CAPITALISM’S FIRST GLITCH

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Capitalism's First Glitch - Capitalism In Crisis

Capitalism's First Glitch - Capitalism In Crisis

My last post dug into the challenge of equilibrium in economics.  It’s an analytical lens, inherited from physical scientist Isaac Newton.  When an economist invokes equilibrium and then looks through that lens only, doing so may obscure other aspects of emerging problems in actual economies.

Laissez-faire economists were unable to cope with Great Depression problems of unemployment and unsold goods.  Their “tool bag” did not allow visualization of government as a solution.  These free-market ideologues held—and continue to harbor bias— that government always works at cross purposes with economic welfare.

To illustrate metaphorically, when one’s only tool is a hammer, an ideologue with hammer-in-hand will forever search for a “nail” they believe can be solved only with their unique tool.  However, if the economic problem reveals itself instead, as a screw to be turned metaphorically rather than a nail to be hammered, then a myopic laissez-faire prescription offers little value.  During the Great Depression, when laissez-faire was revealed as insufficient, its advocates doubled down on efforts to convince perceived ideological enemies, theirs was the only proper path.  They stood by what they called Say’s Law.

As a contemporary of Adam Smith, French economist JB Say is associated with the institutionalization of Newtonian orderliness.  The so-called law named after him is no empirical law at all, however. It’s nothing more than a restatement of Isaac Newton’s fixation on orderliness, with unlimited faith in instantaneous equilibrium.

Simplistically, Say’s Law declares that supply creates its own demand.  It’s invocation codifies the belief that the business community’s production of goods, simultaneously generates a flow of income to workers sufficient to allow them to purchase those goods.  It was revealed to be a Depression-era failure when the value of goods supplied by firms exceeded the value of household purchases.  Unsold inventories and massive unemployment followed.  Even so, laissez-faire economists stood their ground, and still do.  They’re still swinging their metaphorical hammer in support of Say’s Law.

I call Say’s Law the First Glitch of economic doctrine, to distinguish it from an emergent second doctrinal glitch.  For Joan Robinson, Cambridge University student of JM Keynes, the obscure name she chose for this Second Glitch of economic doctrine is the “profit lacuna.”  That’s a fancy name for “void.”  In the 1960’s Robinson pointed out that deep within the “bowels” of economic doctrine remains a rate-of-profit void so fundamental that eventually, it could rise up practically, then drag the economic profession—and actual economies with it—into unprecedented, destructive territory.  In recent decades since Robinson’s death in 1983, this prophesy is being fulfilled.

Smithian capitalism is about rewarding entrepreneurs who undertake capital investment.  Capitalist societies—especially in the United States—have offered special incentives to capitalist entrepreneurs, some in forms including tax cuts and regulatory relief.  But what if would-be capitalists do “head fakes” in the direction of becoming legitimate capitalists, then segue instead into roles as riggers, gamers or rip-off artists, preying upon the American system?

I call such people pseudo-capitalists.  The term describes those who take the low, easy path to riches.  Instead of contributing productively, such as legitimate capitalists Warren Buffett or Elon Musk, pseudo-capitalists strategize instead to create fraud-producing schemes, either legal or illegal.  Simplistically, a fraudulent scheme looks like a “bait and switch” operation in which the “sucker” is duped into accepting outcomes inconsistent with their best interest due to the salesmanship and deal-making trap into which they’ve fallen.

These schemes need to be better identified and exorcised, even as they are exploding within the ranks of American corporate capitalism.  In my next post I’ll expand on the productivity-destroying morass that pseudo-capitalism creates, and strategies necessary to free our citizens from it.  For now, think of some hypothetical pseudo-capitalist; some dealmaker who bends the rules to line their pockets, even while those who “take the bait” see their futures and their fortunes diminished.  Think, for instance, of the man who claimed he was entering public office to “drain the swamp.”  Consider the business empire of America’s President Donald Trump.

