Political philosophy and the left (part 2)

The part I found most interesting and compelling was the part about what a guaranteed minimum income would do for the crummy jobs. White’s assertion that if people weren’t forced to work a crummy, low-paying job to survive, employers would have to pay more and offer better working conditions, OR perhaps there would be a push to automate these jobs – I think has a lot of merit.

FWIW, I surmise that some of these jobs would be automated – like self-checkout stands at grocery stores – and some, like nurse’s aides, are probably best done by humans, and we’d see an improvement in pay and working conditions as fewer people are so desperate for work they’ll put up with anything in order to survive. And as far as nurse’s aides are concerned, I wonder if there would be an improvement in patient care as fewer ex-cons and people whose only qualification for the job is a pulse, apply? People working who are there because they want the job and at least tolerate their work might mean fewer nursing home horror stories (or fewer nursing homes entirely).

Stuart White:

This idea of basic income has also been of course sharply criticised. And the concept of exploitation which you can use to justify basic income in the way we’ve just done is also one that’s been used to criticise it. The claim is that if you’re not working and others are compelled through the tax system to support you, then you are effectively exploiting them.

This particular criticism may be well-founded, but it is hardly the most damning criticism that proponents must contend with. The single biggest flaw in the basic income proposal (however admirable the motives that inform it) is its failure to acknowledge the crucial difference between dollar wealth and real wealth.

To better understand the distinction, simply imagine what it would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off of our accumulated ‘wealth.’ What we would soon discover is that we would actually possess no real wealth at all, because no one would be producing anything of value that we could buy.

The only reason why money has any value to us is because it gives us a claim on the productive efforts of others. How wealthy you actually are depends more on what others are doing than it does on your personal accumulations of paper notes. The real economy is the productive behavior of people; it is the actual goods & services that people are producing and trading and consuming.

There is only one economic agenda that the New Left ought to be advocating and that is 100% full employment of all human resources. If every able-bodied and able-minded citizen is producing something of value, and this is brought about by a government that is willing to create and maintain a modest labour shortage, the Poor and Middle Class would soon discover that they’d be living in the best of all possible economic worlds.

Yes, people would still lose their jobs as they do today, but it wouldn’t matter. New jobs would always be easy to find. Market forces would put constant upward pressure on wages & benefits packages, obviating the need for government ‘band-aid remedies’ like minimum wage laws and unemployment insurance. Many employers in a tight labor market would discover that they have an incentive to actually treat their employees with respect.

Lewis likes the idea of a basic income because “by strengthening the position of the disadvantaged in the labour market it thereby precludes relationships of domination between employers and workers.” In other words, employees would have an option: to not work at all, and that would give them some negotiating leverage, but that option would also result in nothing being produced by the empowered ‘workers.’

If the government were to simply create and indefinitely maintain a labour shortage, the same leverage would be ideally provided to the lower classes while at the same time the macro economy is functioning at optimally productive levels. Any New Left ‘solution’ that does not promise optimal levels of production and economic growth is inherently flawed and certain to be rejected by the mainstream.

Any initiatives that seek only to provide the poor with more money—and not an ideally productive society—are inherently flawed. Even with more money, the poor and disadvantaged would be deprived of the higher standard of living they would otherwise be able to enjoy if only the economy were better managed by political decision-makers.

@James Kroeger
And how might a government purposely create a labor shortage? Is it to be a universal labor shortage (no idea how this could ever be achieved), unskilled labor shortage (doubt this would result in meaningful labor), or some particular sort of skilled labor shortage (would the government then be given total control over training of skillsets?) ?

Your “ideal” solution boggles my mind. I hope you can enlighten me on some of the details.

“This idea of basic income has also been of course sharply criticised. And the concept of exploitation which you can use to justify basic income in the way we’ve just done is also one that’s been used to criticise it. The claim is that if you’re not working and others are compelled through the tax system to support you, then you are effectively exploiting them.”

1) The classical idea of exploitation was that people could use claims of ownership (ie power) to extract surplus value from others. People at the bottom on welfare don’t have any ownership to claim value from, so they can’t be exploiting anybody.

2) If this is exploitation, then children are exploiters, totally disabled people are exploiters, and really old people are exploiters.

@ James Kroeger

“‘Under a laissez-faire system, the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).’

The notion that firms will feel inspired to cut back on investment plans at a time when demand for their products is at a peak is simply unbelievable.”

I’m no conservative economist, but what exactly is your objection to this line of reasoning? It sounds like he’s just propounding the (fairly commonplace) notion that rapid drops in confidence can cause drops in production, which hurt the economy, which lowers confidence, and so on.

I think you’ve misread. If you look again, he actually says the opposite:

Half misread. I was wrong to say he doesn’t want activists to learn from him. But I was right to say that he has no idea it might be possible for him to learn from them.

And of course what he’s going to teach them is, basically, his limitless historical ignorance. Anyone who thinks it was Jerry Cohen’s original discovery that private property can restrict freedom has no business talking about left politics, in relation to philosophy or anything else.

If this is exploitation, then children are exploiters

You say that as if there were doubt that it’s true!

lemuel:

“Half misread. I was wrong to say he doesn’t want activists to learn from him. But I was right to say that he has no idea it might be possible for him to learn from them.”

