the cynic I had braced for. Plainly, transparently—and in stark contrast to many modern conservative intellectuals—he is a man concerned with human freedom. One of the unexpected things in Road [to Serfdom] is that he writes with passion against class privilege.

Emphasis Mine

Hayek can propose these things because he is a conservative. And a conservative defends rights and opposes privileges. The arguments within conservatism are mainly about the differentiation between the two.

A conservative could propose that the worker's right to a minimum standard of living trumps the right to enjoy the profits accuring from property because the former reflects a greater good - the right to life.

Unfortunately, conservatives get waylaid into defending the rights and privileges of the ruling class (capitalists, feudal lords, slave owners) over all others. They would come to believe that the current ordering of society (capitalist, feudal, slavery) is the best available and has to defended against the chaos that would result in changing the system.

Larner goes on further to explain why she thinks Hayek is so passionate in his belief that socialism will always lead to totalitarianism because planning reflects the needs and outlook of the planners:

A complex economy is something no person or institution can understand. But it can generate a sustainable order, with a rational allocation of resources, as individuals respond to their own circumstances and make choices as consumers and entrepreneurs, signaling the subjective value that they place on goods and capital stock through the price mechanism: One of Hayek’s most original contributions to economic theory is the insight that economic systems are based primarily on information rather than resources. To plan an outcome and to direct economic inputs and outputs toward this outcome is to stifle the emergence of a spontaneous, democratic response to the needs of the individuals who make up the community—a response that will necessarily have winners and losers, but that will not privilege the vision or depend on the limited information of a governing elite, and that will encourage further experimentation. The responsibility of a government that fosters individual freedom is to set up transparent and impartial rules so that the legal reaction to personal choices can be predicted for all, regardless of social station; to tolerate no privileged access to the law; to provide security; and to protect contracts and private property, so long as doing so does not conflict with the very small set of social assumptions on which there truly is broad consensus (arguably, Hayek’s suggestion that government should be responsible for a minimum standard of living would have fit into this consensus when Road was published.)

Emphasis Mine

Larner is writing this when the price signals from the real estate market caused a huge bubble in property prices, another bubble in stock prices, another bubble in oil and other commodity prices, and a bubble in food prices. And she still believes in the efficient pricing through the market?

And as for the efficient allocation of resources, toll roads are still being built in Sydney while the rail network is near collapse.

Larner overlooks one way of planning: democracy. We all vote on different plans and the one with the most votes is implemented.

I think Larner is of the reformist left in that she would soften the edges of capitalism through the spontaneous emergence of worker collectives that compete within a capitalist economy.

In that, I think she is naive to think that the ruling class would sit idly by while its power is whittled away. No ruling class has ever gone quietly into the dust bin of history.

Make no mistake, a worker collective directly challenges the capitalisr right to rule the economy. For once people see that they can make better decisions that the capitalists, then the people would question the need for a separate class of property holders and their privileges.

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"Libertarians and the Welfare State"

Mark Thoma comments on "Libertarians and the Welfare State". He is of the opinion that since everyone benefits from labour flexibility, everyone should support the workers in their unemployment.

He concludes that:

The source of the insecurity for workers is the system we live under, capitalism. It's better than any other system yet devised at providing for our needs, but within this system changes in preferences, changes in technology, management errors - all sorts of things out of the worker's control can cause them to become unemployed. Because it's a risk that's due to the system we live under, the cost of insuring against it should be shared by all those living within the system and benefiting from it, i.e. the cost should be shared across the entire population. The burden of paying for capitalism's dynamism and flexibility shouldn't be limited to the individual or the individual's family. So I don't see any contradiction in saying that families should not be required to provide this insurance, but "complete strangers" should.

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The nature of the Capitalist system is that the workers are expendable in favour of capital. You cannot expect Capital to be nice because the workers are hurting.

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'Worst crisis since Depression'

Robert Elstone, ASX Chief Executive, says that Australia faces the 'Worst crisis since Depression'. He explains that

Importantly, issuers (users) of capital will better appreciate that the financial sector is not there to purely be accommodative to the real economy.

I think this alone explains the current crisis.

WE are in the midst of a global financial crisis inspired by a potent combination of forces.

