Marx is back

Recently, Nouriel Roubini’s exhumed of Karl Marx to help explain the current travails of the global economy. His argument included this spectacular paragraph:

So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

Now comes the fine UBS analyst, George Magnus, with a  the return of political economy. The note includes the following introduction:

The Convulsions of Political Economy
“At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merelyexpresses the same thing in legal terms – with the property relations within this framework of which they have operated hitherto”.
Preface to A Contribution to the Critique of Political Economy, Karl Marx(1859)
In ‘The Return of Political Economy’ (Economic Insights, 5th February 2010), I wanted to emphasise how, in the wake of the financial and economic crisis of 2008-09, the interaction between political and economic decision-making wouldcome to play an increasingly significant role in the determination of economic,and market outcomes. Looking at the time at the complicated legacy of de-leveraging in developed markets, the embryo of the sovereign debt crisis,especially in Europe, and growing social and economic contradictions in China, it was possible to imagine, if not predict precisely, pretty much what we see playing out today.

Now you don’t have to be a member of the Socialist International to recognise that Marx’s words above have contemporary relevance. For him, post-feudal ‘conflict’ would lead to social revolution and the overthrow of bourgeois society, but we know different, not least because the Western model of economic development overhauled and democratised the concept of ‘ownership’ (of the means of production). Nevertheless, the old guy was a pretty shrewd analyst, learned a lot about political economy from likes of Adam Smith and David Ricardo among others, and offered some still relevant insights into how and why things happen in the economy and society. The quote above captures the important idea of conflict or turbulence when events happen that lead to challenges to the power, authority and legitimacy of the existing political and economic order.

During the last several months, we have seen a succession of such challenges in the Eurozone, the US, and even, in embryonic form, in China. The recent skittishness in financial markets and increase in risk premiums reflect not only a rise in anxiety about the deteriorating health of the global economy, but the draining of confidence thatpolitical elites are up to the task of addressing it.This note, then, considers the existential crisis in the Eurozone, ‘deficit attention disorder’ in the US and other advanced economies, and China’s current politicaleconomy, for which the recent high-speed rail accident serves as an interesting metaphor.

The pinkos are back to save us and, frankly, it’s not before time. These lines of thinking are precisely the new angles of argument that we need if we are to redefine the liberal balance of governance and markets that our civilisation needs for a return to stability. Enjoy.

Comments

    • I am just wondering how many of the commentators have ever read Marx and whether there is at least one who has spent at least a year for understanding his methodology and his great dialectical approach to political economics.

      Everyone who thinks that the socialist system, which started with October revolution in Russia 1917, is a Marxist creation, shows only ignorance. October revolution and its consequence, the so called socialist system, was Lenin’s idea and one should keep in mind that Lenin was the greatest reviser of Marx’s ideas. Contrary to Marx’s ideas Lenin believed that socialism can start in one isolated country and that could be the poorest country, like Russia was at that time.

      Lenin, as it turned out, was absolutely wrong. We don’t know yet whether Marx would turn out to be wrong, because capitalism hasn’t reach its highest level of development and hasn’t won yet in the whole world, which was the main presupposition for any further social-economic changes. Marx prove with his analysis that capitalism has to develop fully its productive forces and science as to be changed with higher economic system. Although the globalization has already started, it hasn’t finished yet.

      Ignorance is the main cause of the poor understanding of Marx’s ideas and his conclusion for capitalism prospects. What is happening now (globalization) is what he has predicted as a dialectical evolution of the free market, capital accumulation and centralization. It is very interesting comparing all arguments of the wise and intelligent MB bloggers with Marx’s arguments. They are amazingly close and similar sometimes.

      Don’t forget that the natural development and evolution of capitalism was disrupted for some period from 1917 until the collapse of totalitarian system and the beginning of the globalization, because the world (including the West) believed that the then socialist system is what Marx had in mind.

      Marx’s ideas were for higher human freedom, which had nothing to do with the totalitarian actually feudal system. He believed that capitalism is the best system for development of the human productive forces and for creating the base of the genuine human freedom, through development of the science and technologies. And he was right about that.