I doubt it, and certainly the fact that that particular “idea” didn’t arise in the relatively brief exchange he had with Ed Lewis doesn’t show that it has never occurred to him. I assume there’s a lot that he’s thought about that, nonetheless, did not make an appearance in this particular interview. Honestly…

“And of course what he’s going to teach them is, basically, his limitless historical ignorance. Anyone who thinks it was Jerry Cohen’s original discovery that private property can restrict freedom has no business talking about left politics, in relation to philosophy or anything else.”

See, right now what you’ve got there is mindless abuse. If you wanted to turn that into a remotely useful comment, you could, for example, challenge White’s argument on the facts (e.g. by providing facts that contradict what he says, rather than merely gesturing angrily at their existence). But it’s up to you, of course.

Non-polemically, does anyone know what the Erik Olin Wright book’s like?

Nearly every economic contraction the U.S. has experienced over the past century was either caused intentionally by our central bank, or was precipitated by a financial panic. In both cases, the proximate cause of economic contraction and unemployment has always been a contraction of the supply of loanable funds.

It is arguable that the only time irrational fears are able to cause a booming economy to suddenly contract is when those irrational fears are embraced by central bankers, viz., their irrational fears re: inflation. Why wouldn’t this sort of irrational fear be able to sabotage a zero-unemployment economy?

Well, the only way it would ever be possible for us to experience a [sustained] labour shortage economy in America is if the executive branch of government were given direct control over the money supply. This would mean, of course, an end to the ‘independence’ of America’s central bank from the government (the Fed is not actually independent of the whims of commercial bankers).

If Congress were to (A) authorize the spending, (B) give the Treasury Department control of the money supply and ( C) enjoin the new Central Bankers to pursue a different sort of ‘Prime Directive’, it would be possible to virtually eliminate the possibility of an irrational panic among business owners/managers.

(The Fed’s current Prime Directive: optimize growth [employment] but only up to the point when that effort begins to threaten price stability [= inflation above 3%]. The new, full-employment Prime Directive: minimize inflation but only up to the point when that effort begins to threaten full-employment.)

( In pursuit of such a directive, ‘robust’ levels of inflation would be tolerated [see Gerald Epstein] , but minimized through the same sort of initiatives that the People’s Bank of China has used to minimize inflation rates without ever throwing their economy into a recession.)

You may not be interested in analytic philosophy but analytic philosophy is interested in you.

if you’re not actually on the barricades, or at least lifting the pavement to see the beach beneath, then you’re a stooge for The Man.

More like: If you’ve never been on the barricades, or talked to anyone who’s been on the barricades, or read anything about the barricades, or think there’s anything to learn from the barricades, then you probably shouldn’t be writing about left politics.

But you’re on the right track.

john c. halasz:
Due to the fundamental uncertainty with respect to future investment prospects, there’s no economic system that could completely avoid economic cycles and crises, even if there are means to alleviate them.

I’m not sure why, but you seem to be curiously unaware of China’s recent economic history. Over a thirty year period, China has enjoyed strong, dynamic economic growth without the occasion of an economic recession.

That doesn’t mean that they haven’t had to overcome various crises that have threatened over the period. For example, they managed to recover from a couple of double-digit spikes in inflation without throwing their economy into a deep recession as western central bankers are fond of doing.

Economic crises are at bottom rooted in or cause by failures of the realization of productive capital investment in the real economy, due to backward lagging investment expectations, asymmetries and lags in the distribution of income and thus demand from the prior boom phase, and, indeed, the very success of prior investments in raising technical rates of productivity and thus a falling rate of profits or a “decreasing marginal efficiency of investment”. The payment claims of financial assets attaching to such investment then fail to be sustained, thus causing the underlying crisis to be prolonged and “expressed” as a financial panic.

I’m not saying that financial panics cannot be caused by lagging investment expectations, but I am saying that financial panics of the sort you are referring to need not cause an economy to experience a recession.

For example, if Congress in 2008 had responded to investment bank failures by simply created its own “Taxpayers’ Bank” [by buying up the assets of failing banks at fire sale prices], it could have provided the Main Street economy with all the liquidity it might have required to avoid a collapse in aggregate demand, even while the entire financial sector of the economy was crashing and burning in a moral hazard pit of despair.

It simply is not necessary that the real economy be as dependent upon the whims of financial investors as our current overloards prefer.

Matt,

It doesn’t sound rhetorical at all, it’s a very good question. But before it becomes relevant, one first has to recognize the relevance of political practice for political philosophy. And Stuart White hasn’t even reached that point yet. In other words, if at any point he had said something like, “The political movements I’ve been most engaged with have been ____, and that’s shaped my philosophical work in the following ways…”, or “If you look at the struggle for ____, you’ll see it transformed people’s thinking like this….”, then I would accept almost anything within reason to go in the blanks. My criticism of him isn’t that he’s not engaged in the form of political practice that I personally think is best ( I’m not at all sure what it would be, anyway; who is these days?) but that he doesn’t recognize the need for political thought to be grounded in political practice at all.

Barricades was Rob’s word, not mine, by the way. My own political work, for what it’s worth, has all been in the US labor movement and the lefter parts of Democratic electoral politics. I’ve never pried up a paving stone in my life.

That’s useful Lemuel- thanks.

MS:

But, if they (presumably) were aware that, as you argue, inflation rates could go higher, why didn’t they recommend them? Because high inflation rates have distortionary effects in an economy. They’re a disincentive for lenders; they make holding onto money a bad idea; etc.; etc.