A drift in fiscal and monetary responsibility in the US, care of the "War on Terror", has been accompanied by a meltdown in the US mortgage market and a failure of intermediation by several global investment banks.

In this decade of easy credit, access became a right with fewer obligations and leverage became mainstream for households and investors.

This used to be called 'deregulation'. Now, it is called 'Oh shit! We are all going to die!'.

These forces have coincided to produce the worst financial crisis in the US since the Great Depression, which globalisation has exported to other financial economies, including Australia.

Now, globalisation is a bad thing because we all get to share the pain.

Bank borrowing and lending spreads have substantially widened, diversified financials and banks have been savagely re-rated, financial group failures are openly speculated on, and vocal stakeholders have blamed every regulator in sight, irrespective of where regulatory responsibilities actually lie.

So much for macro-economic reform that remove obstacles to innovation. What were once obstacles are now seen as crash barriers.

In late March 2008, US Treasury Secretary Henry Paulson released a blueprint for reforming the structure of financial services regulation in the US along the lines of the "twin peaks" model that prevails in Australia (recently endorsed in the IMF's Global Financial Stability Report).

Last February, I argued that a mini Wallis-style review of the Australian financial sector was logical, once the new Australian Government had passed its first test of fiscal responsibility with the May Budget.

In other words, once Rudds finishes screwing the battlers, he get around to giving the financiers more assistance and less oversight.

Much has changed in Australia's financial sector in the decade since the Wallis inquiry in terms of the development of opaque OTC derivatives, the depth of transparent exchange-traded derivative markets, credit and collateralisation practices, particularly in the mortgage and (share) margin lending markets, and the enormous growth in self-managed superannuation funds.

There is a lot of shit going on that nobody understands.

Irrespective of whether the Government pursues a "whole of system" inquiry or a series of more targeted Green Papers as referenced by Senator Sherry, the opportunity should not be missed to strengthen Australia's competitive position as a financial economy in much the same way that governments in Singapore, Hong Kong, Ireland, Switzerland, the Middle East and China have done.

The government's attitude should be one of 'Don't Ask', while the financial market's would be 'Don't Tell'. It is not the Government's business to stop the financiers from screwing up the financial system.

The next generation of vital microeconomic reform in Australia will rely heavily on the quality of our financial market infrastructure to deliver longer-dated price discovery for industries with long-dated asset lives, a forward price for carbon to facilitate technology substitution decisions, more transparent risk-sharing arrangements in public/private partnerships, and a regulatory framework that continues to balance the interests of capital providers and users.

What the financiers want is government bail-outs when they stuff up.

Importantly, issuers (users) of capital will better appreciate that the financial sector is not there to purely be accommodative to the real economy.

Meanwhile, on planet Earth, life goes on...

Conversely, supporters of an ever more robust continuous disclosure regime also need to take account of a listed entity's right to preserve confidentiality for competitive reasons and not have to spend its resources quashing constant rumours and often baseless speculation.

Stop asking questions! The financiers have no fucking idea what is going on. Questions can cause a loss of confidence because people might find out things.

Market events in Australia, such as the circumstances surrounding Tricom's woes and Opes Prime's failure (and Lift Capital's entering into administration), have reinforced the case for higher resource levels for corporate regulator ASIC to deal with record numbers of ASX frontline referrals and to address regulatory gaps, rather than for radical surgery to overhaul the entire regulatory framework.

There are a lot more bad apples. This does not mean that the whole orchard is bad, just a sizeable portion of it.

Calls in the media for severance of market supervision from market operation and risk management, or for the dismantling of the "twin peak" separation of corporate and prudential regulation, carry their own costs, risks and unintended consequences, which those making the calls would seem to have little interest in taking accountability for.

Stop trying to find out what is going on! Nobody knows. But nobody should know that nobody knows.

Legislative initiatives in the area of "short selling" of equity securities, a Treasury review of disclosure requirements for equity (swap and contracts for difference) derivatives and an RBA review of settlement risks with stock lending are necessary and welcome moves from the new Government.

Damm that free market! How dare the free market determine that the real price of those assets is lower than whale shit!

Recent market events in Australia have spanned the gamut of corporate and prudential regulation, as well as the market for corporate control.

