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What the current crisis teaches us about capitalism or Why I'm not a libertarian
Jason
God EmperorArrakis Moderator
(A review of past thoughts on the economic crisis one year later.)
From my perspective, the current economic crisis reinforces the idea that, barring a revolutionary economic transformation, capitalism needs to be regulated in order to prevent, or at the very least limit, the exploitation of labour, the negative effects of externalities and, of course, economic crises. The current financial crisis itself could've been avoided, and, using them as an example, so could AIG's near failure.
It's rather complicated to explain exactly what happened with AIG, but the bottom line is that AIG's financial sector was paid by investment companies to back up securities that were in turn backed by pieces of mortgages. AIG effectively promised to make up the difference if the investments failed. So where did they go wrong?
It seems that AIG, thanks in part to Gary Gorton, the finance professor who designed AIG's risk models, figured that being paid to take on these risks was "free money" because they never thought they'd have to make any payments to cover actual defaults. What they apparently didn't take into consideration, however, was the potential write-downs or collateral payments to trading partners (How AIG Failed). But specific regulations dealing with these securities and mortgage default swaps could've possibly prevented all of this. This is where both the company and the government failed.
David Swensen, the person who's credited with creating derivatives or "swaps," eventually paved the way for an entire industry to be built around creating and trading derivatives based on mortgage payments of homeowners (Inventor of the "Swap" blames regulators for Financial Crisis). In the case of AIG, they basically insured these mortgage-backed securities. But the government was seemingly reluctant to regulate these derivatives and the industries that had developed around them, and traders eventually abused them to the point of financial collapse. Part of this was due to the perceived benefit of these swaps by people like former Fed Chairman Alan Greenspan. As Bob Moon notes, "... he called credit default swaps "probably the most important instrument in finance," because they were supposed to spread risk around and stabilize the market" (Banks deep into unregulated 'gambling').
The sad fact is that stricter regulations and oversight on the part of the government, plus more transparency and less greed on the part of financial institutions, could've prevented much of this from happening, including what happened with AIG. Swensen himself says that he supports "requiring swaps and other derivatives to be traded openly on an exchange" since it'd reduce the risk, but surprisingly, this very proposal was "torpedoed by both the Clinton and Bush administrations." Why? Swenson theorizes that, "Financial institutions that deal in these things have resisted that because it would make the market more transparent and less profitable" (Inventor of the "Swap" blames regulators for Financial Crisis).
That's why I'm convinced that, at the very least, the U.S. must adopt an economic model similar to those that have taken shape in Europe — with a mixture of capitalist and socialist aspects — out of sheer pragmatism.
For example, in a broader context, I've found some of Karl Kautsky's concerns regarding the drawbacks and weak points of the capitalist system amazingly prescient, especially in regard to commerce and credit, although the fact that he was decidedly biased against it seems to have blinded him to the potential ability of future generations to solve some of these problems. Nevertheless, I've found many his arguments against the capitalist method of production to be rather strong, even eye-opening.
The beginning of chapter three of Kautsky's The Class Struggle, for example, provides a simple yet excellent overview of the main causes contributing to the current world-wide economic crisis. In regard to credit, he notes that, "Credit is ... much more sensitive than commerce to any disturbance. Every shock it receives is felt throughout the economic organization" (47). Besides making a strong argument for why this type of system makes it increasingly more difficult for small production (e.g., small farmers, small business owners, etc.) to succeed, he stresses that this credit based system ultimately renders modern industry "more and more complicated and liable to disturbance, to carry the feeling of uncertainty into the ranks of the capitalists themselves and to make the ground upon which they move ever more uncertain" (48).
But the type of careful direction that is needed to insure the uninterrupted operation of this modern system of production is hindered by the very institution of private property on which it is founded. As Kautsky summarizes: "While the several industries become, in point of fact, more and more dependent upon one another, in point of law, they remain wholly independent. The means of production in every single industry are private property; their owner can do with them as he pleases" (50-1).
So for these reasons, among others, it's apparent to me that to be able to effectively manage a world-wide, credit based economy, a certain amount of outside interference is unavoidable because without a certain amount of intervention, whether in the form of stricter regulations and oversight or outright nationalization, the market system is extremely vulnerable to abuse, disruption, etc.
