A Crumb in the Forest?

[oddlots]

With most of the issues grappled with here at our particular moment I have this sinking feeling that I'm like a ham-fisted detective, too dense to read the clues and end up just muddying the "crime scene" and ending up both despondent and panicked: the "culprit(s)" always just elude me.

- is it fiat?
- is it debt?
- is it fraud?
- is it FIRE?
- is it central banking as a notion or the Fed in particular?
- is it debt per-se that's the problem or is it the symptom of a system that simply must have nominal growth and therefore, puppet like, some sector will run headlong into debt
- is it the logic of dollar hegemony slowly working its magic with financialisation to produce a kind of monster child that no-one can deny is beautiful because they all had a hand in creating the love child?
- is it crony capitalism that could become un-crony capitalism or is crony capitalism the best outcome we could have given globalisation (hey, at least some westerners are benefitting?)
- is finacialisation serving globalisation or is it the other way around?
- is Keynsian stimulous (still) the only way to get out of a debt bubble (insufficient aggregate demand) when you have a negative return on stimulous in terms of demand as appears to be the case? (That really seems a new blind alley.)

And on and on...

I suspect that we could all come up with a similar list of fundamental questions that somehow seem just as opaque now as they did say 5 years ago (or at least I flatter myself that everyone's as confused as I am.)

Hell, after reading Mosler's piece that I referenced here I couldn't even articulate what "fiscal responsibility" in government would mean?

(I am not a good student in my middle age.)

For what it's worth, I thought the following essay actually struck at the root of some of this. Or at least voiced the suspicion that there's something behind the bug-bears that I certainly fixate on (financial fraud for example) that might actually be more fundamental and challenging than the bug-bear itself.

http://www.nakedcapitalism.com/2012/...al-issues.html

Just to avoid confusion, here are the passages that struck home for me:

After a quick review of the great depression he comments:

What lessons should be taken from this? Quite simple ones. Democratic capitalism is a deeply dysfunctional, perhaps even suicidal system. In the good times capitalists and financiers gain ever more power to influence politicians and, after a brief retreat when crisis occurs, they continue to hold this influence when the deflationary pressures set in. Meanwhile, the policymakers convince themselves that the government budget is the same as a household budget – and in this are supported by numerous economists. This leads to a sort of ‘perfect storm’ situation where the budget deficit becomes the main issue of the day and all else is ignored, including the declining economy.

The business class, together with those elected officials who have become their representatives, feel threatened by any added government intervention. They see in it an attack on their own power. That may seem paradoxical in the case of government officials. Surely, after all, they would see their power increase with increased government intervention. In theory, yes; in practice, no. These officials are so enmeshed in the web of business and moneymaking that any increase in government intervention would appear to them threatening. This is not dissimilar to a journalist embedded with troops in a warzone. Because they become so dependent on the troops for their livelihood they tend to lose all distance from what is going on around them and become one of the gang, as it were. Ditto for the politicians.

Polish economist Michal Kalecki as the Dimitri Orlov of the (post) depression era?:

The great Polish economist Michal Kalecki noticed this dynamic early on and rightly predicted that it would have enormous consequences for any mixed economy. In his classic paper The Political

Consequences of Full Employment

he wrote:

There are, however, even more direct indications that a first-class political issue is at stake here. In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question.

Kalecki rightly noted that deficit-financed spending was in the interest of the business class. Especially in a depression, when output and hence profits were so low, it is only the government that can return capitalism to prosperity – and yet, capitalists are remarkably hostile to such action, preferring to wallow in a stagnant economy rather than accept assistance. From an economic perspective – which assumes that businessmen care about profits above all else – this makes little sense. But to Kalecki’s mind it was perfectly logical.
First he notes how this aversion manifests itself – today’s reader will be impressed to know that Kalecki was writing in 1943.

Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. 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). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Kalecki moves from this highly illogical position to more reasonable ideas that might circulate around the business class:

The dislike of business leaders for a government spending policy grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidizing mass consumption.
The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (e.g. hospitals, schools, highways). Otherwise the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment.

And so Kalecki suggests that the business class may then favour directly subsidised consumption. But this proves not to be the case.

[S]ubsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ – unless you happen to have private means.

So much nonsense. But what lies behind it is anything but. Because Kalecki then goes on to argue that such intervention makes the business class wary that its power might be eroded. For one, a regime in which the government could hire people to alleviate unemployment threatens the businessman’s main disciplinary measure: the sack. This could well lead to an erosion of his social power.

Well, that's not very selective is it? But I actually think that Pilkington is doing some hard work here and - ultimately - it's worth reading the whole thing.