Not that the whole system is fucked! No! That is merely an incorrect impression.

They have an impact on the policy considerations for the evolving market microstructure of Australia's wholesale markets in a way that the Financial Services Reform legislation of 2002 did not cater for. Any claim that such legislation envisaged a world of competition for market services is very different from it providing the practical apparatus for implementation.

Look, how could anyone know that relaxing rules would allow dodgy practices to arise? These were all nice people with ideas that turned out to be crap. Besides that, how could anyone know?

The investment community has every right to expect that policy decision-makers would only allow a significant structural change after a rigorous cost/benefit and risk analysis, conducted with the hindsight of recent market events, and with a high level of confidence in the outcomes. Moving towards such a world without appropriate planning and transitioning milestones, as well as clear market integrity protection mechanisms, would be unwise.

The panic starts now!

Recent market events will create a linkage between what were hitherto considered private contractual arrangements, in areas like stock and margin lending, and the Corporations Law.

They certainly provide the case for ongoing review of areas of vulnerability and opportunity.

This is especially so if we are to pursue our national interests in infrastructure, climate change and the growth of national savings for an ageing population, and ensure the Prime Minister's stated aspirations for our financial economy are realised.

White collar crime is such a nasty term. It may be appropriate and applicable but there is no need to use such gutter language.

And for you people, remember that the stock market holds your life savings hostage. So be nice to them. They might return some of it to you some day. Might!

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Safety-Critical Computing

Jonathan Jacky discusses Safety-Critical Computing: Hazards, Practices, Standards, and Regulation and discovers why several people were killed by radiation therapy machines.

There is a less innocent reason why clinics continued to use their machines after injuries and deaths occurred: they were driven by what accident researcher Charles Perrow calls production pressures. In his classic study of high-technology mishaps [27], Perrow describes how plant operators, under pressure to keep production lines running, will sometimes tolerate unsafe conditions--until an accident occurs. Today's cancer clinic is hardly less driven by economics than a power plant or chemical refinery; an idle clinic must still pay for the million-dollar machines and the staff that operate them. Pressures may be most acutely felt in the for-profit "free-standing" clinics that only provide radiation therapy, which have burgeoned in recent years and are actively competing with hospitals and with each other [18]. The FDA was sensitive to the clinics' plight. Asked after the fifth accident whether the FDA was considering a total ban, Edwin Miller of the Office of Compliance in the agency's Division of Radiological Products replied, "No such action is planned at this time. A complete ban would require an extensive study of risk assessment" [4].

Production pressures bear most heavily on the therapy technologists who actually administer the daily treatments (usually in the absence of a physician). The working world is largely divided between people whose job it is to track down problems and others who are supposed to get on with production. Many technologists find themselves in the latter category, and can become inured to 40 dose rate faults a day, routinely pressing the "P" key rather than interrupting treatments for the hours or days required to get the machine back in tune. When Cox was hurt at Tyler, he was at first unable to communicate with the technologist outside the heavily shielded treatment room because the intercom and closed-circuit TV were not working that day [2, 5].

Some clinics resist the pressure. The Hamilton, Ontario, clinic kept its machine out of service for months following their accident, until the fault was positively identified and repaired [3]. Recently, a prominent radiation therapy journal felt it necessary to remind readers, "Remove the patient from the treatment room as a first step when uncertainty in normal treatment unit operation occurs; err on the side of safety rather than staying on schedule" [28].

Emphasis Mine
Footnotes are in original

The thing about Capitalism is that life and death decisions are cost-benefit ones. How many people can we kill without impacting profits?

This is also the result of the proletarisation of the medical profession. Medical staff act and think like factory workers. This is the way to extract profits from their work.

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How we just avoided the big D

Paul Sheehan brags How we just avoided the big D (Depression). He concludes:

Last week Evans-Pritchard, ever pungent, wrote in an opinion piece: "Put a clothes peg on your nose. The moral stench of bailouts for the uber-rich will be sickening.

"None of us wants to pay a farthing to rescue the bankers and assorted debt pimps who got us into this financial mess, and in doing so exposed our societies to such harm … Yet we must forbear. It was such sentiments that turned the 1930 recession into [the Depression]."

