Michael Perelman, on Market Myths, Past and Present
Tuesday 07 July 2009
by: Seth Sandronsky, t r u t h o u t | Interview
Seth Sandronsky: There has been one stimulus package each from Presidents George W. Bush and Barack H. Obama. In the meantime, local and state government budget deficits are growing. What is going on here?Michael Perelman: First of all, when the economy slows down, tax revenues decline for federal, state and local governments. Second, government expenditures increase because people who experience sudden drops in income need to rely more on the social safety net. Third, the federal government stimulus has been largely directed toward the financial sector.
IOUs are printed at the State of California's Controller's office in Sacramento. (Photo: Max Whittaker / Reuters)
Seth Sandronsky: There has been one stimulus package each from Presidents George W. Bush and Barack H. Obama. In the meantime, local and state government budget deficits are growing. What is going on here?
Michael Perelman: First of all, when the economy slows down, tax revenues decline for federal, state and local governments. Second, government expenditures increase because people who experience sudden drops in income need to rely more on the social safety net. Third, the federal government stimulus has been largely directed toward the financial sector.
Unlike the New Deal, when the government put people to work producing valuable projects that people can readily appreciate while walking around cities today, this stimulus is largely directed toward prettying up corporate balance sheets.
This strategy creates two problems. First, finance does not produce many jobs. Spending $1 million on infrastructure creates many more jobs than an equivalent expenditure propping up financial businesses. Second, one of the strategies for rescuing finance is to subsidize consolidations, such as Bank of America taking over Countrywide Financial Corp. (former titan of subprime mortgage lending). These consolidations result in job cuts, besides making future regulation more difficult - in part because of the concentration of corporate power.
The "rescue" of the automobile industry illustrates the problem of emphasizing balance sheets. A key part of the strategy to make the company successful will be to produce more automobiles abroad.
The combination of tax declines, job losses and increased public responsibilities is catastrophic. In California, the approach is to cut public employment, which makes the job problem worse and to abdicate responsibility for those in need. But cutting employment - including public employment - is just the opposite of a stimulus. Declining state and local expenditures will offset any potential benefits of the stimulus. A similar anti-stimulus phenomenon also undid much of the effect of the New Deal.
Sandronsky The Depression of the 1930's changed the public policy views of some in the economics profession. In brief, what were the main changes, and how do they connect with the post-bubble economy of mid-2009?
Perelman The Great Depression severely tarnished economists' reputations. For example, The Economist published an article on 17 June 1933, entitled "Economists on Trial," which described a "mock-trial - not entirely mockery -" of "the economists." The trial was staged at the London School of Economics, with Robert Boothby, M.P., representing "the state of the popular mind." He accused the economists with "conspiring to spread mental fog," charging that they "were unintelligible; that they had in general proved wrong; and that in any case they all disagreed." The economists - Sir William Beveridge, Sir Arthur Salter, Professor T. E. Gregory, and Hubert Henderson - were all highly respected in the field. They answered Boothby's charges without wholly refuting them. The article concluded, "There was never a time when the advice of an expert was so often asked and so seldom followed as the present." According to the magazine, the problem was that the authorities did not listen to the economists.
At the same time, during the New Deal economists played a very prominent role. For the most part, they had not previously been among the doctrinaire defenders of laissez-faire. But keep in mind that, until the post-World War II era, the economics profession was much more diverse. A good number of progressive economists had been purged from academia, but some progressives remained. The more elite a university was, the less diversity it had. Yet, even in elite universities there was a modicum of diversity.
Although the discipline of economics became radically more conservative after World War II, during the 1970's economists who were active during the Depression tended to give me a much more sympathetic hearing, even if they had drifted considerably to the right.
Today, the makeup of the economics profession has changed dramatically. The economists who experienced the Great Depression are gone. On virtually any campus, the economics department will be among the most conservative. Dissenting views are rarely tolerated, except in liberal arts colleges. Catholic colleges also tend to be less fearful of unorthodox views.
However, the government's stimulus plans - under both Bush and Obama - have been so inept that a good number of very conservative economists have been highly critical in ways that do not entirely differ from my own.
Perhaps what is most surprising is how little influence economists have had in the policy realm. Virtually no Congressional hearings have called upon economists, whether they are conventional or radical. How much influence economists - other than Larry Summers - have had behind closed doors is an open question.
Sandronsky Economists by and large use the price system to measure human activity. How well does this system account for interactions between people and the natural world?
Perelman I especially appreciate this question. I have thought about this subject for years. For more than two centuries, economists have gone out of their way to focus their attention on market transactions at the expense of the production process. This intentional diversion of attention also excludes any other consequences of economic activity. In my new book, "The Invisible Handcuffs of Capitalism: How Market Control Tyranny Stifles the Economy by Stunting Workers," which Monthly Review will publish next year, I explore the causes and consequences of this kind of economics.
The importance of the natural world, in so far as economics is concerned, is that it represents a storehouse of potential commodities. Extraction of these "commodities" degrades the "storehouse," but no account is taken of this degradation.
Just imagine a person walking into an automobile dealership, offering to pay the cost of "extracting" the automobile from the premises - maybe $.10 worth of gasoline plus a nickel, which would allow the dealer to enjoy a fifty percent markup - ignoring the depletion of his stock of automobiles. Nobody would take such an offer seriously, yet the market prices resource extraction in a similar fashion.
Sandronsky Adam Smith's book "The Wealth of Nations" is nearly 250 years old. His view of the market's invisible hand, free from monarchs' rule, cheers the self-interest of individuals as the best way to benefit society. What explains the power of Smith's thinking in economics today?