      Capitalism is and will be for some time ahead the best system until it gives more freedom for human development than any other alternative, what ever it would be. Today’s capitalism is not sustainable and this is something everyone knows, but doesn’t want to think about the consequences. They won’t be in our life, so why to bother at all and why to make comments on a giant we can’t reach intellectually.

  1. “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.”

    This summation is simplistic.

    Firms are cutting jobs because there is insufficient demand for their specific products and services. i.e. investment in these firms was malinvestment.

    Malinvestment can’t be rectified by propping up the firms that were malinvested in.

    The immediate effect is fewer unproductive jobs. The long term effect is restructuring and emergence of new productive jobs.

    Valid conclusions cannot be drawn from simplistic aggregates.

    • Simplistic, yes. And I take your point about productivity too. But, that’s for the global economy as a whole, not necessarily for a single national economy, such as the US, where cost cutting has gutted the middle class and left a huge hole where demand used to be. You can’t outsource your industrial base and still have demand.

      • ‘You can’t outsource your industrial base and still have demand.’

        I have always argued this. This model is not self-sustaining over the long term and is a fundamental flaw in the free-market globalisation ideal.

        It is illusory as we have witnessed – you can only outsource your industrial base and still have demand when the demand is credit binge funded, but you cannot when the credit plug is pulled/debt saturation point reached. Hence my view that by extrapolation generally economies cannot support growth in the services sector without a solid industrial/manufacturing capability.

        Most Western economies have gone gangbusters down the FIRE/Services sector route, eagerly offshoring production to the cheapest provider (China) and now have little industrial framework on which to fall back on – this has traditionally been a reasonable employment market also. Interesting to note that two developed countries that did maintain a viable industrial base, Germany and Japan, both utilised this base to rebuild following the war and to a large extent have ensured their economic viability (yes, I know Japan has problems of its own, but I mean it it general terms).

        • ‘You can’t outsource your industrial base and still have demand.’

          I have always argued this.

          WTF Fanboy?!

          Isn’t that what we’ve done in Australia?

          Isn’t the strong dollar (thanks to our terms-of-trade) accelerating the hollowing-out of our industrial base?

          Isn’t the quarrification of the Australian economy something cheerlead here every day?

          Have you seen the light, or are just very, very confused?

          Oh that’s right, the mining boom is “helping us adapt” to the new economic order.

          • Extractive operations are a pre-requisite for industrial operations. It is a Tier Effect, not a standalone. Without extractive operations there would be NO modern world at all, let alone any industrial base or services sector. We would all be back in the caves. Do people not understand this, so blinded by dogma.

            And yes, I cheer-lead our resources sector because it is an important component of this economy.

            Manufacturing and industrial sectors have been on the decline in this country and other similar countries for a couple of decades or more – not as a result of the resources sector but of the model of free-trade globalisation we participate in.

            You cannot truthfully deny this. We have only had a strong AUD in relatively recent months and the boom itself is only just getting underway. It is spurious to claim that the resources sector was responsible for the historic decline in our industrial base.

            There may be some industries adversely affected now, but we are at the other end of the cycle of our industrial strength, and as long as we continue to embrace the current globalisation model were, most unfortunately, destined to be dinosaurs. This is a travesty, but over an historical period definitely not the fault of resources.

            Our resources sector has been exposed as the only sector that has any strong global demand at present. At least we have something.

            And yes, this debate shows how important it is we transition – my preference would be to recalibrate manufacturing at all levels (eg a small start would be something like requiring major resource infrastructure projects to source product, not just manpower, from Australian suppliers) – but to extend this more broadly throughout the economy seems impossible – this is a critical point in the globalisation debate – as I have said before, it is a dual edged sword.

            I have always championed the need for a vibrant manufacturing/industrial base – but until now, very few has expressed a similar view. Remember – we all heading to services…Joke on us.

          • Even extractive industries outsource – I believe for the Gorgon project, while the fabrication units in WA were waiting for work to come their way (pollies promise, you see), most of the fabrication has been outsourced to South Korea.