In other words, the Capitalist system is so fucking weak that strong Socialist measures are required to save it.

After twenty (20) years of financial deregulation (macro-economic reform), we have arrived at the situation of having:

This month the system meltdown that [BIS] had warned about was almost triggered by the collapse of one of the world's leading merchant banks, Bear Stearns. When US federal regulators examined the bank's collapse, they were aghast at what they found. Bear Stearns was enmeshed in financial derivative positions totalling almost $15 trillion, a figure notionally equivalent to a quarter of the world's entire economic output. Underpinning this edifice of speculative excess was about $90 billion of actual financial reserves. These reserves were, in turn, underpinned by about $20 billion in cash reserves. The $20 billion evaporated in 48 hours when the bank was hit by a run. The bank was insolvent.

Emphasis Mine

Bullshit. Bears Stearn was bankrupt and had to be nationalised (via JP Morgan).

Sheehan wants us to believe that the worst is over because the US Federal Reserve acted so decisively. Yet, they are still floundering around in creating liquidity windows.

The outlook for Australia is:

"Smaller, open economies like Australia are vulnerable during times of instability like this," he said. "Like Britain and the US, you've had a housing boom, and a credit boom and a consumption boom. So Australia is looking pretty vulnerable. I would be short on the Aussie dollar …"

"The commodities boom will be affected by the financial crash. It always is. Australia also has an unhealthy 7 per cent current account deficit, which makes it extremely overstretched for a commodity-based economy."

The current Capitalist economy is designed to produce houses as a commodity. Housing production drops, the economy contracts. Almost everything that is produced depends on housing: white-goods, cars, electonics, kitchens, pools, landscaping, etc.

We need to realign the economy from reliance on one commodity.

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Most of us are moral most of the time

Ross Gittins realises that Most of us are moral most of the time. His ... shocking conclusion is that:

... Sometimes monetary reward is a poor substitute for duty, honour or professionalism in encouraging people to do the right thing.

A new book, Moral Markets, edited by the neuroeconomist Paul Zak, and published by Princeton University Press, argues that most people behave ethically most of the time.

"Just as most human beings have an intact and active moral compass, so, too, does economic exchange, the child of human minds, have a vigorous moral dimension," Zak writes.

Most economic exchange, whether with people you know or with strangers, relies on character values such as honesty, trust, reliability and fairness. And a set of shared values is essential to the functioning of modern economies.

That's the first sense in which markets are moral, Zak argues. The other sense is that market exchange itself can lead to an understanding of what constitutes fair exchange, and in this way build social capital in the community. Research has shown that the values that create social capital are a potent stimulus for economic development.

"Exchange is inherently other-regarding," Zak says. "Both you and I must benefit if exchange is to occur. In this sense exchange in markets is virtuous: one must consider not only one's own needs but also the needs of another."

Emphasis Mine

Here we a confusion between Use Value and Exchange Value. A fair exchange between us means that we consider the goods or services to be of equal value. Neither of us can fairly profit by an exchange. We may find that our new goods have a higher Use Value, but this is not the same as the Exchange Value.

...

"These moral emotions have been localised to evolutionarily old areas of the human brain," Zak says. Many moral decisions, including market decisions, have both cognitive and emotional components.

This is not an attempt to sanctify capitalism. It's an attempt to understand how markets actually work and put back into the story important elements left out of the economists' conventional model, with its focus on supply and demand and price, and its lack of emphasis on "institutions" (which include the moral values of the participants).

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Here we have the mistaken belief that markets only exist in Capitalism. Markets exist wherever exchanges of goods and/or services take place. Markets preceded the rise of Capitalism and will certainly be around after its fall.

The article fails to consider the current amorality of the markets could be due to the great concentration of economic power in a relatively few individuals. And that these individuals are immune to any corrective action taken by other more moral people.

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So, Work Really Does Matter ....

Tom Peters advocates the overthrow of the oppressive Capitalist workplace as he notes that So, Work Really Does Matter ..... He advises workers to:

I am left wondering, in today's world of Brand You, whether the challenge of finding meaning in one's work should be down to the employee herself? Surely it is up to each of us to make the connections and to discover for ourselves the purpose in what we are employed to do? It would be great if leaders could do this for us, but since work means different things to each of us, surely we have at least some responsibility to do this for ourselves?