I advocate the creation of a chronic labor shortage economy primarily because I think it can be demonstrated that the real costs of inflation are actually quite minuscule when compared to the enormous price society must pay when any level of unemployment is tolerated. Gerald Epstein (UMASS) has reported that:

…there is a great deal of evidence that moderate rates of inflation, inflation up to 20% or more, has no predictable negative consequences on the real economy: it is not associated with slower growth, reduced investment, less foreign direct investment, or any other important real variable that one can find.

It may be true that inflation does impose certain costs on society, but those costs are actually (A) quite minuscule, and (B) easy to remedy within the inflationary environment. The real cost savings society would enjoy if it were to maintain a labor shortage would far exceed the real costs that moderate (5%-25%) rates of inflation would impose on society. Consider the question from a costs vs. benefits perspective.

The benefits of creating a Labor shortage? Well, they are at the top of the chart. As far as the real economy is concerned, we would be experiencing economic perfection. All able-bodied & able-minded citizens would be producing something of value. In such an economy, the production & consumption of wealth would be optimized. Investment would be optimized. When production & consumption & investment are all at optimal levels, society gets to experience an ideal economic achievement.

If all able-bodied and able-minded poor people are working, producing more real wealth, then much more money is going to be spent on poor people by poor people. Increased sales would prompt firms to increase the supply of goods and services available to the poor. Yes, the poorest people in the economy would still be the poorest people in the economy, but in real, material terms, the poor would experience an enhancement of both their standard of living and their economic security.

Inflation hawks like to suggest that higher inflation rates discourage firms from investing, but the empirical reality is that investment levels are at cyclical highs whenever economies are experiencing ‘robust’ levels of inflation. It is only when measures are taken by central banks to fight inflation that investment levels drop. As long as demand for the output of firms is strong, and they do not expect the central bank to shut down the economy, they will continue to invest at the highest levels, and that means economic growth will be optimized.

For some puzzling reason, economists in general do not recognize that inflation is always and everywhere harmless when it comes to its effects on purchasing power. That is to say, we can be sure that nominal incomes in general are always keeping up with price increases in an inflationary economy. If they were not keeping up, then prices [in a market economy] would begin to decline , and if prices are dropping, we would not have a problem with inflation, would we? The reality about inflation is that nearly everyone is working and keeping up with prices, and on the production side, it is not possible to for society to be any wealthier, for production and growth are at optimal levels.

Yes, it is always pointed out that those on fixed incomes stand to ‘lose’ in an inflationary economy, but it is a problem that is extraordinarily easy to fix. The ‘government’ could easily print up any dollars/pounds that might be needed to subsidize those on fixed incomes, in order to maintain their purchasing power compared to everyone else. If we focus our attention on the real economy, on optimizing employment, investment, and economic growth, we can be certain that the welfare of all citizens is being optimized, so long as all are able to keep up with the general inflation rate.

Now I’m not arguing that any inflation rate is acceptable, but only that much higher levels can be tolerated (say 5%-15%) with occasional spikes up to 25%-30%. It is a matter of historical fact that the PBOC was able to moderate the high rate of inflation the Chinese economy was experiencing in 1995 (24%-27%) back down to lower single digits without throwing their economy into a recession. Indeed, the Chinese economy’s growth rate never dipped below 7% during the period of moderating inflation rates.

For some inexplicable reason, the FOMC prefers to use a sledgehammer (sharp declines in overall interest rates) to fight inflation instead of the clever use of “sterilization bonds” (like the PBOC) to soak up excess liquidity and more-directly-targeted credit controls. Absolute lending limits could be imposed on banks with respect to certain categories of loans, making the prospect of ‘hyperinflation’ an absolute impossibility.

Bottom line: almost every aspect of our economic and social organization would be optimized if higher levels of price inflation were tolerated.

My careless failure to include this information in the past may have led to Lemuel discounting the value of my views

I don’t discount your views, Chris. You’ll search my comments in vain for any such criticism directed at you personally.

As for Stuart White — well, in a very long, far-ranging interview he does not mention a single concrete left political movement or organization. Not just one that he is participated in. None at all. How is one supposed to avoid the conclusion that either (a) he doesn’t know anything about movements of the left or (b) he doesn’t consider concrete movements to have any importance in discussing left politics?

Also, do you really think that the idea that private property can impose limits on freedom was an original discovery of Jerry Cohen’s? Really? and can you see why such a claim might seem comical to anyone familiar with Marx? (As vastly more people on the left, even in the US, are than with Rawls or Dworkin or whoever.)

James Kroeger:

I don’t deny the crucial role that flow of payments, money and credit play in a modern production economy, and I wasn’t trying to give any complete account of economic crises. Nor was I objecting to the “stabilization” or emendation of economic crises through policy actions. However, I was taking objection to your “vulgar Keynesianism”, (which is not an objection to Keynes per se, who was a far subtler economic thinker than many of his supposed followers and whose thinking on international trade, even more than on aggregate demand, is all the more relevant nowadays). I was simply pointing to the “origin” of all such monetary flows in the productive structure of the real economy, which places constraints on what can be done and on the collateral effects of policies on the remediation of crises. (Yes, Keynes didn’t fully and once-and-for-all solve the structural contradictions of capitalism). And that simply taking measures to restore the circular flows of money and goods doesn’t guarantee some sort of perfect and perpetual economic optimum, let alone “ontological” summum bonum. (Yes, I do think that insolvent mega-banks should have been taken into public receivership, with bond and equity holders forced to realize losses, and publicly recapitalized, while measures should have been taken to reduce unsustainable household debt burdens. But even that would not eo ipso amount to a full resolution of the crisis and the full extent of the structural changes needed).