          • Free trade, yes. But there is absolutely no value-add in digging dirt out of the ground and shipping it off. We are doing something primitive and want to keep doing it because there is money in it (for a relatively few people).
            .
            IMHO, that is just as bad as the FIRE economy – House and Holes gets it – I guess thats the reason for the nick!

          • My main concern is risk. It is LUDICROUS to bet the house on an untried political and economic model when you don’t have to.

            Moreover, it becomes INSANE when that same untried model is in direct confrontation with your own model and its major strategic defender, the US.

            Value add exports are the insurance.

          • What are you saying Mav – the resources industry should also get into the minerals processing, steel making, copper wire etc production industries – they do have a lot on at the moment.

            Those opportunities are for others to take up – and indeed they have – in China for example. I agree, we should have done it differently BUT WE DID NOT. AND ARE NOT LIKELY TO NOW. Our loss.

            But on the positive, we still have a fabulous natural resources base.

          • H&H – it is a risk. But where else do you suggest we pin our hopes?

            Not many options out there and the structural changes required to provide the broad based stability desired are highly unlikely to be adopted in this environment.

            But, the time bought by the resources boom, is an opportunity not granted many economies at present – what we do with it is the question. I am not overly optimistic in that regard.

            I remain intrigued in where you disagree with my comments above. That we have aligned ourselves closely with China in an economic sense is a separate issue, again this is relatively recent phenomenon.

          • The key problem with value adding in australia is locations. With a political system that favours NIMBYism.

            The populance can generally understand that the locations of mines, farms, forests etc need to be where they are for geographical reasons.

            When in comes to processing plants its a totally different ball game. Put it at the site of primary production and people will complain that it destroys the rural environment, put it near the infrastructure and labour force (the only other resources required)and people complain about having to live near it.

            Short of building an industrial base on Chrismas island and using a FIFO workforce what are the options ?

          • The big miners (more specifically the big aussie) used to be involved in manufacturing.

            Until the point came where they realised that many of their manufacturing industries were only surviving because of cashflow from other businesses in the group.

            The businesses were spun out to survive on their own, and magically became more efficient when put into sink or swim on your own context.

          • DD

            I have harped on about the need to value-add for years. Again, very few others and certainly none in positions of influence have expressed any interest. Partially a legacy of the Clever Country – One, which touches on your point, often these value-add industries are considered ‘dirty’ and not wanted in any location (no chance now with the carbon cops about to prowl). Two, the focus on the services sector and three, our love affair with property ‘wealth’.

            We have signed our own fate and few have cared…until now it would seem.

          • A lot of the structure of manufacturing seems to come from the old english (mercantile) models.

            ie do the dirty work in the colonies (read rural areas for modern Aus) and bring the labour intensive assembly work to the city where labour is cheap.

            This all worked well until the price of rural labour went up, when people became more mobile and relocated back to the cities, and so we offshored the dirty parts (smelting, wool combing, pulp/paper mfg other stms). Unfortunately the viability of the tertiary processing is dependant on doing the secondary processing in locally, othewise you have to compete internationally.

      • “But, that’s for the global economy as a whole, not necessarily for a single national economy, such as the US, where cost cutting has gutted the middle class and left a huge hole where demand used to be. You can’t outsource your industrial base and still have demand.”

        It is my belief that this gutting and outsourcing are results of years of loose monetary policy coupled with government deficit spending, leading to malinvestment.

        So I agree with you that the gutting and outsourcing are a bad thing, but perhaps we disagree about the root cause.

        If interest rates had been set at a more reasonable level, more closely matching expected or desired real rates of return, I think there’s little doubt the outcome would have been vastly different.

        Instead interest rates have consistently been set too low, in order to artificially dampen recessions. This has merely lessened short term pain in exchange for massive long term pain.

    • Weimar Republic

      are you saying that every firm that experiences a drop in demand for their goods and services has malinvested?

        • Weimar Republic

          In that case was your summation:

          Firms are cutting jobs because there is insufficient demand for their specific products and services. i.e. investment in these firms was malinvestment.

          any less simplistic than the one in the article?

          • “In that case was your summation: “Firms are cutting jobs because there is insufficient demand for their specific products and services. i.e. investment in these firms was malinvestment.” any less simplistic than the one in the article?”