Emphasis Mine

And as Peters mulls over whether this should be a top-down revolution, or a bottom-up one, one should realise that it is the right of the owners of the enterprise to determine what work should be and in what manner.

This right does not change no matter if the economic system is Capitalist, Socialist, or Communist! It is the owners that change, not the right!

For an idea like tat of Peters to work, a degree of meaningful worker ownership is required. The greater the degree, the greater the control over work a worker has.

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Exchange Value

In the WikiPedia article on Exchange Value, a commodity is supposed to have four (4) values. This is incorrect - it has only two (2) values: Use Value and Exchange Value.

Both of these values are directly observable. Use Value is the relative enjoyment of a commodity by an individual compared to other commodities. Exchange Value is what two (2) individuals determine to be a fair exchange between quantities of different commodities.

Use Value may well determine the motivation for exchanging a quantity of a commodity that I prefer less for a quantity of another commodity that I prefer more of. It is possible that I may well go through a series of exchanges in order to gain this.

At present (whilst typing), I am drinking a glass of water. I am not eating an orange. The Use Value of the glass of water is greater than that of an orange for me at the present time.

In the near future, I will have finished drinking the water. Then the Use Value of the glass of water and an orange will be indistinguishable because I will not be preferring one over the other at that time.

Note that I am doing a pair-wise comparison between types of commodities (currently a vague term). This comparison is not a transitive function. If I prefer A to B, and B to C, then does not necessarily mean that I prefer A to C.

With regards to Exchange Value, two (2) individuals are involved in the exchange of different types of commodities. One would not exchange oranges for oranges, unless the oranges differred in some aspect.

Assume that I have twelve (12) oranges, and you have ten (10) apples. There are 120 (= 12 x 10) possible exchange values starting with one (1) orange for one (1) apple, and up to twelve (12) oranges for ten (10) apples.

What then is the right Exchange Value between your apples and my oranges? If we make an exchange, then that is the right answer for us at that time.

Other people may say that the Exchange Value is wrong. Then they would say that one of us profited by the exchange because the Exchange Value was higher than the social average of the Exchange Value for that commodity.

Say we exchanged six (6) oranges for five (5) apples. So, the Exchange Value of six (6) oranges is five (5) apples, and vice verse.

Fred says that I gained an apple on the deal. He means that he thought the Exchange Value should have been six (6) oranges for four (4) apples. And a lot of other people may agree with him.

If that is so, then the social average of the Exchange Value of six (6) oranges would be four (4) apples.

The social average of the Exchange Value can then be determined democratically is there is a sufficiently large number of people involved in the process of exchanging oranges for apples.

However, this social average may change over time.

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Selfishness goes only so far, we also like a fair system

Ross Gittins finds that Selfishness goes only so far, we also like a fair system.

In the minds of many people - including many economists - capitalist economies are powered by selfishness. No, not quite.

The father of economics, Adam Smith, seemed to establish that proposition in 1776 in a famous quote from his book, The Wealth Of Nations: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

But Smith's views are rather more complicated than that. In the book he wrote 17 years earlier, The Theory Of Moral Sentiments, he observed that "how selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it".

Emphasis Mine

He concludes:

Why have humans evolved in a way that makes them worry about the welfare of the group rather than just themselves and their close relations? Probably because groups with pro-social norms outcompete groups that are deficient in this respect.

It's not surprising that the great religions - Judaism, Christianity, Buddhism, Islam, Hinduism, and so forth - stress the pro-social norms such as helping your neighbour, giving each his due and turning the other cheek.

These research conclusions have implications for government policy. Economists, convinced of people's simple selfishness, usually propose to deal with antisocial behaviour by raising the material cost of that behaviour. Increase the penalty if you're caught and increase the chance of being caught.

But this research suggests a principal purpose of publicly proclaimed laws and regulations is to stigmatise anti-social behaviour and thereby influence people's values and codes of behaviour.

To put it more positively, the authors say that "effective policies are those that support socially valued outcomes not only by harnessing selfish motives to socially valued ends, but also by evoking, cultivating and empowering public-spirited motives".