You couch your claims in terms of “full employment” optimizing full production/maximum “wealth”. The problem there is that technological productivity has become increasingly substitutable for labor, which latter doesn’t necessarily produce large marginal increments to output. IOW “full employment” needs to go together with a redistribution and diminution of total hours worked, and with the development and institutionalization of other forms of “productive” activity than commoditized “labor”. Which runs up against the key driver of the economic system, namely, the maintenance of the “value” of capital through the rate-of-profit. And the idea the market exchanges are the sole effective, efficient and “equitable” mode of social regulation. Granted, policies and programs of structural transformation could be proposed that push beyond those limits. But they would be difficult, complex, and require both concerted and coordinated collective effort and major and somewhat incalculable structural change. Not simply waving a magic wand within the prevailing order and eo ipso reconciling all contradictions and competing goods within the limits of that order.

Your citation of Red China here is more-than-faintly ridiculous. Surely you aren’t proposing as such a system of authoritarian administrative control for other economies, (when even in China it’s a path dependent historical legacy)? Red China in the last 30 years, a) started from rock bottom, with vast surpluses of rural labor with 0 marginal productivity, (such that net produce from a plot of land would be the same with 5 workers as with 10), which still exists today in the 10’s of millions, b) went through many crises, not least the recapitalization of its entire banking system in the 1990’s, c) has depended on an undervalued currency to attract foreign, mostly MNC capital investment and build up its productive capacity and infrastructure, with the corresponding build-up of huge FX reserves, which express that it’s selling its exports below “value”, which eventually will mean capital losses on those reserves of at least 25%, d) has an economy which is dependent on huge levels of over-investment, much of it likely misallocated or unprofitable, (including a likely large RE bubble), while having record low levels of consumption as % of GDP, and e) has generated vast inequalities of income and wealth, while providing little social security to the vast mass of its population and has generated huge environmental “externalities”, the cost of which likely outweigh the benefits of its nominal growth. The top leadership in Red China seems quite adept and is aware of many of these problems and the trade-offs involved, which they’ve partly accepted for reasons of their own, but likely the vast masses are not so aware, nor able to voice their own objections and preferences. In short, that 30 year run is hardly over and it remains to be seen what its overall outcome will be. But it’s no generalizable model, nor a paragon.

I must disagree with Lemuel that liberal political philosophy of the kind White summarises in his clear and informative interview has no basis in practice. On the contrary, it has its basis in bourgeois political and economic practice. I don’t think that socialists should ignore it.

(I very much enjoyed MS’s explanation of the political division of labour, between the thinkers, like Dworkin, Cohen and White, and the political hewers of wood and drawers of water, like the rest of us, whose work, though more practical, is nonetheless ‘good, thoughtful, creative, and useful’.)

Lemuel – Just for the record, I do personally think you have been very unfair on White (though not at all unusually so, by the standards of this comments section!) One question that did occur to me: do you think you would have reacted in the same way if he had been discussing economics or sociology, say, rather than philosophy? (A genuine question…)

Rob – on Wright’s book, you can read about half the chapters online at his website (though he’s missed off some good’uns) – http://www.ssc.wisc.edu/~wright/ERU.htm. There are also overviews of the themes of the book available on that page. You can also read an interview I did with him on New Left Project. Here’s the link to part one: http://www.newleftproject.org/index.php/site/article_comments/envisioning_real_utopias/

My view is that though it is indeed quite heavy, as noted above, the book is oustanding because it synthesises a huge amount of work of recent decades, done by Wright and others, on a huge range of the concerns of the left: the problems with capitalism (not unfamiliar territory, but dealt with comprehensively and carefully), values, visions for political and economic alternatives, strategies for transformation, and more. Also, Wright is scrupulously clear in his presentation of his (to me, very cogent) arguments.

It’s not garbage. Personally, I thought the way you put was a bit condescending but sorry for the snark. It is an interesting perspective — and a plausible one if you assume that theorising about socialist values or directions proceeds on the model of a science — but it is not one I share.

@ Engels and Lemuel

I think that, at the very least, what I said was condescending and poorly phrased. What ended up coming out wasn’t what I meant, and I can see how what I said could be offensive; in fact, I see that it is offensive, period.

@ Lemuel

The gist of what I was trying to get at – besides defending Stuart White, who I’d never heard of before these interviews got posted, but who I doubted had never heard of Marx – is that theory does not have to be developed in the context of practice. And what I meant by ‘trickling down’ – which again, is a poorly chosen and, I think, offensive statement – was that what is taught in a high school calculus class (for example) is not the same as ‘calculus’; rather, it’s an applied and modified form, suited to be applied to be a classroom. Now, that says that the students in the classroom don’t know calculus, sure – but it says nothing about the teacher. The students are the situation, and the teacher’s using skills – practical skills – which in no way imply that the teacher doesn’t grasp the theoretical concepts. Rather, the teacher’s fusing the theory they know with a situation they know, which if anything indicates higher understanding.

