[OPE-L] The Financial Times and the problem of elite uncertainty

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Jan 29 2008 - 14:01:39 EST

The FT comments today:

"the world leaders who assembled in the Alps (...) are meant to be the "masters of the universe": presidents, prime ministers, bankers, billionaires. If anybody can make sense of world events, it should be them. But the air of confusion in Davos was both palpable and alarming. The meeting took place against a background of crashing stock markets, panicky interest-rate cuts and a massive bank fraud. The global financial system is now so complicated that nobody really knows how deep its problems run. This central "known unknown" means that all the subsequent big questions are much harder to answer. Will America face a serious recession? It all depends. How bad will the knock-on effects be for the rest of world? Search me. How should politicians and regulators react? Difficult to say."

As I mentioned, the uncertainty is in part a socially constructed artifact of "financialization", meaning that you simple cannot know or predict a lot of things about how resources will be allocated, there are just too many mutually dependent variables. Plus, of course, postmodernist metaphorical ideology replacing social scientific theory isn't any help, insofar as it stresses the limitations of people to know anything beyond their own individual interactions. In a way, that's wonderfully relaxing - if you cannot know it, you don't have to deal with it. The worry is however that you may have to deal with something that you don't know, anyhow.

It would be wrong though to infer that you cannot know anything about the present and the future because it is "too complicated". That's just an ideology. In reality, the essential problem is quite simple. In order to exist, capitalism must always grow (more profits, more markets). That is the pressure of competition for development at all levels. But if the growth of real wages and disposable income (after tax, inflation adjusted earnings, not the newspaper bullshit about nominal gross wages) of the vast majority of people stagnates, as it has done, then the main ways the system can continue to grow are: 

1 - through extending more and more credit
2 - by selling to the wealthy, who command the resources to buy stuff with (including luxuries, weaponry etc.)
3 - by incorporating more people with earning power into the cash economy. 
4 - by extending grants in cash or in kind to people unilaterally ("purple politics") according to some ethic.
5 - by means of countertrade and barter

Obviously the rich, because they have much more collateral, can borrow much more than the less well-off; "debt management" becomes a booming business, boosting that fraction of the national income which consists of interest and capital gains (because many countries do not tax capital gains, there is often not much data about them either, adding to the unknowables). But how do you know how much credit can be extended in aggregate? The fact is that you don't know that, and you have little control over it. Neither can you prevent the extension of credit, nor can you stop issuing credit. The whole system is ultimately based on trust, backed by legal enforcement, and the only empirical indicators you have are the number of people who go broke or cannot repay debts. Much hinges on a reputation of creditworthiness. If the debt volume is very large, then whatever you do qua fiscal policy or monetary policy may not make much difference in the end. A whole generation has been educated with a "live now, pay later" mentality, and insofar as they cannot "pay now" anyway, they will inevitably adopt that mentality even just to survive, which means they will borrow in all kinds of ways which are not necessarily responsible. That in turn in itself makes market crashes inevitable sooner or later, and it is conducive to criminalization.

Insofar as the rich become very rich, it becomes difficult to oversee and control all that wealth - the chasm between ownership, control and responsibility for assets widens ever more, making "private ownership" often more a legal fiction, and giving rise to concepts of "governance" of resources by "stake holders". Insofar as central control is possible, however, it means that the allocation of huge resources depends on the ideosyncratic whims of particular people who may make their placements for all kinds of reasons, which do not necessarily have anything much to do with economic rationality, but much more with ideological or cultural predelections. Whether tens of thousands of people will be hired or fired, can depend on the perceptions of a handful of people who hold the purse strings. That also generates uncertainty. One fraudster who robs the Societe Generale is merely the tip of the iceberg.

Incorporating more people into the cash economy turns out to be as much a cultural problem as an economic problem, since it depends to a large extent on social behaviour with regard to property rights, financial habits etc. To expand the market, you cannot very well extend credit to people who have no collateral, and cannot be relied upon to pay it back. If, in addition, these people have all sorts of traditional customs and habits with regard to acquiring and disposing of assets external to the cash economy, it may be difficult to get them to cooperate with the cash economy, because they have no vested interest in it. In his forthcoming book, Marcel van der Linden cites Peter Bauer as saying "Market-oriented economists and advocates of extensive state economic control are agreed on one matter, namely that advance from subsistence production to wider exchange is indispensable for a society's escape from extreme poverty." But, he argues, this may appear somewhat cynical in the light of the facts, since "where means of subsistence disappear without replacement by robust social insurance provisions, the likelihood of extreme poverty increases, rather than decreases. The great reluctance which small farmers and wage workers have shown in the past to abandon their own subsistence production is therefore entirely understandable." Marxists, like free-marketeers, have traditionally despised the "craft idiocy" of subsistence production, but if the choice is between producing your own stuff and economic destitution, subsistence production is a much preferable alternative. Yet it does not follow a market logic.

Grant-giving was recently popularised by Bill Clinton, but also for example Jeffrey Sachs recommends providing the poor in Africa with tools and implements, rather than cash. But such a philantrophic or charitable atititude is not majority opinion among the bourgeoisie, who feel that "throwing more resources at the problem will not solve it" and anyway state resources are not unlimited. You cannot cut taxes and spend more in the long term. In part, this has some rationality, insofar as if you are poor, you are more likely to grab what you can get, and maybe use it without the best of bourgeois morals. Influencing people's morals appears to be the most difficult, intractable problem of all, particularly if you tell people that their life depends only on their own free choices. But overall, the amount of aid given has strongly declined anyway, in favour of "more market" reforms which often make poor people poorer than they were before, since they do not have the cash to buy things which they previously obtained by non-market methods. It is virtually meaningless to say that a billion people now live on $2 a day instead of $1 dollar a day, because it says nothing about their total quality of life.

As regards countertrade and barter, it happens all the time, but it is not necessarily conducive to promoting a cash economy. Among other things, the largest single item in countertrade consists of weaponry, and countertrade occurs mainly between states. The most famous example of countertrade, the Iraq "oil for food" programme, went disastrously wrong and turned out to be a hotbed of corruption.

Socioeconomic inequality can increase almost endlessly, to the point where some people are looked upon as subhuman and others as superhuman, and insofar as markets favour the strong against the weak, they exascerbate inquality. That was the original insight of social democracy, which therefore sought to mitigate poverty with state expenditure. But the reduction of welfare spending means a reduction of social democracy. At a certain point, however the inequality becomes counterproductive, because large masses of people become disintegrated from society, and the "social fabric" is torn up, "social cohesion" is lost - above all, respect for private property relations in all forms is lost. That is really the source of much social anxiety in our times, especially since modern digital technologies reduce the sphere of privacy. The downfall of neoliberalism is that ultimately more and more government restrictions on social behaviour become necessary, since people do not use their freedom with the morality required for efficient market functioning. Ultimately, you cannot convince people that they have more freedom, if in reality there are more and more restrictions on what they may and may not do. The advocacy of freedom is therefore crucially ambivalent, because it combines with the fear of freedom. Behind that fear is a class prejudice: only "responsible" people with money ought to have freedom, other cannot be trusted with it.



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