            Very good point. I would say it is simplistic, but less simplistic. I believe it to be a more correct rough picture, but a rough picture nonetheless.

            If I can state my point a little more clearly, I don’t believe conclusions drawn purely from broad aggregates are valid.

            The statement from Roubini, and the type of thinking that it emanates from, assumes that you can look at something called “aggregate demand”. What I am saying is that you need to look at the millions of disaggregated, heterogeneous demands, and corresponding hetereogeneous supplies. Very hard for a government, or an economist to do, but easy for a decentralized free society, if allowed to happen.

          • “Very hard for a government, or an economist to do, but easy for a decentralized free society, if allowed to happen.”
            .
            I think you are reading too much Ayn Rand fiction.
            .
            Funny, I haven’t read Karl Marx’s book yet – the bugger may have a thing or two that is useful in the real world.

          • PA: “Very hard for a government, or an economist to do, but easy for a decentralized free society, if allowed to happen.”

            Mav: “I think you are reading too much Ayn Rand fiction.”

            There’s no need to draw upon fiction when you can see all around you the amazing inventions of real free societies, and you can meet many real people who changed jobs or industries, through necessity, but went on to thrive.

          • “There’s no need to draw upon fiction when you can see all around you the amazing inventions of real free societies”
            .
            There is a little bit of contradiction there – Earlier you said “decentralized free society, if allowed to happen.”. Now, you say they are in existence in the real world out there.
            .
            Anyway, where are these real free societies and what are their amazing inventions?

          • “There is a little bit of contradiction there – Earlier you said “decentralized free society, if allowed to happen.”. Now, you say they are in existence in the real world out there.”

            The full quote was: “What I am saying is that you need to look at the millions of disaggregated, heterogeneous demands, and corresponding hetereogeneous supplies. Very hard for a government, or an economist to do, but easy for a decentralized free society, if allowed to happen.”

            By “allowed to happen” I mean allowing private parties to solve the disaggregated demand and supply mismatches, rather than the government trying to do it, by assuming that demand is homogenous, and thinking that any demand will do.

            We are living in a relatively free society, and we have many inventions to be thankful for. We need to be mindful of how they arose. I can guarantee you the vast majority were not created by stimulus spending to boost aggregate demand.

        • Silex Solar announced today that they were ceasing the local production of solar cells, and that 30 jobs were to go as a result.

          They will continue to assemble solar panels, but cannot compete with overseas in the fabrication of the constituent cells, due primarily to the strength of the $A.

          Guess it was a pretty stupid malinvestment to think that we could make a go of the solar industry in such a dark, dank place as Australia 🙂

  2. It’s sort of ironic how the people who are singing Marx’s praise, like Roubini & Magnus, are all mainstream/Neo-Keynesian. Where are all the Marxian economists, like those involved in the early 20th century debates, and why aren’t they saying “we told you so”?

    • Perhaps it has something to do with acute embarrassment over the Soviet Union, pre-capitalist China, East Germany, North Korea, Kampuchea, etc?

      • Really? So why hasn’t the slightly embarrassing history of the rise of fascism in Europe discouraged the hard money crazies and those who believe that the best way out of depression is through deflation? Because those ideas seem to have made a comeback.

        • Fascism is the opposite of Libertarianism.

          The only ways out of a credit bubble are deflation, hyperinflation, or liquidation of creditors a la WWII. Which do you choose?

          • Libertarianism is a very nice fairy tale, which if implemented leads directly to a Hobbesian State of Nature or Fascism.

            Also I can’t see how deflation is a way out of a credit bubble, on planet earth, where debts are all nominal and most sane people reject the idea of 20% plus unemployment.

          • “Libertarianism is a very nice fairy tale, which if implemented leads directly to a Hobbesian State of Nature or Fascism.”

            It depends exactly what kind of Libertarianism you are talking about. Societies with relative freedom and relatively small governments have tended to be very productive and harmonious.

            “Also I can’t see how deflation is a way out of a credit bubble, on planet earth, where debts are all nominal and most sane people reject the idea of 20% plus unemployment.”

            So you don’t like option 1. Which option is your preference?