From my perspective, the current economic crisis reinforces the idea that, barring a revolutionary economic transformation, capitalism needs to be regulated in order to prevent, or at the very least limit, the exploitation of labour, the negative effects of externalities and, of course, economic crises. The current financial crisis itself could've been avoided, and, using them as an example, so could AIG's near failure.
It's rather complicated to explain exactly what happened with AIG, but the bottom line is that AIG's financial sector was paid by investment companies to back up securities that were in turn backed by pieces of mortgages. AIG effectively promised to make up the difference if the investments failed. So where did they go wrong?
It seems that AIG, thanks in part to Gary Gorton, the finance professor who designed AIG's risk models, figured that being paid to take on these risks was "free money" because they never thought they'd have to make any payments to cover actual defaults. What they apparently didn't take into consideration, however, was the potential write-downs or collateral payments to trading partners (How AIG Failed). But specific regulations dealing with these securities and mortgage default swaps could've possibly prevented all of this. This is where both the company and the government failed.
David Swensen, the person who's credited with creating derivatives or "swaps," eventually paved the way for an entire industry to be built around creating and trading derivatives based on mortgage payments of homeowners (Inventor of the "Swap" blames regulators for Financial Crisis). In the case of AIG, they basically insured these mortgage-backed securities. But the government was seemingly reluctant to regulate these derivatives and the industries that had developed around them, and traders eventually abused them to the point of financial collapse. Part of this was due to the perceived benefit of these swaps by people like former Fed Chairman Alan Greenspan. As Bob Moon notes, "... he called credit default swaps "probably the most important instrument in finance," because they were supposed to spread risk around and stabilize the market" (Banks deep into unregulated 'gambling').
The sad fact is that stricter regulations and oversight on the part of the government, plus more transparency and less greed on the part of financial institutions, could've prevented much of this from happening, including what happened with AIG. Swensen himself says that he supports "requiring swaps and other derivatives to be traded openly on an exchange" since it'd reduce the risk, but surprisingly, this very proposal was "torpedoed by both the Clinton and Bush administrations." Why? Swenson theorizes that, "Financial institutions that deal in these things have resisted that because it would make the market more transparent and less profitable" (Inventor of the "Swap" blames regulators for Financial Crisis).
That's why I'm convinced that, at the very least, the U.S. must adopt an economic model similar to those that have taken shape in Europe — with a mixture of capitalist and socialist aspects — out of sheer pragmatism.
For example, in a broader context, I've found some of Karl Kautsky's concerns regarding the drawbacks and weak points of the capitalist system amazingly prescient, especially in regard to commerce and credit, although the fact that he was decidedly biased against it seems to have blinded him to the potential ability of future generations to solve some of these problems. Nevertheless, I've found many his arguments against the capitalist method of production to be rather strong, even eye-opening.
The beginning of chapter three of Kautsky's The Class Struggle, for example, provides a simple yet excellent overview of the main causes contributing to the current world-wide economic crisis. In regard to credit, he notes that, "Credit is ... much more sensitive than commerce to any disturbance. Every shock it receives is felt throughout the economic organization" (47). Besides making a strong argument for why this type of system makes it increasingly more difficult for small production (e.g., small farmers, small business owners, etc.) to succeed, he stresses that this credit based system ultimately renders modern industry "more and more complicated and liable to disturbance, to carry the feeling of uncertainty into the ranks of the capitalists themselves and to make the ground upon which they move ever more uncertain" (48).
But the type of careful direction that is needed to insure the uninterrupted operation of this modern system of production is hindered by the very institution of private property on which it is founded. As Kautsky summarizes: "While the several industries become, in point of fact, more and more dependent upon one another, in point of law, they remain wholly independent. The means of production in every single industry are private property; their owner can do with them as he pleases" (50-1).
So for these reasons, among others, it's apparent to me that to be able to effectively manage a world-wide, credit based economy, a certain amount of outside interference is unavoidable because without a certain amount of intervention, whether in the form of stricter regulations and oversight or outright nationalization, the market system is extremely vulnerable to abuse, disruption, etc.