The point to me is that I think he's put some menace into the time-worn comparison's to the great depression and highlighted how potentially fractious these issues are. [And intractable: it is sooo familiar nooo?]

Just to give some emotion to what I'm saying, I recall watching as a kid some BBC documentary about the general strike in Britain in the 20s. I remember being really disturbed by the idea that young men from wealthy families felt compelled (in whatever number) to oppose the strike and take to the streets in apparent defense of public services. Frankly what struck me as both incomprehensible and frightening while I watched it - roughly early eighties I would guess - was the idea that some politics could actually penetrate so close to my age group and in such a recognizable city context (my extended family was in London and we went there every other year roughly.) The conflict was unresolved for me: which tribe would we have belonged to? Was it the right one?

[c1ue]

Re: A Crumb in the Forest?

I'd suggest you look at the Capital as Power post:

http://www.itulip.com/forums/showthr...l-accumulation

The wrinkle introduced there is the concept that Capital is not pidgeonholed as being either some necessary prerequisite of production, or some evil power attacking labor, or even just money/land/factories, but is the aggregated means to affect production in 2 different scenarios.

In the growth scenario, capital is aggregated and used to grow and increase market share of production.

In the mature or declining scenario, capital is aggregated and used to destroy and thus increase profitability of production.

This is a very interesting idea because if true, the fundamental behavior of capital is not governed by profit, but rather by control, and the means by which this control is used is different depending on the situation.

In the context of the present US economic situation, I think it is safe to say that the US is presently in a mature or declining stage.

If so, then capital's goal is to aggregate power in order to destroy productive capacity. This is precisely in opposition to what the millions of under- and un- employed require, as well as the overall financial health of the nation.

[davidstvz]

Re: A Crumb in the Forest?

In a mature industry, margins are likely razor thin. So in a down turn some companies are going to fail. Then you'll get mergers or bankruptcy which would naturally decrease total productive capacity. The behavior still looks like it's ultimately governed by profit seeking to me. Where does control come in to the picture except as a means of preservation (for the purpose of future profit)?

[Raz]

Re: A Crumb in the Forest?

[QUOTE=davidstvz;220227]In a mature industry, margins are likely razor thin. So in a down turn some companies are going to fail. Then you'll get mergers or bankruptcy which would naturally decrease total productive capacity. The behavior still looks like it's ultimately governed by profit seeking to me. Where does control come in to the picture except as a means of preservation (for the purpose of future profit)?[/QUOTE]

+1.

[oddlots]

Re: A Crumb in the Forest?

Very interesting piece Clue. I'm still ruminating on it but the dual nature of capital seems to map onto my lifetime experience and explains or perhaps just to some extent describes why job and apparently value destroying financial "bust outs" of businesses appear somehow almost "god's work." An example that comes to mind that is also noticeably in the "real" goods producing economy is that of Arcelor-Mittal. My understanding is that their strategy is to buy steel capacity really in order to shut it down and so raise the value of their own. How this somehow doesn't cause cries of monopoly is beyond me but I've certainly seen this analysis of their strategy in the business press without any sense of alarm or outrage, nationalist or otherwise.

Of course as E.J. has pointed out, the return to "pricing power" is one of the steps in the business cycle and at least a portion of the process described above could be called a rejuvenation of capital, especially after a debt-fueled build out and so might be viewed as somewhat benign (think Jim Grant's "value restoration project") but they - Nitzan and Bischler - obviously mean something beyond that.

In terms of re-assessing my own views the piece is a bit troubling. The analysis of, for instance, Steve Keen suggests that there's a benign form of capitalism that is gasping under the predations of finance and that this might be freed up again to do good work were we were to collectively better understand that credit creation is really a part of the commons or something like that... The piece above kind of darkly suggests that we are all lashed to the mast of a ship that's passed through the sunniest climes and is heading into a storm.

[oddlots]

Re: A Crumb in the Forest?

Or here's another example that's always stuck with me that suggests that there's something else going on with much of finance than actually adding value, the normal assumption:

"We try harder, but what's the point?