          • How about Option 4:

            A global inflation target of 7% over 5 years, coordinated by all central banks. To:

            1. Increase global NGDP
            2. Inflate away debts
            3. Wipe out the rentiers

          • “How about Option 4: A global inflation target of 7% over 5 years, coordinated by all central banks. To:
            1. Increase global NGDP
            2. Inflate away debts
            3. Wipe out the rentiers”

            How do you propose to achieve 7% inflation without increasing sovereign debt levels? Private credit is already saturated, so the tradition means of inflating through multiplication of reserves is not available.

            The irony of your comment is that a rapid deflation would wipe away the rentiers, through default. I agree a slow tortuous deflation through substitution of private debt for taxpayer debt (a la Japan) allows the rentiers to keep receiving the rent. This is not a great outcome but I suspect it’s what we are in for, followed by eventual sovereign defaults or hyperinflation.

          • “How do you propose to achieve 7% inflation without increasing sovereign debt levels?”

            That is the easy part. Tomorrow all central banks announce they will accomodate the publics nominal demand for base money until inflation is 7%, and expected to stay at 7% for 5 years. The day after that, they crank up the printing presses. See its very easy. Sovereign debt will fall, along with private debt.

            And a rapid deflation would not wipe out the rentiers. Anyone sitting on a risk-free fixed income instrument would make out like bandits.

          • “That is the easy part. Tomorrow all central banks announce they will accomodate the publics nominal demand for base money until inflation is 7%, and expected to stay at 7% for 5 years. The day after that, they crank up the printing presses. See its very easy. Sovereign debt will fall, along with private debt.”

            When you say “crank up the printing presses”, do you mean issue currency not backed by assets held at the central bank?

            Currently currency can only be issued when backed by a corresponding asset on the CB balance sheet.

            Do you propose a radical change to the CB model?

            “And a rapid deflation would not wipe out the rentiers. Anyone sitting on a risk-free fixed income instrument would make out like bandits.”

            There are no risk-free fixed income instruments.

          • “Do you propose a radical change to the CB model?”

            No.

            The central bank can just as easily swap (buy) output, art, whatever with cash as they can swap bonds with cash. The liquidity effect is exactly the same.

            To paraphrase Bernanke in his 2002 speech: “There is a wide menu of assets the central bank can buy”

            I know, I know, you will say the central bank conducts OMO’s with banks. But they don’t have to. There is no reason theoretically or operationally why they can’t conduct an open market purchase down at the local supermarket. They could swap cash with your newly bought groceries.

            The point is, a central bank willing to accomodate a nominal demand for money at a level of NGDP, can always create inflation & what it buys is irrelevant. Bernanke again: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services”

          • “The central bank can just as easily swap (buy) output, art, whatever with cash as they can swap bonds with cash. The liquidity effect is exactly the same.”

            I’m pretty sure there’s not enough art to make a dent.

            Consumable goods probably aren’t a good idea.

            What do you propose they buy? I believe Ben mentioned ketchup once. Maybe he has shares in Heinz.

            Whatever they choose, it will distort that part of the economy. There won’t be a pure inflation effect. The thing to go up in prices the most will be the thing they buy. Cronies will queue up to be first to sell their wares. Production of whatever they purchase will, perversely, increase.

            I don’t think this is a great plan.

            Even if it could be relied up to generate a targeted NGDP growth, what would then be done if real GDP started to decline, which is entirely possible? It’s real GDP that matters, not NGDP.

          • “There is a wide menu of assets the central bank can buy”
            .
            By assets, I think Ben meant the toxic financial garbage that banksters need to get rid off their books quickly – RMBS, student loans, money market funds, just about any asset they can skim a lil profit off, even treasuries – borrow from the Fed at near 0% and lend it back to the government at 2-3%.

          • “What do you propose they buy?”

            If a central bank really wanted to create inflation, then they should probably buy equities (partly because of Tobins Q).

            Politically though, that would be a non-starter.

            What matters though, is just getting the money out there.

          • “toxic financial garbage that banksters need to get rid off their books quickly – RMBS, student loans, money market funds, just about any asset they can skim a lil profit off, even treasuries – borrow from the Fed at near 0% and lend it back to the government at 2-3%.”