Nor should this imply that, for example, an educated person talks down to students. Instead, the teacher tries to teach the theory in this modified way, as it’s best suited to be taught to them – however that is – and then they can learn the theory themselves, as well as how to teach it. Now, as I understand it, that’s empowering. I can understand how, when I neither explained it nor phrased it well, it was insulting; but said the way I just said it, though now in politics, I believe that someone developing a political theory independent of practice, and then incorporating it into practice, isn’t elitist. I believe that ideas do move in this way: consider how Marx’s theories, for example, developed in the deep abstruseness of Capital, were made practicable by labor movements in the late 19th and early 20th centuries.

If what I have said is still as nasty as it was the first time, again, please tell me.

The kind of ‘theory’ that White is offering the Left is very different to that which Marx is in Capital. White is offering a ‘theory of justice’ which instructs the rest of humanity on such matters as what is Right, what they should be fighting for and the manner in which they are permitted to fight for it. Capital otoh aims to provide a scientific understanding of capitalism and where it is heading. Capital is not an easy book but it isn’t written for a ‘professional’ elite. And it wasn’t written by a ‘disinterested’ scholar on research leave at Oxford or Harvard but by someone who was directly involved with and passionately committed to the working class movements of his day.

Chris – Sorry if you are bemused by my comments.

1) I suggested that liberal political philosophy arises from bourgeois practice. (This in disagreement with Lemuel’s view that it is divorced from all practice.) I didn’t say that this invalidates it or that socialists should therefore disregard it. (I explicitly said the opposite.)

2) Sorry if you take exception to the sarcasm in the sentence you quote from my last comment. Again, I was responding to a previous comment (by MS). Stripped of any sarcasm, the point is there is fundamental difference between Marx’s scientific ambitions in Capital and the normative concerns of Rawls, Dworking, the Later Cohen, et al. To me, that makes the idea that this work can be carried on (a la MS) by a specialist in a purely a priori fashion much more problematic.

Rob – I hope you’re not a client-facing democratic underlabourer.

Engels,

I’d hope that a socialist would appreciate that not all offers are made with financial gain in mind.

From the Swift and White paper again:

This last role [advancing substantive normative views about political ends, aka ‘instruct[ing] the rest of humanity on such matters as what is Right’] remains underlabouring, despite being substantively normative, precisely because the arguments she makes are, indeed, offered. It is for her fellow citizens to decide whether they want to accept them.

So political philosophers are ‘democratic underlabourers’ in the very strict sense that they make no claim on State power to enforce their conclusions! This does like false modesty to me, I’m afraid., unless direct control of the levers of government is the only way in which individuals or classes are able to dominate others in Britain today and intellectual authority and influence over decision makers counts for nothing…

James Kroeger:

As to the Fed, it only directly controls the short-term interest rate, and adjusts the money supply through open market operations to maintain its target rate. That, in turn, only effects the yield curve of the banking system, with longer rates being supposedly determined by the sum of expected future short rates, (but then how one can assumed future expectations are accurate rather than uncertain beats me). That, in turn might have some effect on long rates and on “interest rate sensitive sectors”, such as housing and construction and consumer lending for durable goods. But interest rates are not a decisive determinate of long-run fixed investment. (It takes, e.g., at least 4 years to build a new oil refinery and 20 years to amortize the cost, through a variety of economic cycle and interest rate conditions. In turn, refineries will tend to be underprovided in accordance with high short-term demand conditions, so they can reap higher margins to defray the long-run risks. Considerations of real productive structure matter more than short term policy manipulations for basic investment decisions and productive structure).

Banks create credit, (as opposed to currency/money), endogenously. They lend out “money” they don’t actually have, because loans create deposits in the banking system, for which they then borrow the “reserves”. An account of how this works can be found here, (though I’m indifferent/uncertain between “circuitist” and “chartalist” versions of the explanation):

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

But part of this dispute is about debt vs. equity in financing the economy and its distributions of income. Credit/debt is essential to the operations of a modern economy, but the build-up of debt and leverage is damaging to it, as well. Here’s a chart of the U.S. debt/GDP ratio historically. Note the Fisher debt deflation dynamic in the Great Depression and note how the ratio has climbed since the notion was dominant that Fed regulated monetary policy was the panacea for a supposedly self-regulating market economy:

http://1.bp.blogspot.com/_H2DePAZe2gA/TGygWq6cRcI/AAAAAAAAORU/OVaPksTdyFo/s1600/creditmarketdebtgdp.png

Er, households should be running surpluses and corporations borrowing for investment in the normal case. Increasing household indebtedness to compensated for stagnant wages is a recipe for disaster, (like now).

But you should also familiarize yourself with the Wynne Godley version of national income accounting, whereby the financial balances of private business sector + the private household sector + the public government sector + the foreign sector sum to 0. IOW, so long as the foreign sector is running a surplus, (which means a domestic trade/CA account deficit), and both businesses are loathe to borrow for investment and households are attempting to pay down their over-indebtedness, then the government sector will be running a deficit and providing “savings” to the private and foreign sectors. That’s an NIPA accounting identity, which means it will hold no matter what, behaviorally or causally, any sector will do. How the government then spends from its debt then becomes a crucial issue, assuming trade rebalancing is not in the offing. (Though IMHO global trade imbalances were a key causal factor in the current global quasi-depression. Which means revisiting Keynes’ original conception for Bretton Woods and his Bancor proposal, to develop a new international trade and for-ex regime).