SEATTLE — In 1946, Warren E. Avis (who died last month at the age of 92) had an idea: Rental cars should be available at airports. So he founded Avis Airlines Rent-a-Car. In 1954, he sold the company to another businessman, Richard Robie. Two years later, in 1956, Robie sold Avis to an investment group led by a company called Amoskeag. In 1962, the investment banking firm Lazard Frères bought Avis. In 1965, Lazard sold Avis to the giant conglomerate ITT Corporation.
In 1972, ITT spun off Avis as a publicly traded company. Then, in 1977, the company was bought by another giant conglomerate, Norton Simon. In 1983, a company called Esmark (formerly Swift & Co.) bought Norton Simon. In 1984, Esmark was bought by Beatrice Foods, and in 1986, Beatrice was bought by the leveraged buyout firm Kohlberg Kravis Roberts & Company.
Kohlberg Kravis Roberts immediately sold Avis to an investment group called Wesray. Wesray sold Avis's fleet leasing business to a company called PHH Group. Then it spun off Avis's foreign operations and took them public as a company called Avis Europe P.L.C.
And then, in 1987, Wesray sold Avis to its employees under an employee stock ownership program. Wesray more than tripled its money in 14 months.
Two years after the stock ownership deal, the company sold General Motors a complicated security that effectively gave it a 26 percent stake in Avis. Apart from that, Avis's employee ownership experiment lasted nine years, until 1996, when Avis sold itself to a company called HFS. Employees got an average of $26,000 each. Eighty or 90 current and former Avis executives got an average of $1.75 million each.
A year later, in 1997, HFS took Avis public. (The initial public offering raised just over $330 million. The banker Bear Stearns charged $15 million for its services.) In 1999, Avis bought PHH. Remember PHH? That was the company Avis sold its fleet leasing operation to in 1987. PHH was owned by Cendant, a company that had been formed in 1997 by the merger of HFS - right, the company that had spun off Avis in 1997 - and another company called CUC. HFS had retained 19 percent of the company's stock when it took Avis public. With the stock portion of Avis's purchase price for PHH, Cendant now owned 34 percent of Avis.
A couple of years later, Cendant bought the roughly two-thirds of Avis that it didn't already own and made Avis a wholly owned subsidiary.
In 2006, Cendant split itself into four independent companies, one of which was the Avis Budget Group. (Somewhere along the line, Cendant had also acquired Budget Rent a Car.) The Avis Budget Group became the parent company of Avis Budget Car Rental.
Since 1946, Avis has been sold or reorganized 17 or 18 times, depending on how you count. Each time Avis changed hands or structure, there have been fees for bankers and fees for lawyers, bonuses for the top executives and theories about why this was exactly what the company needed.
Modern capitalism has two parts: there's business, and there's finance. Business is renting you a car at the airport. Finance is something else. More and more of the news labeled "business" these days is actually about finance, and much of it is mystifying.
Even if you can understand - just barely - how it works, you still wonder what the point is and why people who do it need to get paid so much. And you strongly suspect that the swirl of financial activity around Avis for the past six decades has had little or nothing to do with the business of renting cars.
Last September, a week after the Avis Budget Group began trading on the New York Stock Exchange, The Wall Street Journal reported that the new company was "ripe for the picking." Carl Icahn, another wily financier from the 1980s, had acquired a $100 million stake in the company and would not comment about his intentions.
The Journal warned, "If a buyout or acquisition deal doesn't materialize for Avis, stock and bond investors will have to focus on the fundamentals of its car-rental business." Goodness! Anything but that!
http://www.nytimes.com/2007/05/16/op...1.5734421.html

[c1ue]

Re: A Crumb in the Forest?

In a mature industry, margins are likely razor thin. So in a down turn some companies are going to fail. Then you'll get mergers or bankruptcy which would naturally decrease total productive capacity. The behavior still looks like it's ultimately governed by profit seeking to me. Where does control come in to the picture except as a means of preservation (for the purpose of future profit)?

What you are describing is supposed to be a result of impartial market forces at work.

What Capital as Power in the declining stage is describing isn't a question of profitability or impartiality - even if very profitable, aggregated power would be expected to destroy even more production in order to keep increasing profitability.

When taken to its ultimate extent, aggregated capital becomes monopoly at which point the amount of production is predicated on the maximum profitability - i.e. what the market can possibly bear - as opposed to how much you can sell unit wise.

This is an important distinction.

An example would be: even if two companies equally shared a dominance in a market, the benefits of either outright collusion or consolidation are far greater than the aggregate profit of the existing situation. Capital in this instance would seek to aggregate the 2 companies in order to maximize profit specifically via the mechanism of destroying production.

Each time Avis changed hands or structure, there have been fees for bankers and fees for lawyers, bonuses for the top executives and theories about why this was exactly what the company needed.

Modern capitalism has two parts: there's business, and there's finance. Business is renting you a car at the airport. Finance is something else. More and more of the news labeled "business" these days is actually about finance, and much of it is mystifying.

It seems the last sentence above is explained by the first sentence quoted.