Emphasis Mine

In other words, humans survived by being cooperative rather than competitive.

It looks possible for a Communist society to enforce social norms by means other than force.

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You weren't Meant to Have a Boss

Yves Smith linked to You weren't Meant to Have a Boss. The gist is that people were not meant to work in large groups. The author has a bias towards small start-up companies for computer programmers. I think the author has misread the growth of large organisations.

...

What's so unnatural about working for a big company? The root of the problem is that humans weren't meant to work in such large groups.

Another thing you notice when you see animals in the wild is that each species thrives in groups of a certain size. A herd of impalas might have 100 adults; baboons maybe 20; lions rarely 10. Humans also seem designed to work in groups, and what I've read about hunter-gatherers accords with research on organizations and my own experience to suggest roughly what the ideal size is: groups of 8 work well; by 20 they're getting hard to manage; and a group of 50 is really unwieldy.

Whatever the upper limit is, we are clearly not meant to work in groups of several hundred. And yet—for reasons having more to do with technology than human nature—a great many people work for companies with hundreds or thousands of employees.

Companies know groups that large wouldn't work, so they divide themselves into units small enough to work together. But to coordinate these they have to introduce something new: bosses.

Emphasis Mine

And yet, these large organisatiosn work reasonably well. They are stable over a long time - some organisations lasting more a century.

The size of the organisation should depend on the size of the task at hand. For example, a farm would have required a dozen people to operate efficiently a century ago, but, today, a single person can operate a larger farm more effectively.

The degree of automation means that smaller organisations can now attempt to do what a large organisation would have been required with a manual division of labour.

Decision making requires someone to make a decision. This can be a person (e.g. a boss) or a committee or everyone. The quickness of decisions depends on the number of people involved.

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Rachel Corrie's Case For Justice

Five (5) years later, Rachel Corrie's Case For Justice is still compelling.

This week, the Corries come to Israel to attend the first Arabic-language performance of the acclaimed one-woman play, My Name is Rachel Corrie. ...

...

Moreover, this month has seen the release of Let Me Stand Alone: The Journals of Rachel Corrie, a major publication by Norton. Here, as in the play, Rachel becomes more than a political symbol. As Cindy explains, "Sometimes she is demonized; sometimes she is lionized, but it makes it more possible for her to have more impact if people see her as human." The sustained beauty of Rachel's writings and sketches, and her incisive observations into personal and global relationships, from 10 years old into young adulthood, expose a young woman who is deeply caring, creative, quirky, wise beyond her years, anything but naive. "People accuse Rachel of being naive, which of course she wasn't," says Craig. "Though she may have been naive about US pressure on Israel." Up to the day of her death, Rachel worked tirelessly, building relationships with Palestinians and Israeli activists, engaging in direct action, and strategizing on the grassroots level to stop the "massive destruction of civilian homes" in Rafah. In a press release from March 2003, she writes, "We can only imagine what it is like for Palestinians living here, most of them already once-or-twice refugees, for whom this is not a nightmare, but a continuous reality from which international privilege cannot protect them, and from which they have no economic means to escape."

Today, the Corries share Rachel's sense of urgency, even as they point to the hypocrisy of the US government, the world's superpower, claiming impotence and abdicating responsibility in Rachel's case, and in the case for Palestinian justice. As Craig says, "We have the luxury to sit around and discuss all of this, yet we feel the growing impatience. We want to drive home Rachel's message that we have a responsibility to act."

Emphasis Mine

We should never forget what the bastards are capable of. Rachel's mistake was to think that there was a human being driving the bulldozer. Instead, there was a desensitised person who had been brainwashed into not seeing Arabs as human beings, and consequently, killing Rachel was not murder - only a day's work.

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Flip

Peter Sheahan's book, Flip lists four (4) forces of change (p.14)

1. Compression of Time and Space (p.15)
2. Increasing Complexity (p.20)
3. Increasing Transperency and Accountability (p.27)
4. Increasing Expectations (p.31)

1. Compression of Time and Space

For Communists, the compression of time means that decision-making is forced down the command hierarchy. This is good because workers are exposed to decision-making more and more.

