Thursday, August 11, 2011

It’s the Political Economy, Stupid!

Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough.

But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.

This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.

The rapid and robust global restoration of profits post-2008 was not an accident. Public funds were used to bail out exposed creditors and shore up asset values, while the crisis was used to suppress wages and postpone meaningful regulatory reform. Indeed, I can predict with some confidence that many of the profits, particularly in the financial sector, that have been reported in official filings and blessed by the accounting firms will later be found to be illusory—but not before those who have claims on the revenues have cashed in to their own personal advantage. The institutions will be decimated, but those who owned, lent to or bet on them will be rich. This is not a failure, at least not for them.

You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic. Neither appears to be the case today. From what we (you and me) can see from our vantage point, the ruling demands are to make sure my bonds are serviced, my counterparties pony up, the markets I invest in stay liquid, and expenditures for public welfare (i.e. the losers and chiselers) are slashed.

The first principle of political economy is that the scope of democracy depends on the range of views and interests (typically tightly linked) of the owning and controlling class. Genuine public debate and decision-making extends only to those issues on which the elites are divided. In what country today is there a significant division among political-economic elites over core economic questions? How would our situation be different if Obama, Cameron, Merkel, Sarkozy et al. had been on the losing side of their elections?

So, the current mess is not the result of a failure by intellectuals—although clearer, less ideologically-driven thinking by economists would certainly be a good thing and might make a small dent at the margin. As long as there are even a few economists who proclaim the virtues of austerity and deregulation, however, their views will dominate. They haven’t won a battle of ideas; they are simply the ones who have been handed the microphone.

The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy.

21 comments:

PQuincy said...

I'm a historian, and I think the past confirms your assessment of elite behavior and priorities, not only in the last 2 centuries of mass-based polities, but since the rise of large-scale states altogether. Political contention is almost always limited to a narrow range of issues on which those with power disagree, meaning that significant change (and there has been significant change in the political sphere, as well as the economic one) generally results from elite conflicts, not from 'popular' pressure. In fairness, elite contention does open gaps for genuinely 'progressive' change, and that's an important lever for intellectuals to remember...but as you say, academics, thinkers, et al. are as a rule never in a position to have more than a marginal effect.

It's not a promising situation now, structurally: a series of positive feedback loops in the political sphere are actually concentrating the influence of what I am forced to call a "reactionary clique", at a time when the policies pursued by that clique are, at least on a larger time-frame, seriously destabilizing. But the narcotic effects of power are such that those who drive the dynamics of elite conflict rarely see the larger picture -- behave, for all practical purposes. as though they were incapable of seeing the larger picture (call it, if you like, discursive hegemony), and those who believe they see a larger picture are structurally excluded from bringing about changes in response to their perception.

Awwww....we poor intellectuals ;-)

foosion said...

The current plunge does not appear to serve the interests of the financially endowed, at least not those who depend on their portfolios.

The recent drop obviously hits equity ownership.

The financially endowed make more money with higher real returns on bonds than with lower real returns on bonds. Real returns are very low at the moment. Increasing real rates would lower the principal value of bonds, but this would be temporary, as higher interest more than makes up for the drop.

In a health economy, both stocks and bonds are serviced, counterparties pony up and markets stay liquid. The portfolio gains would more than make up for slowing the slashing of public welfare. Besides, the war against public welfare was proceeding along even in good times.

wellbasically said...

The 2007 bailout seems to be the best illustration of your point. But it's not going to score the political points the way you want it to.

TheTrucker said...

A very good article from Peter Dorman. I have no disagreement and little to add. My "ideas" are just about worthless in the current climate. Even more worthless that those of well known and respected folk like Krugman, Delong, and Dean Baker and others.

I stand fittingly chastised for my indictment of the economists.

The Tea Party may well have hit upon a method to overcome the current problems. A constitutional convention to propose particular modifications to federal government structure might seem to be the way out. But that is a holdover from the time when people rode a horse to the nation's capital in order to be seated in the discussion chamber. The problem is best resolved buy an incorruptible on line polling system of direct democracy in which various policies are proposed and tested for consensus. I do not trust the pollsters and I do not feel that they ask the right questions. At present we have the "super committee" approach which goes in the wrong direction totally. This election of Dems or Pugs who then decide what is the best way to maintain their own power has got to go.