            Exactly – the opposite of wiping out the rentiers.

          • “What matters though, is just getting the money out there.”

            I think what matters is the distortive effects of all of these types of artificial intervention in the economy.

            These got us where we are. More of the same, and more extreme versions of the same, will exacerbate, not fix, the problem.

            You can’t just go out and buy assets without artificially helping the owners of those assets at the expense of everyone else.

            After Ben tries his last measure, the credit bubble will still be there, and one of the choices above will still have to be taken.

          • Ben’s helicopter to drop money into the real economy is just his scholarly imagination – it does not exist. In the real world, the rentiers have given him a goods train to ship money – only the tracks lead directly to their door-steps.
            .
            Yes, the rentiers are the funnel through which the money has to pass from the Fed/CB into the real economy. How the rentiers funnel that money is up to them – they seem to prefer to rush to the casino – either to the commodities table to bid up the prices there or hold high frequency 8sec long poker matches in the equities table.

          • “Yes, the rentiers are the funnel through which the money has to pass from the Fed/CB into the real economy. How the rentiers funnel that money is up to them – they seem to prefer to rush to the casino – either to the commodities table to bid up the prices there or hold high frequency 8sec long poker matches in the equities table.”

            Well said.

      • Witchsmeller Pursuivant

        Can I be the one to point out that “China, East Germany, North Korea [I’ll leave Kampuchea for the moment]” are/were state capitalist societies, that don’t even slightly resemble socialism/communism that Marx may have recognised. Kampuchea, I would term psychopathy, influenced by French Marxism.

        • So of all the attempts to set up a socialist state, none have actually succeeded?

          That indicates a fundamental flaw somewhere.

          It would also indicate that any future attempts to set up a “true” socialist state are unlikely to succeed in setting up a true socialist state, and are in fact more likely to result in another Soviet Union or similar.

    • Yes, I posted on this yesterday.
      .
      The oligarchs have created the tea party frankenstein to cripple US fiscal policy in order to keep taxes low for themselves.
      .
      Now the teatards are running amok and trying to cripple monetary policy, especially QE – something that actually benefits the oligarchs!!
      .
      This is going to dangerous and fun at the same time – So bring out the tinfoil cap and some pop corn.

        • I don’t know.. I am just listening to Warren Buffett.
          .
          Also, I am not a believer in Trickle down economic theory.

      • Do you actually believe that half the politicians believe what they say? In the end they will act with their self interest in mind – and that’s any party.

        Right now the Tea Party are in such a position that campaigning for what they are is good for them. If they ever get into power they will do something else to benefit themselves as they have already benefited by doing the other thing. Look at Obama for example with his speeches about how wall street ran amok before he got elected.

        Admittedly though I do agree with the notion of small government – banks would have never grown so concentrated or so large if it wasn’t a centralised government protected system. Sure there would be banking crisis but it wouldn’t nearly be as bad as today.

        • I agree with you. I am saying the Tea tards have been co-opted by the Big business interests that want government regulations to be reduced.
          .
          I want Rick Perry/Michelle Bachmann to become the next US President, so that the tea tards can see for themselves on how well the lunatics can run the asylum.

  3. I’ve been wondering where the Left was in the economic debate. All we’ve seen is the Right destroying the Centre – it’s created a fine mess.

    • Witchsmeller Pursuivant

      When the “legitimate political” left, i.e. the slightly-right wing government of the bloody country!, can’t get a fair hearing, what chance those actually on the left?

  4. “Most people who read “The Communist Manifesto” probably have no idea that it was written by a couple of young men who had never worked a day in their lives, and who nevertheless spoke boldly in the name of “the workers”.”

    T Sowell

  5. in the end, if we all worked 16 hours a day in cheap shoddy places for next to nothing, we would be competitive. Globalisation is a hidden attack on workers’ rights. Oh shit, we can’t go to the next guy in line cos they’ve all banded together and are demanding the same thing. We’ll go to the next town. Oh shit, this union movement has gone national… how about we go global? We know the governments of the world will never band together and we can play them off against each other. Developed countries will never be competitive unless workers’ rights are abolished or the developing world increase their workers’ standards.