~ Jim Sawyer

Here is a link to the prior post on equilibrium in economics (ECON Errors 101)

ECON ERRORS 101

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Economic Errors - Capitalism In Crisis

Where to start? Let’s start here. Macroeconomics is largely science but built upon huge metaphysical assumptions. One notable assumption is orderliness. We should ask then, what happens when some assumptions, orderliness included, no longer describe aptly, the way in which the contemporary economic world has come to work?

Our focus initially is upon physical scientist Isaac Newton, to demarcate the turning away from a bold new opportunity to also adopt non-conventional economic thinking, about a century ago. Adam Smith thought Isaac Newton to be the greatest human ever to have lived. Consequently, Smith sought to create an intellectual system for understanding the economy analogous to the one for understanding physical space carved out by Isaac Newton in the decades immediately preceding Smith’s career.

Albert Einstein undermined the dominant orderliness paradigm of physics of course, beginning with publication of his path-breaking article on the special theory of relativity, in 1905. Eventually Einstein saluted Isaac Newton as profoundly brilliant for his time, but unable to see beyond the 17th Century-world he described.

Newton’s obsession came in part from his observation of how the planets revolve around the sun, perfectly. But following Einstein, standard Newtonian physics could no longer “stuff” all observations of the physical world into Newton’s “orderliness straight-jacket.” As a consequence, Newton’s methodology of looking for orderliness was qualified and its use, restricted to certain common physical phenomena. Beyond that, randomness evolved to become a better explainer and predictor, outside the level of our solar system or beneath the level of the molecule.

Unfortunately, the economics profession did not extrapolate fully from Einstein’s discontinuous break-through. If it had, contemporary economists would be much more tenuous about asserting equilibrium as the natural state of the economic world, as in college-level Economics 101. Methodologically, equilibrium is taught as follows.  The quantity of goods and services supplied by firms in simplistic economic systems must be set equal to the quantity of goods and services demanded by households.

Smithian laissez-faire worked well for decades. About a century following Adam Smith’s death however, conventional macroeconomics entered a period of revisionism not unlike the one occurring in physics. Unfortunately, perhaps due to the premature death of JM Keynes, reformulation was choppy and incomplete.

Keynes provided the practical road-map out of which a thorough escape from methodological economic orderliness could have been taken, as he did in the Great Depression. For the most part however, economists following Keynes lacked the creativity of 20th Century physicists following Einstein. Had Keynes lived a decade or two longer, his contributions might have been generalized, then solidified into something analogous to the methodological form laid down by Einstein.

One practical way of looking at Keynes is this. Order returns eventually to actual economies modeled upon laissez-faire principles, but not immediately, as dislocations of the Great Depression illustrated. In short, the quantity supplied of goods and services far-exceeded the quantity demanded, following the October Crash of 1929.

Then, conventional laissez-faire economists appealed for more time, arguing for theoretical forbearance and practical abstinence from government intervention. In the long-run, orderliness will return; just wait. In the long run we shall all be dead, Keynes quipped in response. What he inferred was this. During protracted downturns called depression, only government is capable of entering the marketplace to stimulate return to real-world normalcy. Otherwise, dysfunction may extend indefinitely.

Under Franklin Roosevelt, the federal government became the temporary employer of last resort. Eventually as normalcy returned, Newton-type orderliness again appeared under the guise of equilibrium, as the quantity of investment undertaken by the business sector equilibrated with the quantity of saving provided by the household sector (in the simplistic two-sector model).

To summarize, innovative macroeconomics has been insufficiently innovative.  Sometimes the profession stumbles through predicting how the road-map forward ought to appear, thereby prolonging recovery and extending dysfunction. Coming up next: there have been liberal political failures also; not conservative failures only.

TOLSTOY: GET GOVERNMENT OFF PEOPLE’S BACKS?

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Capitalism in Crisis - The Role of Government

Amid the culture wars, some from the political right pluck a Leo Tolstoy quote out of context, then use it to express disdain for government. “I sit on a man’s back,” said Tolstoy, “choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means—except by getting off his back.” Is this a metaphor for antipathy toward the taxation and regulation functions of American government?