I know that the public is easy to fool. The Republicans prove it every day. Yet there is no acceptable substitute for self governance. When we look at the polls we find that taxing the rich is the majority opinion and that social welfare is a high priority. Yet there is no way to act upon this consensus because the rich own the government. That must change, and it cannot change from the top. Surely there must be a peaceful means of revolution.

If a policy and polling system can be created that is impervious to tampering and corruption then it is entirely possible to supplant the current system or to dramatically improve the current system's performance. I see no other way.

Re-Considering .... said...

Thanks for the very well thought out reasoning in you post.

While you correctly identify the problem and its solution (current "ruling class" and its unseating), you are shy in suggesting how a solution might come about. While I do not advocate violence, history has shown us that fundamentally there are two ways by which subjugated classes improve their position. A traumatic way and less traumatic one.

Revolutions (most egregious examples are the French, Bolshevik, Chinese, and Cuban revolutions), whereby the ruling class, along with its interests, are eliminated by the subjugated classes. A traumatic event indeed, but, in my opinion, not sustainable in the long run unless the entire world adopts those political and economic paradigms.

Less traumatic and, more sustainable in the long term, are the outcomes of strong labor and student movements like the ones that took place in Europe in the 60s and 70s. Those movements made sure to convey to the ruling classes the message that a more equitable wealth distribution and effective social safety net were needed to avoid the extremes and dispossession that a revolution would involve. Reluctantly, the ruling class complied and the social safety nets and income distributions typical of Western Europe emerged.

In the same light, one must interpret the recent unrests in Western European countries (UK, Greece, France) (and most recently in Israel) as a response to the austerity measures taken by conservative governments of these countries to protect rentiers and capitalists. The austerity movement is trying to undo at least some (ideally, all) of the achievements of the 60s and 70s and redistribute wealth away from the “ruled classes”, when it is clearly the “ruling class” that should bear most of the cost of its disastrous, reckless, and self-serving policies. While the current message in Western Europe is still not of the same intensity of the 60s and 70s due to a current better wealth distribution than that of the 60s, the message is similar in content and direction. Its intensity may increase if the rentiers and capitalists will insist with their policies.

So, why the US labor and student movements do not materialize or are active to the same extent of the ones in Europe? The answer is very simple… while in Europe the “ruled classes” realized a long time ago that there will never be cooperation between them and the “ruling class”, in the US people still believe and pursue the American dream, which is fueled by the once in a while admission of few “mortals” on Mount Olympus. Let’s also not forget that constant sense of guilt passed on by the Pilgrims that, somewhat, it is exclusively the individual’s fault if his/her life is not better… and, maybe, the Pilgrims they were right given that US citizens keep electing the same (type of) people over and over to lead them. After all, wouldn’t you rather have a beer with a nice guy from Texas or Hawaii than protesting in some square?

JW Mason said...

This is a great post.

But I think there's one point that needs to be clarified. You argue very convincingly that current policy reflects the interests of the rentier class. But then you write:

You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic.

In other words, the rentiers are not acting on their true interests, which are the same as ours -- renewed stable growth for the real economy. This suggests that it is intellectual failure after all. If, as you say, "the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy" and it's not happening, then doesn't that mean Krugman is right, and the problem is intellectual failure? Or, in the absence of a political challenge to the power of finance, is a rescue of the real economy maybe not in their interest after all?

DeclineRedux said...

Interestingly enough the political economy that pervades the marketplace is also permeating public schools as explained here:

http://wp.me/p1fMnz-pl

Hard to get any kind of agreeable change whether it's within the economy or schools when people's interests are largely ignored.

DeclineRedux

Moopheus said...

Well, I like to say, economics is politics by another means. For much of human history, societies were defined strictly by class--wealth and power concentrated in the hands of the few--everyone else was a serf. Education, democracy, and civil rights threatened the concentration of power--labor and capital (the merchant class) could act autonomously, out of the direct control of the aristocracy. When Teddy Roosevelt instituted the estate tax, it was specifically to prevent the establishment of a permanent aristocracy in America. It is hardly coincidental that at a time of rising income disparity and reduced social mobility this once again becomes a political issue. So yes, this is all of a piece--the aristocracy has always resented the existence of bourgeoisie, and now they think this is the moment to finally put us in our place.