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Comments
1. Money is a lie.
Once upon a time the paper we carried around in our purses and wallets represented gold, silver and copper that was held in the Federal Reserve and guarneteed so that the paper we consider so valuble was backed by something that insured this was indeed the case. But the paper we call "money" only has value because we say it does...ultimately money is meaningless ink on paper that has "no value but the name" quoth the Bard.
2. Capitalism needs cheap labor to function.
As long as people are willing to see no connection between cheap items and the virtual slaves that must make them for nearly non-existant wages, capitalism will always be a morally bankrupt enterprise that at the very least is a beast which cannot ever be fed to the point of satiation (sounds like Dukkha to me). The factories in China, Bangladesh, Mexico, and dozens of other countries are slave pits as horrible as anything imagined by Charles Dickens...and this is where all the cheap stuff we get from Wal-Mart, Target, K-Mart, Big Lots, Sears, JC Penny, and countless other retailers comes from.
Oh I'm more than willing to address the exploitation of labour.
Greetings to you, too, Validus! It's always nice to see a new and pleasant face.
Firstoff, I must admit I've never read Karl Kautsky. That said, I do agree with what I've understood him to mean. Obviously, the role of cash on hand isn't what it was a hundred years ago and is likely to diminish further. The Two Big Players now have to be the "Owners" and the Government.
The former "owners" of the capitalist systems must erelong let go of their Squiredoms and become caretakers. (Here I speak of the super-rich dynasties and the banks and huge corporations.) The world cannot much longer bear to be broken into groups of "Owners" and "non-owners." A democratization of economic affairs must pass in which the medieval squire's prerogatives will not outweigh the interests of his village, even to its detriment and demise. In future, surely, no Heir will be able to claim all that was held in private trust a generation or two before him as his unique possession.
It seems that industry doth indeed need government to intervene more proactively than ever with banks and financiers. The articles that you provide links for, Jason, scare me. Stephen Mihm in The Boston Globe and the editorial in the S F Gate speak of a certain temerity to do anything about these matters right now. Such timidity or reluctance would truly be unfounded. I don't understand. Most people I know have had up to two-thirds of their retirement funds wiped out and up.
The principal function of government is to protect life and property, and by so doing to establish justice and concord in the land. I don't think that objective is being weighed with all due urgency here.
We need a system in place that guarantees you'll not be bankrupted because you broke your arm, and that you have a decent job that pays the bills. I'll take that hard left turn now.
Good to hear from you, by the way.
Same here.
...or dead.:nonono:
Palzang
I lived in Boonville, Missouri for 4 years once...I'd say that's worse.:D
Palzang
What could be worse then being in both samsara and Missouri?
Palzang
In Australia, we have always done fine regarding 'capitalism'. The government has always regulated the system and there has always been plenty to go round (until recently, as imbalance has slowly crept into the system over the last 20 years).
Money is fine. It is neutral as long as it is a measure of economic output and the tangible goods and services exchanged. The gold standard and such are not necessary. How silly. Gold and silver do not represent genuine economic activity.
For example, how can gold represent the trade between the USA and China. Where would we find all the gold?
The American problem is that of borrowing & printing money, especially for foreign exchange. I heard a plausable theory (not sure of the facts) that the USA was required to invade Iraq because Saddam Hussein was going to trade Iraqi oil in Euros. As such, the USA would not be able to merely print money to buy oil. They would have to actually trade with Europe to obtain FX.
These problems are American problems, where folks are used to living beyond their means in rampant excess, through printing and borrowing money.
American debt = $X trillion.
Chinese savings and debtors = $Y trillion.
The alternative is communism, which history has shown stunts human initiative. Where there is no individual initiative, there is little progress towards enlightenment.
I am not saying there is an easy solution. I hear where you are coming from.
Indeed. The current economic disaster arose from an underregulated and unfair economic system.
It appears as a civilisation, the USA has peaked and a little 'shrinkage' is the inevitable path.
Kind regards
DDhatu
Government regulation is fine. As I said, Australia is fine.
I have heard American advocates of total free markets (eg. Peter Schiff), who blame govt for the current crisis.
Govt corruption rather than govt per se is probably the cause of the current crisis.
Genuine govt supervision works fine.
My impression of the little I have seen of American govt is it is each man for himself or his vested interest.