    • As I see it, the fly in the ointment with this plan is – Some of those jobless workers might eventually find their way to the gated communities at The Hamptons, pitchfork and torch in hand.

    • I’m searching for a word/s of what to call it, I think I will just call it “little person syndrome” not in reference to one’s height but in reference to what one can achieve in life, if all you think you can be in life is a glorified robot so be it, even fleas can be trained to jump only so high, you and others appear to have been trained well.

      The main reason we have our current standard of living is because of people that weren’t trained so well, I.e they looked for opportunity in the market place, to invent something, open a new business etc, not to work as glorified robot for someone else.

      If we all want to increase our standard of living then we need to make things cheaper relative to the average wage, which is what any good business tries to do, that is to contain costs and constantly look for ways to be more competitive unless government comes along and gives monopoly rights and thereby distorting whole markets.

      • Well said. I think many Keynesians and Socialists have a very low opinion of their fellow citizens, assuming that they can’t find work for themselves and so on.

        21% of Australians are self-employed. They didn’t need a job to be “created”. They created it themselves.

        Most people are amazingly capable and creative.

        • Thanks Paul, glad that at least a few commenters understand the basics.

          Your right most people don’t need their hand to be held, even if they don’t realise it.

      • The main reason we have the standard of living we have is because we ship all our ‘shitty’ jobs that no one wants to do overseas, where people will work for less. Why are Nike shoes not made in Thornbury? I can tell you it’s not because workers in Thornbury aren’t efficient or that productivity is higher in China. It’s because Australians have higher wages, caused by higher working standards. I agree with you that businesses will always try and reduce costs and try and be more competitive – which is PRECISELY why companies will ship manufacturing to other shores if their wages are cheap enough to justify the extra shipping etc. Show me one country that has increased its standard of living through globalisation – and i’ll show you another where they’ve shipped their ‘shitty’ jobs to.

        • Most nations have some sort of competitive advantage over others, Australia’s main competitive advantage currently is mining & agriculture, in the future it may be something else.

          Maybe you get a kick out of sending money (donations) to those poor starving huddled masses overseas, I’m more in favour of allowing them to trade freely with other nations, using their competitive advantages (currently cheap labour), and thereby improving their lot in life.

          As the Chinese and others improve their lot in life, their wages also go up.

          • “Maybe you get a kick out of sending money (donations) to those poor starving huddled masses overseas, I’m more in favour of allowing them to trade freely with other nations, using their competitive advantages (currently cheap labour), and thereby improving their lot in life.”

            Perhaps you could explain, without resorting to the argument that we haven’t allowed them to trade freely, why that hasn’t happened.

            Or whether the turning over of agricultural land to cash crops – so vulnerable to the vicissitudes of prices which are often dependent on bets made in the financial markets – actually does amount to such ‘free trade’ and has really improved their ‘lot in life’.

            The true ‘competitive advantage’ of many very poor countries’ inhabitants is a modern form of slavery.

          • Macondo,

            Please have a read of this –

            “One of the “key elements” of economics is that trade creates wealth. Wealth is whatever people value, but trade allows us to produce either more material goods with the same resources or the same material goods with fewer resources. While it does not profit a man to gain the world but lose his soul, trade increases our ability to produce goods and services and therefore increases our range of opportunities.”

            http://mises.org/daily/3026

            and this –

            http://mises.org/daily/3134

  6. “The only ways out of a credit bubble are deflation, hyperinflation, or liquidation of creditors a la WWII.”

    This is just not so. The US, for example, is currently in the process of adjusting to the exhaustion of a very long expansion in debt. But they are not experiencing any of these phenomena. Instead, businesses, households and governments are going through the processes of adjusting their balance sheets to new constraints. This is taking a long time and is having some (unnecessarily) painful consequences for the unemployed. But businesses have accumulated a lot of cash and households are rebuilding their savings, paying down their debts and even slowly growing their consumption.

    The US economy is not alone in this. Other economies are also adjusting. Notably, economies with significant export exposure to emerging industrial economies have been able to reduce their debts and grow their incomes at the same time.