Perelman I don't think Smith's popularity has much to do with his thinking. Smith was, after all, initially a professor of rhetoric. Even so, his book did not make much of an impression at first. Let me plagiarize from "The Invisible Handcuffs" about the early reception of the "Wealth of Nations." Before I do so, I should mention that Smith was already a celebrated writer because of his "Theory of Moral Sentiments":
In Parliament, where the members frequently quoted important political economists, Charles James Fox made the first reference to "Wealth of Nations" on 11 November 1783, six years after the book first appeared (Rashid 1992, p. 493).
Even in 1789, when Thomas Robert Malthus signed out the 1784 edition of "Wealth of Nations" from his college library, he was only the third person to do so (Waterman 1998a, p. 295). Up to the year 1800, only a few Cambridge colleges had even acquired the book (Waterman 1998b). Emma Rothschild notes with some irony that when Adam Smith died in 1790, "The Annual Register," an influential publication at the time, devoted only 12 lines to Smith, compared with 65 for Major Ray, a deputy quartermaster general with an interest in barometers. The Scots Magazine gave Smith a scant nine lines (Rothschild 1992, p. 74). Only after the French Revolution of 1789 made British property owners fearful, did "The Wealth of Nations" take on an air of importance. Thereafter, Smith's influence steadily increased.... In fact, as one of the most active Smith scholars today observed: "There were more new editions of "The Wealth of Nations" published in the 1990s than in the 1890s, and more in the 1890s than in the 1790s."
In short, what made Smith popular was not his expertise as an economist, but the practical usefulness of his book. For example, once Smith's utility was recognized. For example, Francis Horner, famous British Parliamentarian, member of its powerful Bullion Committee, and editor of the "Edinburgh Review," was requested to prepare a set of notes for a new edition of "The Wealth of Nations." He explained his refusal in a letter to Thomas Thomson, written on 15 August 1803: "I should be reluctant to expose S's errors before his work had operated its full effect. We owe much at present to the superstitious worship of S's name; and we must not impair that feeling, till the victory is more complete .... [U]ntil we can give a correct and precise theory of the origin of wealth, his popular and plausible and loose hypothesis is as good for the vulgar as any others (cited in Horner 1843; 1: 229).
Although the first half of Smith's book is highly ideological, the second half is more policy-oriented. There he contradicts many of his ideological talking points.
Sandronsky In "The Invisible Handcuffs," you use the ancient Greek legend of Procrustes to unpack the modern ideology of work, workers and working conditions in your next book. Who was this ancient and how does his legend help to clarify myths and realities of the modern capitalist economy?
Perelman In Greek mythology, Procrustes was a sadistic innkeeper who made his "guests" bodies conform to his iron bed. He would chop off as much as necessary from the tall ones and stretch out the short ones. I used the reference because the market is typically treated as a voluntary system, whereas, in reality, the rules of the market require most people to conform to the system, much like the sadistic innkeeper.
The book concentrates on the exclusion of work, workers, and working conditions from economic theory. This neglect carries over into the way business is done under capitalism, especially in the United States.
I intentionally disregard considerations of justice because many other people have done good work from that perspective. Instead, I try to look at how irrationality of this exclusion of work, workers, and working conditions affects the process of production. In following this line of thought, many of the other destructive and unjust aspects of the system become obvious.
Of course, this system does little to help people on the lower rungs of society. The book does not emphasize this injustice, but rather how it deprives society of people's lost potential. This potential could make life better even for those at the controlling heights of society.
In my previous book, "Confiscation," I made the case that market tyranny created economic chaos that puts everybody at risk - including the rich and powerful. The book came out in October 2007, just as the stock market peaked.
Sandronsky As the housing bubble grew, big credit rating agencies failed to rate sub-prime mortgages accurately. This failure has not kept at least one of these rating agencies from doing business with a local government. Why is accountability for such a firm so unnecessary, given its track record?
Perelman The opacity of business has been a constant thread throughout the history of capitalism. Hyman Minsky proposed that capitalism runs according to a recurrent pattern. After a severe economic downturn, business has trouble winning financial support from potential creditors. The first business propositions that win funding will mostly be solid. As optimism picks up, both business and potential creditors become more optimistic. More and more risky businesses take hold and even previously solid businesses get careless and began to find themselves on shaky ground. Minsky refers to this stage as hedge finance. Finally, as optimism turns to euphoria, business takes on even more risk. For this final stage, Minsky coined the appropriate expression: Ponzi finance.
Part of what makes this deterioration of the quality of business possible is the opacity of business. How many investors would have put their money with Bernard Madoff if they had known the nuts and bolts of his business? For obvious reasons, business resists letting the shades up and allowing the public to peak in. Any talk of regulation today will set off howls of "trade secrets, government meddling, etc."
The ratings agencies add a nice little twist. Their "clients" hire the agencies to grade them. My university would frown upon it if I were to have my students pay me to grade them. If I were in that business, the distribution of grades might be affected. Fortunately, the University is not quite as bad as the ratings agencies, even though it increasingly looks upon the students as clients.
When the fraud is finally exposed, everybody in positions of responsibility is shocked, shocked. How could such a thing happen? The required answer is always that a few bad apples are responsible. Other than that, the system is just fine. Doubts about the system as a whole have no place in polite society.
In conclusion, the ratings agencies are part of a close-knit club of businesses, investors, banks, all of whom pretend that they are doing a public service. When it finally hits the fan, they come, hat in hand, for their bailouts, expecting to wait for a bit until they can sanctimoniously pretend once again that they are disinterested guardians of society's welfare.
Sandronsky Thank you for your time.
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