The basic point I’m making to you is that real aggregate effective demand depends upon the structure of the real productive economy and the distribution of incomes deriving from it. It can’t continuously be goosed by excessive indebtedness, nor by deploying labor with low marginal productivity. On the other hand, if public indebtedness is incurred to meet a crisis, (as will happen one way or another), then public investment and publicly guided investment policies, “industrial policy”, become a crucial issue, when private investment has stalled, (due to its prior drastic mis-allocations, as well as its productive sucesses). But that then requires careful thinking in political economy on institutional designs and mechanisms, lest public investment and guidance become wasteful itself, or captured by prevailing corporate and sectoral interests, at the expense of any genuine restructuring. But trying to prop up prior levels of aggregate demand in the absence of addressing underlying productive structure is a fool’s errand, (unless, of course, “full employment” is part of a popular mobilization toward required restructurings).

But then again “full employment” doesn’t just refer to labor utilization, but is supposed to be a proxy for the utilization of all available “resources” in an economy. So there can be exogenous “shocks” to an economy from other resource constraints. Increasing efficiency of natural resource utilization and energy or decreasing environmental insults and damages can be a structural goal. (The U.S. is currently half as energy-efficient as the EU, with their lesser resource endowments and higher energy taxes). So there are other reasons why simply restoring prior levels of demand, to maintain the current economic structure, and failing to write-down losses and generate new real investment structures might be undesirable.

I’m not really concerned about the “poor”. (That ” the poor will always be with you” was a criticism of human vanity, not an economic prognostication or rationalization). And I’m not really concerned with placating the wealthy and powerful. To be sure, a full employment economy with ist network effects on families and communities would be beneficial to the “poor”. But I’m also not concerned with maintaining the current disciplinary resentment of the “work ethic”, based on the rationing of employment in the interests of capital. Wage compression policies can readily be instituted to eliminate dire poverty, just as reduction in work-hours pressures can alleviate resentments. “Free rider” problems are actually relatively trivial (and inverted and misdirected) in regard to employment and social discipline. (If there are legacy issues from the persistence of an “underclass”, they will require other remedies and expenditures than “full employment”). But what’s more at issue is to develop ways to institutionalize the distribution of productive surpluses toward other human and natural “productive” ends than those stipulated by the maximalization of profits from capital stocks. So long as the valorization of capital remains the key, if not sole, driver of socio-economic systems, then “full employment” will remain a chimera.

Your basic apparent intuition is correct: that “full employment” counts against the relative increase in profits, even though such aggregate demand conditions would actually increase the absolute amount of profits. But that’s just a basic contradiction of capitalism: abstract appeals to maintain aggregate demand are no panacea, since the failure to do so, all other things aside, is intrinsic to maintaining the private extraction of relative profits. The capture of gains in ever-increasing technical productivity by the very top echelon and the restructuring of corporate rents through Wall St. and MNC sponsored policies of “globalization” and financialization to arbitrage currencies, wages, resources, regulations and taxes and public budgets is, er, no accident. Any simplistic appeal to the principle of real aggregate effective demand is likely to fall way short of the mark.

It’s not that “full employment” programs and policies are functionally impossible; it’s that they challenge the fundamental power structures of the system in force. Which is to say, that they would require considerable popular mobilization and counter-hegemonic organization to stand any “functional” chance. (As to the wage-price inflation spiral resulting from “full employment”, cf. the Lerner/Collander MAP system of a corporate mark-up cap-and-trade system to prevent wages from chasing ever-increasing prices). But I would personally prefer a progressive consumption tax, combined with wealth taxes, to mere progressive income tax schemes, for a variety of reasons. (A sketch in this blog comment: http://www.interfluidity.com/v2/918.html#comment-7655). We’re not differing much on the level of mere intentions and desiderata really and I don’t mean to trade in the “narcissism of small differences”. But there’s a whole lot more complexity than you’re accounting for, and you’re making some basic errors in understanding how the “system” might actually work.

Engels’ comments on this thread are sounder than mine, I think. And John Halasz is saying a lot of smart stuff.

Why aren’t either of your names links?

James Kroeger:

O.K. this could go on forever, since you’re rather unresponsive to my points, -(though, as always, perhaps I haven’t been sufficiently “clear”),- in pursuit of your leading obsession.

But this doesn’t make much sense to me:

“I realize that it is fashionable—-for some reason I can’t quite grasp—-to suggest that the Fed is helpless to control long-term interest rates, but it is a thoroughly ridiculous notion. If at any time the Fed wants to drive down long-term interest rates, it could start selling 30-yr. Federal Reserve Notes [call them ‘sterilization bonds’] that would serve no purpose but to soak up excess liquidity while at the same time forcing down the long-term rate. If it wants to force long-term rates up—-perhaps as a favor to bankers—-it merely needs to buy any privately- or publicly-issued I.O.U.’s that feature 20-yr. or 30-yr. maturities.”

Um, the normal account of the Fed pursuing unconventional monetary policy, “QE”, to drive down long rates has them printing up money to buy long bonds, (which, if they’re not gov.s means also assuming private credit risks), and thereby drive down long rates, (partly by pushing money into the economy, which, given the decreased supply of “riskless” assets, would presumptively go to riskier assets). It’s already been partly tried, with very limited results and potentially harmful side effects, ( as in goosing bubbles, and artificially propping up asset prices, preventing the recognition of losses and thus restructurings, and in promoting a back-door bail-out, where excess reserves provided by the Fed, a branch of the government, simply get invested back into gov. bonds in a meaningless “positive carry” trade). In fact, there is a chartalist argument that fiscal deficit spending doesn’t raise interest rates by “crowding out” private investment resources, but actually lowers interest rates, since gov. debt is private savings, which provides collateral for private borrowings.