Sandwichman said...

"Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy."

That's not true. Someone has a clue. A revolution CAN'T be "engineered" by technocrats -- even "progressive" ones. A revolution can only be an organic development. The clue is in the historical narrative that the progressive technocrats spend so little time trying to comprehend.

In the 19th century, Karl Marx spent a great deal of time and effort identifying what he believed were the implications of contemporary struggles of a potential revolutionary subject, "the proletariat".

In the mid-20th century, C. Wright Mills and Herbert Marcuse -- among others -- explored the eclipse of that presumed revolutionary subject and projected an alternative (or alternatives) in youth, young intellectuals, disaffected groups, etc.

At this point, after successive failed or aborted revolutions, it is not some amorphous "modern, complex, transnational" capitalism that we are dealing with but quite specifically a "political economy of counter-revolution." Unless the analysts acknowledge the counter-revolutionary intention of a great deal of that "complexity", their analyses and prescription are likely to be as efficacious as re-upholstering deck chairs on the Titanic.

Grandpa Don said...

A very disturbing post although it rings true. We simply WISH there were some kind of intellectual failure to account for the fact that government elites choose wrongheaded policies that seems to make our lot worse. Clearly the way out means to get through or past or over these very large obstacles. But how? The riots in the UK will be suppressed with cruelty. Will British elites learn anything, let alone change? Doubtful, since their existence, statue, power, income, etc depends on their not learning anything. How could it be different here?

wellbasically said...

What if the Tea Party is the revolution

Unknown said...

The Trucker said "If a policy and polling system can be created that is impervious to tampering and corruption then it is entirely possible to supplant the current system or to dramatically improve the current system's performance. I see no other way."

The polling system part has already been developed. It was designed by cryptographer David Chaum and provides the user with a coded receipt that he can use to verify that his vote was counted, and counted for the appropriate candidates. See http://en.wikipedia.org/wiki/Punchscan

carl said...

Very well put.

TheTrucker said...

Unknown:

Punchscan is not an on line system and it uses paper. That means that it is too slow and too costly to be used to determine/support policy issues. While it may be a very good system for elections of candidates, that is not the real need. The real need is for polling that cannot be tainted by the pollsters.

The priorities in such a system are: to insure that every "vote" is a vote from a real live person that domiciles in a particular zip code; and that the voter can assure the self that the vote was counted, and that the voter cannot prove to anyone but him/her self that the vote was his/her vote.

Such a system works best with registration via bank debit cards. Once registered, the voter can vote on as many issues as the voter wishes for one full year. I see that the pushscan system might offer some very real possibilities in an on line version.

The voting software must run live from a non writable CD and the CD's mut be certified by the polling authority which is bonded and insured. The responsibility of the polling authority is only to assure that the CD contains the accepted open source code that all persons may review. If I can run Ubuntu from a CD and never touch the hard disk then I can certainly run the client side of the voting system in that fashion.

Richard said...

Yes, external National public debt is a concern – but it is far from being the major national security threat to America. Actually one of the other equally hazardous threats was included in Adm. Mullen’s reply to a follow-up question in Detroit when he said:

“We [the Defense Establishment] are not a business. Parts of us do this really well;parts of us have never had to. Plus,we have been – our budget has doubled over the last 10 years since 2000. And when you have – when you are in that kind of a vector,you lose some of your skills. You don’t have to make tough decisions,you don’t prioritize as well as you should,your analysis goes away,you don’t have to make the trades. So a lot of those skills have to be sharpened for us right now."

Reading that segment,which is never,ever,included in Republican talking points,is that “Defense”has had it’s budget doubled during the past ten years,and they have not done a very good job of spending money wisely. Adding that information to the original quote changes its focus,mitigates its authenticity,and suggests a different interpretation of the quote is in order. Otherwise a cynic could assert Mullen is acknowledging the Defense Establishment is becoming a victim,after being one of the main protagonists of the threat.