    There is no question at all that this process of adjustment is painful. But apocalyptic visions are just wrong. Not only are they wrong, they are absolutely daft.

    “Deflation” will make debt problems, not better. “Hyperinflation” will completely impoverish anyone with savings – which is to say debt:asset ratios will worsen, not improve. Nor is it necessary to “liquidate creditors”, who, after all, are the net savers in an economy.

    What needs to be understood is that borrowing to consume is the same thing as bringing forward future consumption. It is the converse of saving, which is the postponement of current consumption.

    What has to happen – what is happening – what will continue to happen – is that household savings/consumption behaviour will return to historic norms. As this occurs, the propensities to consume and invest will also gradually revert and growth will return to its potential.

    The single most important thing now is that the institutional framework of the economy – the finance sector and capital markets, the public sector, the core industrial sector, the human skills systems – are all sustained and the human costs of adjustment are ameliorated.

    There is not a quick fix, but it is absurd to say the solution to excess debt must be liquidation. On the contrary, destruction can be avoided. The “Equity” component of the collective balance sheet can be re-built, in every sense of the word.

    • If the end result is a smaller public and private debt to GDP ratio then you are talking about a deflation.

      “This is just not so. The US, for example, is currently in the process of adjusting to the exhaustion of a very long expansion in debt. But they are not experiencing any of these phenomena.”

      They are substituting public debt for private debt. There is, as yet, no deleveraging of the total debt to GDP ratio.

      Despite this, there is deflation in assets purchased with credit, such as housing. This is because the private credit markets are saturated, and very little new private credit being created if any.

      ““Deflation” will make debt problems worse, not better.”

      Deflation is, in a credit-based system, by definition, reduction of debt, which is equivalent to making debt problems better.

      “What has to happen – what is happening – what will continue to happen – is that household savings/consumption behaviour will return to historic norms. As this occurs, the propensities to consume and invest will also gradually revert and growth will return to its potential.”

      I agree that this is a possible outcome. It hasn’t started yet (see above). If/when it does, it will be coincident with deflation. However, if the deflation is drawn out, or ameliorated too much, then we will merely be repeating the Japan scenario – long slow deflation in assets, flat CPI and private deleveraging offset by continuing public leveraging. The scenario in Japan has yet to play out in its entirety, because public debt to GDP is still growing, as is the size of the Japanese Central Bank’s balance sheet.

  7. There is only one problem with the ‘inflation, deflation or liquidating of creditors’ – none deal with supply side issues.

    Imagine that the central banks managed to inflate away all debt… there are no savings, there are no debt. Big finance and the rich no longer get to a big cut from a shrinking real economy.

    Now a growing world population just has to continually cut its total energy, food and water consumption.

    Australia will be laughing all the way if Paztek and Croft were right about India, China and Indonesia’s coal production, which they reckon will peak from 2011-2015. Just have a look at the increasing volatility in China’s electricity production and the 10GW of new coal generation that has been put on hold in India.

    And as we all should know by know, oil production has been on a plateau since 2006, and set to be in steady decline by 2015.

    As an aside, we cannot outgrow our debt burdens with the real economy. Without FIRE, the real economy has grown at pretty much the same rate as energy production. Time for the world to default.

    • Individuals have the ingenuity to deal with supply side issues. None of these resources will suddenly come to a full stop. As they become scarcer, their prices will rise and there will be more incentive to develop alternatives, and incentive to reorganize individual activities to cope with reduce resource availability.

      Millions of individuals making their own decisions are much better placed to cope and adjust, than are large central organizations.

      If malinvestments are allowed to disappear, the incentives will be much better aligned to the realities.

  8. “So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct…”

    Um…no, he was completely wrong on this point. The only aspect he got partly right was finance sector running amok…but as those that understand the freee market have always argued, the finance industry operate in a rigged market – a market rigged by Government (the State).

    Marx and Keynes are dead…lets bury their economic theory and embrace freedom, innovation and creative destruction.

    Only economic freedom can truly serve the interest of the people. It wont serve us all equally – but we were not meant to be equal!