As you should be able to see, I prefer fiscal over monetary means for regulating the economy in terms of production/business cycles. And, as I pointed out about, extraordinary monetary policy measures are really fiscal policies in disguise, (of dubious legality and legitimacy).

Aggregate demand is consumption spending + investment *spending* + government spending + net exports. Now government spending is a peculiar item, since the developers of NIPA couldn’t account for its productivity so simply assumed it was sheer consumption spending. But insofar as it consists in transfer payments, only transaction costs are net spending, and some government spending is actually investment spending, whereas other categories are essential to supporting economic activity, while other spending is on public goods that the “private” market can not or will not provide and still other spending is on extra-economic ends, such as basic research, education, or defense, which are only partially economically functional. The “efficiency” of such gov. spending needs to be examined on a granular case-by-case basis, so that cost-plus defense contracting is obviously wasteful, whereas under-funding regulatory enforcement is “wasteful” in the opposite direction. In turn, gov. taxation, which is ex post to gov. spending, can add or subtract from aggregate demand. But then there is another component to AG, which is credit/debt. Insofar as debt is invested to increase productive capacity successfully, then it is paid of by profits-from-production and associated incomes. But if there is no increase in actual and potential output, then debt payments amount to just a transfer payment and don’t add to net wealth. (Consider the impoverishment of spend-thrift nobility in the 16th and 17th centuries in hock to bourgeois merchants and bankers). Increasing net indebtedness can add to AG until such a point as the growing cost of debt servicing comes to subtract from and collapse it, (which, er, is what has just happened). I’m amazed you don’t recognize that point. Nor the point about the ways in which increased indebtedness transfers wealth to already wealth creditors and thus also diminishes AD in the long run, (because the distribution of income effects both the level and the composition of AD, because of the declining marginal utility of income). Nor the point that increased levels of credit/debt tend toward the over-financialization of the economy and productive operations within it, an increase in unproductive speculative activity, and the generation of large stocks of fictitious capital, which eventually will need to be written-down in the failure of its repayment expectations. And then again, the rent extractions of a hypertrophied financial system with its supposed innovations and efficiencies, (which peaked at over 30% of all corporate profits during the last U.S. cycle and at 40% in the peak year, while financial sector debt, i.e. leverage, rose to 120% of GDP compared to just 6% in the halcyon 1960’s), amount to a huge tax on the rest of the economy and its productive activity.

So I don’t see why you’re idolizing the Fed, which is a public-private hybrid actually owned by its member banks in non-negotiable shares, who influence the appointment of its regional boards, and which operates primarily through the extant banking/financial system in its direct effects. Leaving aside that interest rates are not the prime determinant of long-run as opposed to short term investment spending, the Fed targets inflation on behalf of the creditors it serves, when even moderately high inflation is not nearly as damaging to the economy as a whole and real investment as commonly claimed, the tendency to maintain low rates, especially negative real interest rates not only short-changes ordinary savers, but encourages leverage to “reach for yield” and all sorts of unproductive financial speculation with underpriced risk. (Negative real rates were a standard scam in high inflation economies, so that, e.g. the Brazilian generals would hand out gov. guaranteed loans at lowered rates to their cronies to be paid back in inflation debased currency). Did you really just miss how the Fed just aided and abetted the Wall St. machinery of structured securitization and derivatives in blowing a housing bubble, which effectively looted the net worth of the broad U.S. middle class, which was primarily tied up in housing equity? On the other hand, as I mentioned above, bailing out the financial system, i.e., the creditors, rather than alleviating household debt was a huge mistake which shall hobble the U.S. economy for years to come. And reducing excessive mortgage debt, (which would also require compensating the “prudent” and renters and non-bubble state residents for political and equity reasons), would be a far more effective means of restoring AG than the current extend-and-pretend Fed policies of propping up fictitious financial assets “values” and recapitalizing an insolvent financial system through back-door subsidies which just extract further unproductive rents. (You do understand the concept of economic rents, eh?) That would accomplish by fiscal means the supposed effect of monetary policy, which currently can’t be realized qua “pushing on a string”. But then again, I also pointed out above, that given the extraordinary reliance of our current system of credit on government backstops and “insurance”, and the need to correspondingly closely publicly regulate it, and the tendency to develop monopolistic market-making infrastructure in current financial technology, and the agent/principal problems that have developed with shareholders incapable of restraining bonus-baby bankers from destroying the long-run viability of their firms, then the whole system of which the Fed is a key part could just as well nationalized as a publicly regulated utility, without resulting in a centralized system subject to political interferences, (which is actually what we partly have now).