The compression of space means that workers have to consider the international outlook. Unfortunately, workers could take the racist approach and retreat into nationalism. But successful workers will be those who can work across cultures to achieve a common purpose at an enterprise. For Communists, we can use this to educate workers about the value of internationalism.

2. Increasing Complexity

This is the most serious challenge to the command and control management structure. This is under increasing stress and is most likely to break first. If and when this happens, this would give Communists some latitude in developing worker confidence.

3. Increasing Transperency and Accountability

This follows from the compression of time and complexity. Communications have to be opened up within organisations with management sharing more information with workers. Communists should use this opening to develop their decision-making and self-management skills, and thereby increase their confidence in their own abilities.

4. Increasing Expectations

This is mainly about luxuries now becoming necessities. However with the looming economic crisis in the US, this may no longer be relevant.

Action Precedes Clarity

To confront these forces of change, Sheahan, among things, proposes that Action Precedes Clarity (pp.271-318). This is where we follow a trajectory by trying various things without having a detailed plan. This chapter should be read by those Communists who hunger for the perfect Party Programme.

Instead, we have a vague vision of a Communist society and must evaluate our actions in achieving that goal. Sometimes, actions may seem silly but the idea is to keep moving forward in the chosen direction.

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The seven habits of spectacularly unsuccessful executives

From On Bear Stearns, the Democratic Primary, and Other Avoidable Disasters by Bill Taylor, I picked up The seven habits of spectacularly unsuccessful executives by Sydney Finkelstein (PDF). As Taylor says:

And please keep in mind Professor Finkelstein’s most basic conclusion: “Extreme success is a warning sign of failure.”

I examine these criteria in terms of Communist Parties.

Habit # 1: They see themselves and their companies as dominating their environment.

Warning Sign: A lack of respect

Not a problem currently in Australia.

Habit #2: They identify so completely with the company that there is no clear boundary between their personal interests and their corporation's interests.

Warning Sign: A question of character

Think of Tommy Sheridan and the SSP.

Habit #3: They think they have all the answers.

Warning Sign: A leader without followers.

Definitely a problem with most of the micro-parties in Australia.

Habit #4: They ruthlessly eliminate anyone who isn't completely behind them.

Warning Sign: Executive departures.

Stalinism running riot.

Habit #5: They are consummate spokespersons, obsessed with the company image.

Warning Sign: Blatant attention-seeking.

Not currently a problem.

Habit #6: They underestimate obstacles.

Warning Sign: Excessive hype.

We have the opposite problem currently.

Habit #7: They stubbornly rely on what worked for them in the past.

Warning Sign: Constantly referring to what worked in the past.

Will always be a problem for us.

Read more!

Blogrolling 4

Did another rolling through the blogs:

1. Cell Phone Need is about various models of mobile phones.
2. Horsekaer is photoblog of a trip through Ireland (Non-English) - both the blog and Ireland are non-English.
3. love sms could be a commercial blog from New Dehli, India.
4. Lerares Chinees in Nederland appears to a Chinese/Dutch blog with various translation exercises
5. Alam Setia's photoblog is from India. Some colourful photos.
Here the link was broken.
6. Reach Out for the Stars is a school-girl's blog in English.
Here the link was broken.
7. Journey To The Top is a non-English blog.
8. Triathlon Team & Lauf AG der HSU Hamburg is a German blog about Triathletes.
9. It's my World is a blog from the UK. Apparently, she is pregnant.
10. Lucas is child blog in Spanish.
11. Read my mind is a photoblog about school students.
12. Oonaemilia is another child blog. (Non-English)
13. Urrutia Productions has videos and photgraphs about water-polo. (Non-English).
14. Love Parade is a commercial blog offering various items of female attire.
15. lui Ghenadie is a professional photographer's blog. Some quite interesting photographs. (Non-English)
16. maelstrom 2.0 is a strange blog. (Non-English)
17. Wonderful World is a librarian's photoblog.
En Circorama is primarily a photoblog of an Italian Circus with video and audio clips. (Non-English)
18. La Serenata Chilena is a photoblog of a trip though Chile.
19. Mirtha Bermegui Buenos Aires is a photoblog of her artwork.
20. michvanetta is a crafts blog for jewelry from Australia.
21. arka sokaklar is a non-English blog of one (1) post.
22. Swiss is a blog in English about a Swiss holiday by a Russian.
23. Back to Mirtha Bermegui Buenos Aires. I decided to stop there.