Full text of my article is available at: http://bit.ly/rp6jqd

Brenda Rosser said...

Re: "Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy."

"All the way down" may be 'overshoot' - the ecological basis of revolutionary change.

Revolution will happen soon either way. The American way of life was never sustainable. It seems logical to suppose that as we move further into this unavoidable non-growth economy the 'portfolio holders' will soon meet their demise as power entities.

I see a great change in power balance in the steady self-conversion from consumer (passive) to home producer (active).
- take advantage of that which is freely available or cheap;
- produce things for your own use;
- actively create/redesign the new media, the new world.
- self-educate.

Ben Leet said...

Excellent post. With the top ten percent of households receiving almost half of all pre-tax income yearly (Saez at U.C. Berkeley, Striking It Richer)) and the top five percent owning 60% of assets and about 72% of all financial assets (Allegretto, State of Working America's Wealth), and this in combination with one in three workers experiencing either poverty level income with full time work, or no work, or inadequate work (njfac.org unemployment data) -- it leads me to hope and believe that the switch will manifest in the nation's conversation and mindset. Too many are being screwed to hide it, and they can mostly read, and some think without the help of Ron Paul or those others.

Shag from Brookline said...

I'm coming late to this discussion on this 8/11/11 post. As I read the post and the comments regarding revolution, I thought of several business books published in the 1990s about "revolutions" in how corporations should conduct business. So perhaps it is time for a new book "Re-engineering the Revolution." Maybe it has been done; I don't know. But did "re-engineering the corporation" books succeed? Consider the bailouts, etc, following the 2008 Bush/Cheney Great Recession. Now, corporations are sitting on huge cash reserves, perhaps having benefitted from the bailouts, etc, post 2008. Yet corporations are reluctant to spend on jobs, presumably because of lack of demand (which may have some truth to it). But corporations now want to be able to repatriate large profits tax free, something that was done before with the benefits primarily inuring to corporate executives and stockholders. The NYTimes had a detailed editorial yesterday (8/21/11) urging that business should at least campaign for further stimulus as cuts in spending only will not create jobs. Infrastructure funded by the government will provide jobs and perhaps demand to get corporations to release their cash troves. But a recent survey of economists indicates the preference of a majority for cuts in spending, no taxes even via the closing of loopholes. All this reminds me of cutting one's nose to spite one's face. So maybe "re-engineering the revolution" is the way to go, but not in the Second Amendment sense.

TheTrucker said...

Shag from Bookline said "But a recent survey of economists indicates the preference of a majority for cuts in spending, no taxes even via the closing of loopholes."

Perhaps you'd like to give us a link to this supposed "survey". Perhaps it was conducted in Chicago or within the Cato Institute. Because that is not what I see and hear from the _real_ economists.

Shag from Brookline said...

In response to Trucker:

http://pajamasmedia.com/tatler/2011/08/22/survey-economists-prefer-spending-cuts-over-obamas-balanced-approach-to-debt-reduction/

Let me make it clear that I am not in agreement with these economists.

While I'm at it, I have recently been engaged in a brouhaha about "capital strike," referring to why businesses are sitting on a $2 Trillion cash trove. Reference has been made to FDR's accusation of business in 1937. Also, Ayn Rand's 1957 novel "Atlas Shrugged" that has become the "bible" for libertarians includes a reference to a "capital strike." Robert Higgs has also made references in recent years to "capital strike." Perhaps posters and/or commenters at this Blog might discuss whether business sitting on $2 Trillion in cash is based upon a lack of demand or results from a concerted "capital strike." At American Thinker, Gene Schwimmer's July 12, 2011 post "Make the Capital Strike Official" seems to be an effort for the idea of concerted action aimed at defeating Obama's reelection bid.

I apologize for not providing links to all of the various sources but in my 9th decade this is not an easy task for me.

Scott Davidson said...

Thanks for your posts, I am looking forward for future posts. Certainly I have become a big fan of yours and waiting for new posts. Your blogs are like risk free day trading. Please share new post on your blog that would be very helpful for me and other visitors.

Scott