“There actually is one time when I think that a progressive consumption tax would be a good idea: when the economy is operating at full capacity and concerns about hyperinflation are starting to be expressed. ” Well, pardon, that’s just a piece of economic illiteracy. Inflation might rise at full capacity, which can be dealt with in a number of ways, assuming it is even all that damaging. But hyperinflation doesn’t arise from full cap u, but rather from the utter collapse of productive capacity. At any rate, you missed my point about a progressive consumption tax, though I didn’t state my reasons and my version and case is different from Frank’s. The point is, by removing direct taxes on both employment and in-going real investment, to remove all the accounting, arbitrage and tax subsidy games that distort real investment incentives, while redistributing purchasing power down the scale to maintain adequate levels of demand. Out-going profits would be captured by consumption, income and wealth taxes on the mucky-mucks anyway. And precautionary savings among the lower income strata, instead of debt peonage, would be enabled. More equity and income, less debt and leverage providing AG and, not least, investment incentives and opportunities: i.e. it would militate against financialized, short-termist, and speculative forms of investment activity, such as stock buybacks to benefit insiders or PE LBOs, which amount to tax arbitrage, accounting and bankruptcy scams. And taxing wealth, more than income, would amount to an extended income averaged progressive tax, since incomes are variable from year to year, but tend to be reflected in accumulated net worth, whereas the income effects of inter-sectoral transitions, as when, e.g., there are too many tax attorneys and not enough bankruptcy attorneys, would be more efficient enabled.

But then your whole obsession with PCE as the key to adequate AD is a bit perverse. The simple reasoning is that investment realizations require consumption demand and if there is insufficient demand to realize their profits, unemployment results. But then just why should workers be held hostage to the profit-motives of capitalists? And why should efficiency in production be valued, but not efficiency in consumption? And to high levels of consumption really compensate for lousy jobs in insecure and bad working conditions? And is the well-being of workers in their agency and capacities really served by the commoditization of labor at the behest of capital investment and their management strategies? Er, especially when investment strategies are increasingly based on global labor arbitrage, and thus import leakage from AD, even as the for-ex manipulations and reserve accumulations that abet them, themselves subtract from global AD and recycle excess funds into financialized global flows. (Though, contrary to Bernanke, there is no “global savings glut”, since S =I is a short-run accounting identity and both have been marginally declining globally pre-crisis, it’s actually a global shortage of investment opportunities for capital, at least).

I suspect your obsession with consumption as the key to the whole AD equation is actually based on a narrow obsession with the conspicuous consumption of status and positional goods by the mucky-mucks, as if that were the key driver of their behavior and as if they could just be convinced that they would have little to lose by diminishing their appetites for status, because it would also diminish the cost of status goods, they they would not stand in the way of salutary reforms. But that’s really just a matter of bad taste, and if you ignore them, they will go away. No, the real problem is the politico-economic power of wealthy corporate elites and their control over investment decisions and aims that condition the whole developmental trajectory of human societies and the human and natural ends and potentials that they serve. In turn, I suspect that you’re really in the grip of two “metaphysical” fantasies of presence, which are also technico-ideological constructs. One is the classical liberal dream that all values and interests can be reconciled and integrated into an harmonious social order, from which conflict and contradiction can be eliminated. (As if conflict and contradiction are not “productive” and transforming of the delimitations and understandings of “values” and “interests”). The other is the neo-classical construct of static general equilibrium, whereby the capitalist economy is always and everywhere self-stabilizing and achieves optimal efficiency and social welfare. (Rather than path-dependent or “non-ergodic” and subject to only partial, sequential, multiple and self-undermining “equilibria”). Both those views are half-truths at best. Long-run dynamic disequilibrium is realistically the more general tendency of the world, and struggle and conflict the only way forward, for better or for worse.

john c. haslasz 65,

Let me just say, John, that I appreciate the effort you are making to articulate the flaws that you think you see in my analysis. A definite chasm exists between our two perspectives, even though we both agree on many generalities. You have not yet been able to convince me that my analysis isn’t sound, but that doesn’t mean that it isn’t possible.

You see, it doesn’t bother me to discover that I have been wrong about something, because my only interest is in getting it right. That is to say, it is much more important to me to have an idea that’s right, than it is to have an idea that’s mine. I guess that is the major reason why I typically have a high degree of confidence in my speculations.

Your lengthy diatribe was notable for the string of erroneous guesses you ventured regarding my ‘ignorance’ [your perception] of various economic facts. I can only guess that you developed that impression due to my habit of avoiding references and jargon that might confuse a broader audience.

FWIW, the only reason why I feel competent to challenge the theoretical assumptions of classical and contemporary economists is because I have studied economic modeling on the Ph.D. level. That is when I learned that I didn’t need to be a mathematical genius in order to recognize when theorists were making unjustified assumptions regarding the economic variables they plug into their models.

Oh yes, and while I recognize that equilibrium theories do have some value in their ability to describe the way changes in certain economic variables are able to effect changes in other variables, I am far from convinced that they are better than any and all other conceptualizations of the economy. Far too often, they are used by [conservative] modelers to exaggerate the impact that certain minor variables have on macroeconomic outcomes.

(They typically do this by simply assuming that these variables [e.g., ‘expectations’, ‘savings’] have a far greater impact on the economy than they actually do in the real world.)

If I have an ‘obsession’, John, it is with unemployment, which I perceive to be an inexcusable economic evil. Contrary to the thinking of most Republican economists, it is not actually necessary that a reserve army of unemployed labor be created in order for capitalists to exploit new technologies.

In a booming economy that features 100% employment, entrepreneurs would still be able to hire the people they need for a start-up by recruiting them from other, existing industries (indeed, that is how it normally works, anyway). Firms in declining industries would find themselves unable to compete for the last available employees, so they would be forced to do without.

More on this at another time…