While a powerful image visually, Tolstoy doesn’t connect well with grievances borne by Donald Trump’s fans, so they move on in search of other rationales for wearing MAGA hats at raucous political rallies.

So, how about George Orwell, from his novel “1984”? Isn’t it Big Brother who picks the pockets of hapless citizens, then over-regulates them such as in this election season when many feel forced to wear a COVID-19 mask just to gain admission to the local grocery store?

There may be an even better image, however. Remember anti-tax crusader Grover Norquist?  During the run up to Mitt Romney’s 2012 presidential contest with Barack Obama, Norquist’s organization committed 95 percent of Congressional Republicans to a policy of “No New Taxes.”

Tax cuts, yes! New taxes; no, definitely no!  Said Norquist: “My goal is to cut government in half…to get it down to the size where we can drown it in the bathtub.” That’s a powerful, visual metaphor!

But “drown” government in the bathtub? For what reason? Among others, conservatives aren’t doing well economically. Most resent lackluster outcomes, then take out their shared sense of group humiliation on government, believing it to be a tool of liberal America.

But is government the culprit per se? Or for conservatives, does it stand in place of something else; dark economic outcomes, specifically?

Here’s a quick run-down on how conservatives are doing economically, vis-a-vis liberals.

Republican voting districts tend toward being rural and ex-urban with higher concentrations of older, whiter, less diverse and more male-dominant workers gravitating toward employment in traditional industries that now tend toward lackluster incomes. While voters with these characteristics control an increasing share of America’s political geography, they command a decreasing share of its prosperity. Republicans are concentrated in traditional jobs within non-dynamic industrial sectors including agriculture, mining and manufacturing.

Americans who tend toward voting “Blue” on the other hand, dominate professional and digital jobs in which increasing worker productivity drives strong income growth. By contrast, Red America is characterized by sluggish productivity improvement and sluggish income growth.

Household income in Blue Congressional districts shot up 13 percent in the ten-year period following the Great Recession’s start. In Red districts however, household income actually declined about 4 percent during the same period.

Gross Domestic Product has grown fully one-third in Blue-leaning congressional districts, whereas GDP growth has turned negative in Red-leaning districts, falling almost 2 percent during this ten-year period.

Also by 2018, the share of total Gross Domestic Product created in congressional districts held by Democrats reached 64 percent, vs. 36 percent in Republican-held districts. That’s almost a two-thirds to one-third split!

As expected, Americans hailing from Blue districts are more diverse and strikingly better educated. Bachelor’s degree attainment between 2008 and 2018 rose 25 percent. Not so for Red districts where college attainment barely budged.

I wonder.  How might Tolstoy weigh in on the comparative politics of economic grievance? Or Orwell? Or Norquist? Or how about the very contemporary Thomas Friedman (see below)?

Capitalism and Government

So there you have it; an essential “take” on why conservatives are angry at government. They see it as a surrogate for, and a “game” in which they don’t compete favorably, and they feel humiliated. But there’s more. In our next Carpe Diem post, we’ll look at ideological failures growing out of the conventional economic paradigm…both on the Red side of the political aisle, as well as on the Blue.

Check out Thomas L. Friedman and his path-breaking New York Times piece on the politics of humiliation:

“One of the deepest political divides in American politics today is between those with and those without a college degree. In the 2016 election, Trump won two-thirds of white voters without a college degree.”

~ Jim Sawyer

Here is a link to the blog section on The Role of Government.

THE GOVERNMENT REPUBLICANS WANT

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Government for Republicans

Industrial policy?  Isn’t it verboten for Republicans?  Don’t conservatives believe proactive government misallocates resources and suboptimizes economic outcomes?

They do.  More recently however, industrial policy perspectives are getting a makeover from many on the political right.  If Donald Trump captures a second term, the Republican “take” on government’s appropriate economic role may grow ever-closer to the role long-advocated by Democrats.

This on-going shift is chronicled by Washington Post writer Jeanne Whalen.  Indeed as Whalen points out, it’s also a shift with uncharacteristic bipartisan support, therefore legislation is likely to clear the president’s desk by 2020’s end.