For example, in Australia we have two political parties which stick to a party agenda whereas in the USA, I notice each individual senator or congressman pushing their own individual cause (with no party consensus).
It seems strange and disorderly to me.
I wonder if capitalism (a modern economic system which did not exist in the Buddha's time) can be called harmless. Both ant and bee are part of a strictly hierarchical structure far closer to feudalism. As has been noted, until the 19th century, chattel slavery was the basis for the wealth of the few. It is the progressive abolition of slavery, despite attempts to replace it in the capitalist system by wage slavery, that convinces me that human society is capable of improvement.
I find it worrying that we appear to have forgotten the disastrous effect of the Western defeat in Vietnam: stagflation, unemployment, depression. We appear to be condemned, having forgotten this, to repeat it.
When I grew up in Australia in the 1970's, there was not a community feeling of deficiency and everything we required we had. We were taught at school 'egalitarianism' defines the Australian culture.
This changed markedly during the 1990's, with 'greed is good' and the 'haves and have nots'.
Thus, human society is indeed capable of improvement.
US society evolved from masters who practised slavery whereas Australian society evolved from the slaves or convincts themselves who shunted excess.
Indeed. Iraq and Afganistan have caused economic disaster for the USA. Trouble with Iran will likely be the end for the USA (just like Britain was bankrupt after WWII).
Societies' 'myths of origin' have always fascinated me. Australia and Israel are, as far as I can see, exceptions to the norm which looks to heroic figures as forebears, whether demi-gods or actual deities - and I include the sanctified 'Founding Fathers' of the USA. Israel prides itself on a slave origin in Egypt and Australia claims its beginnings as Britain's 19th century gulag.
I'm not sure what percentage of Australia's population is actually descended from convicts - smaller and smaller, I imagine, with all the 20th century immigration. But then, of course, the same situation exists in the US with descendants of the 'Pilgrims' and in the UK with Norman families.
I should come out and first say that I am a libertarian.
At any rate, we haven't had anything resembling capitalism or free markets. The current crisis was caused, as all economic downturns are, by a central planner, be it a government or central bank, manipulating interest rates. When interest rates are kept artificially low this sends false signals to entrepreneurs and leads to malinvestment. When the market seeks to correct these imbalances that is the recession, and the recession is necessary to reallocate resources to where they're genuinely required. On a free market interest rates would go down as savings go up, and interest rates would go up as savings went down. That is the type of system we need. But that won't happen as long as government bails out those who need to fail, and allows the banks to continue their policy of fractional reserve banking which is nothing more than fraud.
But libertarianism will always be used that way, because it's a utopian ideal which is impossible to fully achieve, and any partial achievement of it is ipso facto unstable.
Palzang
I'm afraid that's absolutely incorrect. There were no libertarians in any position of power to add to the crisis. I'm afraid you need to look at the progressives and neoconservatives that have been in power over the last 100 years for the corruption in government. Also, the Federal Reserve, which is the institution responsible for the crisis, is an anti-libertarian institution.
No, the market is capable of regulating itself. The only role government should be playing in the market is enforcing contracts and prosecuting fraud.
Right, monopolies and cartels could never form in a free market; free markets prevent excessive pollution and negative externalities (just like in Somalia where companies are free to dump their toxic waste); and a free market is never prone to abuse and corruption because it "regulates itself" as if by magic! Just look at how well the market regulates itself when it comes to bluefin tuna in the Mediterranean.
According to libertarians, the decreasing supply of tuna will make it more expensive for consumers, who will buy less, thereby singling the fishing industry to catch less. It's great in theory until you realize that the price single doesn't work because people with money who want tuna will still pay for it at the higher market prices, which means higher profits for the fishers, etc.
In the end, the elevated prices offset any potential decline in demand, and the people who make a living off of catching fish won't just stop fishing while there's still a profit to be made (even more so when their catch is worth more), which, if left unchecked, will eventually result in a "tragedy of the commons."
Monopolies don't form on the free market. Monopolies are a product of government policies. People dump their toxic waste in Somalia in non-private owned property because it doesn't matter. When there is enforceable private property then there is no incentive to dump toxic waste, otherwise you suffer the consequences.