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The Shock Doctrine

Noami Klein proposes that neo-liberalism advances its agenda via The Shock Doctrine: The Rise of Disaster Capitalism. Her thesis is that a real or perceived shock to a society enables unpopular changes to be forced through whether the changes are relevant to the problem or not.

I think Klein misses a very important application of the Shock Doctrine at the enterprise level. This occurs whenever a reorganisation occurs and there are redundancies.

People are disorientated, and they are susceptible to whatever hocus-pocus management consultants come up with to justify working harder and longer at soul-destroying jobs.

The current mantra is that change is inevitable. That is like saying pain is inevitable in a prison.

Workers are captive to the employment contract. As long as the current system persists, sadistic managers will continue to inflict pain on their employees.

But as Klein points out, shock wears off, and memory returns. The problem is what happens then?

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Character and Capitalism

Yves Smith worries about "Character and Capitalism".

Steve Waldman is on a roll. He has an excellent piece today arguing that despite contemporary notions otherwise, capitalism and character (meaning moral fiber) have not and need not be contradictory.

Although Waldman makes a good case, the barriers to the return of character in commerce are more profound than he lets on.

...

... Waldman meant character in a narrower Victorian sense, as being a person of one's word. But even then, the drive to efficiency that has become pervasive in American businesses has made it well-nigh impossible for that to be operative. The reliance on FICO scores in place of more nuanced credit decisions is merely the logical result of processes that have been in play for many years.

...

So why, when we have had a resounding failure of impersonal methods of assessment, am I pessimistic about the revival of interest in character? Because it appears our society is unwilling to go back on the false economy of preferring anonymous, rule-based approaches. These methods do broaden the market of possible counterparties, which is seen an entirely beneficial, when there are hidden costs in having only superficial proxies about the people you interact with. If anything, I see ample evidence this attitude is becoming more pervasive.

Emphasis Mine

What Smith is describing is the alienation of the service provider due to the conversion of services into commodities.

In the example given by Waldman, J.P.Morgan was personally involved in the credit process. It was his money and he was evaluating the customer because he knew him from other parts of his life.

Now we have workers lending other people's money to complete strangers. There is very little personal involvement in the credit evaluation. If the loan goes bad, someone else gets involved in the collection process.

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Financial system must tap the taxpayer

Yves Smith is very concerned about the idea that the "Financial system must tap the taxpayer".

Krishna Guha in the Financial Times argues that US banks need new equity ASAP to prevent the operation of a "financial accelerator," which is basically, just as leverage feeds on itself, so to does deleveraging: falls in prices lead to margin calls, which lead to forced selling, which lead to more margin calls. We now have the institutional version of that phenomenon, which is that asset price falls lead to mark to market losses, which for banks holding similar assets on their balance sheets, generates an equal markdown of equity, which leads to deleveraging, further depressing asset prices.

Guha argues that private sources probably won't step forward to provide the needed equity; therefore the government must, otherwise it will resort to monetary stimulus, which given the already worrisome uptick in inflation, isn't such a hot idea.

Emphasis Mine

Smith would rather guarantee the customers through FIDC, but is against the bail-outs because of the moral hazard. Smith concludes:

Conversely, as Gillian Tett has argued (and I think she is correct here) there is money sitting on the sidelines that would come in and make investments, including recapitalizing banks, once investors had confidence that the bottom had been reached. Thus flushing out the losses is a vital to returning to some semblance of normalcy.

John Dizard has suggested the use of regulatory forbearance, which is code for letting the firms operate in some sanctioned manner with less than the normally required levels of equity (presumably with much closer oversight).

Emphasis Mine

Smith misses the point that the State exists to protect the interests of the ruling class. At this point in time, the ruling class is in real danger of losing its capital. Therefore, the State must act to safe-guard that capital by absorbing the losses through some sort of compensation.

The moral hazard only applies to those who are not in the ruling class. The longer we tolerate this sort of behaviour by the ruling class, the more we will get screwed.

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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.

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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.

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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.

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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.

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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.

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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.

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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!

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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?

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