According to Will Wilkerson of the conservative-leaning Niskanen Center, this new economic thinking is a qualification of laissez-faire or so-called free market economics.  It’s naïve Wilkerson argues, to assume the standard libertarian position that “the market” always responds spontaneously to structure itself in an ideal way.

Florida Senator Marco Rubio is very much on board with Niskanen’s perspective.  He argues government must identify industrial sectors critical to national security and economic growth, then spur investments in them.  China’s economic rise is mentioned frequently as the antagonist.

Rubio’s proposals include multi-billion dollar federal subsidies for domestic chip-making along with related supporting research.  Overall, such proposals are reminiscent of decades earlier funding support for DARPA, the Defense Advanced Research Projects Agency.  Along with not only military but many civilian accomplishments, DARPA played a central role in launching the Information Revolution.  It led the development of ARPANET—a prototypical communications network initiated nearly half a century ago—that birthed the digital protocols launching the Internet.

Government for Republicans (and for all)

A doctrinal rationale for industrial policy has been constructed within Capitalism in Crisis.  It will be capsulized here in future posts.  Contextually also, I argue America must drill down on three things crucial not only to the future of capitalism, but also to the future of America.  First, we must demarcate what is productive capitalism.  Second, we must distinguish what productive capital is and differentiate it from what it is not, then allocate public rewards and penalties accordingly.  Third and finally, Americans must make these democratic choices against a backdrop of whatever and however we perceive our country’s emergent mission to be.

I’ll be taking a serious look also via these Carpe Diem posts, at fallacious doctrines and bungled economic policies supported by the Republican Party, going all the way back to the Great Depression.  Following that, I’ll look also at what has been mishandled economically by the Democratic Party.

~ Jim Sawyer

Here is a link to a section of this blog you may find interesting and valuable – Where Conservatives Misstep.

DO THESE THREE THINGS…

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The Future of Capitalism

How to reclaim a sense of Francis Bacon’s wonderment about capitalism’s future?  About America’s road ahead?  About the future of participatory American democracy? 

Let’s start with these three things.  We’ll be expanding on each and explaining their necessity for America to thrive. 

First, demarcate productive capitalism.  Then, draw a bright line around what capitalism is not; about what capitalism should not be.  Screen out frauds, scams and cons.  I call these sorts of business strategies, pseudo-capitalism.   

Pseudo-capitalism is about free rides for dealmakers and scam artists who win big through tax and regulatory breaks.  However what scammers offer in return is akin to what America gets when another casino opens.  Pseudo-capitalism is about a few big winners and endless hordes of disaffected losers, like those who feel they’ve had their pockets picked as they exit.   

Ask yourself this.  Do you want America’s commercial future to look more like the business empire of Donald Trump?  Or do you prefer instead that the future we pass to our kids look like the business strategies of people like Tesla’s Elon Musk or Omaha’s Warren Buffett? 

Second, to get to a Buffett and Musk-type capitalism that actually serves America’s interests, we must distinguish what productive capital is, and what it is not.  Capital is not finance per se, although finance is a necessary component used to purchase productive capital in order to make world-class goods and services.  Assets used by pseudo-capitalists must be taxed and regulated at a higher rate in order to dissuade fraudsters, scammers and con artists. 

Third, to demarcate productive capitalism and capital, America requires a renewed vision of the future we want to create, and the capital needed to create it.  This won’t just happen.  Mission must be consciously constructed.  Perhaps America’s culture wars are about this.  Perhaps the two sides are fighting in a free-for-all about what America’s mission shall be.   

The Future of Capitalism

Stay tuned as we drill down on these three things, crucial to the future of capitalism and to America’s future.  First, demarcate productive capitalism.  Second, distinguish what productive capital is, from what it is not, then allocate public rewards and penalties accordingly.  Third, make these choices against a backdrop of America’s emerging mission, sought by the majority of our citizens. 

~ Jim Sawyer   

Here is a link to a section in this blog which focuses on How to Repair Capitalism.