Here's an article that exposes the "tragedy of the commons" and even uses a fish example.
http://www.lewrockwell.com/alston/alston57.1.html
Ah, the No true Scotsman fallacy. I try using this argument all the time when it comes to socialism, but it doesn't work for me either.
All economic systems sound great in theory, but we somehow manage to fuck them up regardless. Free market capitalism is no different in this regard than communism.
You make a lot of good points, Kevin, but I'm afraid that I don't see how an unrestricted market is going to solve all our economic troubles. In fact, I can see how they could potentially make them worse. The idea that some invisible market force will skillfully guide our greed into a utopia is just as bad as the idea that some central authority will do the same.
As an argument, it is both unanswerable and annoying! It's a favourite of the canting section of atheism which loudly defines God for the believers and then 'proves' its/his/her/their non-existence. Or else, here less than elsewhere, we get the "you're not a real Buddhist" argument.
I think this rather weakens your points, Kevin. The truth is, surely, that there cannot be a single causa for the crisis, any more than there can be for a war, even if there is an identifiable casus. There is an inbuilt complcation to all that is which moves inevitably towards impermanence and change. Some have seen this as 'entropy', an unstoppable movement towards heat-death and stasis. Teilhard de Chardin sees it as a salvific journey towards the Omega Point. Both views, pessimistic and optimistic, acknowledge the reality of "change and decay in all around I see".
A bare knowledge of history shows us that collapse is built into every socio-economic system. In each case, since the regular pre-industrial recessions of the Egyptian and Roman Empires have been ascribed to many different causes. None seems to me convincing when they centre on systems or ideologies. The true causes are to be found in the interaction between human beings and the world around them. Every economic collapse, as far as I can see, has accompanied ecological danger, on a principle of "as above, so below" (cf. A Midsummer Night's Dream) and is associated with greed, grasping and growing inequalities within society. By blaming systems (feudal, free market, Pharaonic, Republican, neo-con, Puritan, Catholic, e tutti quanti) we can excuse ourselves and our individual responsibility one to another and, all together, to the world we inhabit.
Nor is it coincidental that this crisis occurs while we are at war. Economy is not simply about money, it is, essentially, a socio-psychological myth structure entirely dependent on general acceptance of the metaphoric as reality, a suit of new clothes for the Emperor. We are surprised every time we glimpse the nakedness of the Emperor and rush back to our comforting denial as quickly as possible, inventing new 'explanations' which clarify nothing.
For those who like Adam Smith and his "invisible hand of the market", perhaps it would be good to contemplate that, like Baron Frankenstein, he invented a monster and now we are all being strangled by it.
It is time for us peasants to grab the flaming torches and pitchforks to storm the castle.
Palzang
We as a people may not be able to eliminate samsara, but we could eliminate the business cycle if we stopped manipulating interest rates and inflating the currency.
Palzang
I disagree. The plans matter very much. If the plan is to give the government more control over the economy then that's not going to help anything at all.
Yep.
That reminds me of a passage Tolstoy wrote in his letter, "To the Working People":
To paraphrase: Каждый думает изменить мир, но никто не думает изменить себя (Everyone thinks to change the world, but nobody thinks to change themselves).
You are half right. One half of the most recent crisis was due to excessive borrowing because of super-low interest rates. However, I think the other half, probably more than half, was caused by greed. The greed was on behalf of the people that created CDOs/CDSs, etc. It was also on the hands of every lender that wrote a loan to somebody underqualified, or to anyone who wrote a variable-rate loan.
The Federal Reserve manipulates interest rates in an attempt to smooth out business cycles, not create them. Saying otherwise sounds like a conspiracy theory to me...
brian
How well has that worked out for us so far? The two worst recessions in the history of the U.S. happened on the Fed's watch. But if you look at all the recessions in our history, you'll see that they were preceded by inflation, cheap credit, and manipulation of interest rates. And this is not a conspiracy theory, Friedrich von Hayek won the Nobel Prize in economics for his work on Austrian business cycle theory, that his mentor Ludwig von Mises first put forth.
I don't know what the solution to this is. The libertarian solution is certainly simplistic. The only way to avoid this abuse, that I can see, would be for most people to start looking beyond their noses, participating in civil society, and demanding transparency and accountability for the people who are given these powers. I just can't see how that's going to happen in the US, though.