The first observation about the riots is that they’re a failure of government. Any government whose people revolt has failed in some way. It hasn’t failed totally or everywhere but it is responsible for a failure – a significant one in this case. The first thing that Cameron has to do is bow down to Britain and admit failure. That’s true from any political perspective. Whether you’re a fluffy nurturing liberal or a tough personal responsibility conservative, Cameron’s government has failed to govern effectively.
Calling the looters criminals is self-serving hypocrisy to avoid admitting failure. All kinds of people commit crimes, but the category “criminal” is rarely helpful for the purpose of explanation. A “criminal” is someone who has freedom of choice and chooses to do something harmful for self-serving reasons. Say Bernie Maddoff, he was a “criminal”. A madman, terrorist, or rioter cannot be explained away as a “criminal”. You may wish to treat them harshly, but you have to ask further questions if you want to explain their behaviour. You should ask these questions so that you can reach and stop other people who may be on the same path. We don’t analyse “criminals” because we’ve accepted that greed, materialism, and selfishness are normal – we just expect people to control them. We do analyse abusers, extremists, and rioters because there may be something useful society could do to change their motives.
To dismiss rioters as “criminals” is to assume that their motivation has been to acquire trainers or PlayStations without paying, and that there has been a remarkably unlikely concentration of these “criminals” in poor UK suburbs over a particular week. Or else it is to assume that the anger, or whatever, they were feeling is normal, that it’s normal they would want to burn stores and break things, but they should just control themselves like normal people. These are not helpful explanations, so let’s please not call them criminals.
So, after admitting and apologising for failure, Cameron needs to start failing less. Then the question opens, what kind of failure was this?
In any closed economy, be it people in a village or countries on the planet, there will always be trade imbalances. For any number of reasons, some people will be more productive than others. Let’s say in one place it rains a lot and that makes people boring and hard-working. In another place it’s sunny and the inhabitants are lazy. The boring people manage to make twice as much stuff each month than the lazy ones. What happens when they try to trade? There are two main options:
They trade at fair prices and even balance (no borrowing). That’s stable and arguably fair, but overall trade is limited by how much the lazy people can produce. Even though the boring people could produce more to sell, the lazy ones can’t produce enough to afford it.
They trade at skewed prices. Everyone produces as much as they can. The boring people essentially barter their suff with the lazy people, so there’s a net transfer of value from boring-land to lazy-land while the money balance stays even.
These are the two overall options. For the first option, which we’l call “fiscally responsible” there are two variants:
Here’s an update as to what is happening with Greece. First, some numbers from the 2011 Greek budget:
Total revenue: €128 billion
Real revenues from taxes etc. €55 billion
Aid from the EU €3 billion
Borrowing from the market, including rollover €70 billion
Total expenses: €128 billion
Real expenses such as pensions, health etc. €63 billion
Debt rollover and interest payments €65 billion
And another pair of interesting numbers
Interest rate charged by the market for German bonds, 2 year maturity: 2%
And for Greek bonds: Around 25%, rising
So, what does all this mean?
Real deficit
In summary the Greek state is like a business that takes in €55 bn in sales but pays €63 bn in salaries and what have you, so it makes a real loss of €8 bn, or 14%. To recover, the state needs to increase revenue by extracting more taxes or running profitable businesses, or it must cut the amount that it pays to the Greek people, or some combination thereof. If it doesn’t the Greek state will run bankrupt anyway, abruptly cut expenses to €55 bn, and go on living in a hand-to-mouth way.
I’m not happy with this post. I tried to mix some rather speculative economic thinking with an attempt to explain to a wide audience, and it doesn’t work. I’ll rewrite it as geeky economic article.
The asset bubble that started in the late 1990s and exploded in 2007 as the financial crisis was caused, in my opinion, by our monetary system. In particular, the following cycle took place:
The general public in western, mainly Anglo-Saxon, economies started using real estate as hard money, profiting from its parasitic appreciation linked to GDP growth. The real economy deflated against housing.
Banks issued new money backed by the rising real estate. This broke monetary policy by expanding the money supply first as intended but then beyond, as banks used securitized debt to evade regulation and recycle their license to create money and use it as their capital.
A positive feedback loop developed, where appreciating houses led to banks issuing more money, which led to inflation of money against housing. The market responded by raising house prices further, until both housing and housing-backed money crashed.
The system of money used by western economies, although no secret, is not widely understood by the public. I’ll explain how our monetary system works, how it caused the crisis, and how it ought to be reformed in principle. Obviously I have no tried and tested new system to propose, but I’ll try to articulate what new conditions it should meet.
Hard money and its parasitic appreciation on GDP
The traditional conception of money is as a fixed quantity, such as a ton of gold. It changes hands, and some people hoard it, but it doesn’t grow or shrink. That way the value of goods can settle against gold through the market. This “hard money” concept served well for most of history because the size of the real economy didn’t change much either. In a static economy, a gold coin buys a sack of wheat, say, now or in a hundred years. Using gold does nothing to erode inequality, but doesn’t amplify it either. Sitting on gold yields zero return, so any productive investment whose risk-adjusted real return is above zero beats that, and will probably get funded.
We’re in the third phase of the financial crisis that peaked in 2008. The events of 2007-2009, which are generally called “The Crisis”, were only phase two. The three phases are:
Phase One: Creation of false assets by private speculators, mostly banks and individuals who play the property market. These assets have a nominal value way in excess of their real earnings potential, and that gap is hidden.
Phase Two: Transfer of the deficit of those assets to state budgets under emergency conditions. Private insolvency becomes state liability, while the gap between nominal and real wealth remains open and is now visible.
Phase Three: Closing of the gap by a transfer of real funds from the public to states. This is achieved by means such as austerity, taxation, default, or inflation. These different options hurt or benefit different groups.
We’re in phase three, and the reason we have austerity in most of the West is that austerity is the method capital wants to see used to resolve the gap. Using austerity in this phase serves to consolidate the gains that speculators made in phase one, such that the whole cycle is a net transfer of funds from the general public to the speculators. Austerity is the “hard money” way to finish the cycle.
Using inflation (by printing money), taxation of capital gains, or controlled default would allow the gap to close by eroding rather than consolidating the false gains made in phase one. These options wouldn’t be clean but they would be fairer and less destructive of the real economy. These options are very unfriendly to capital, so they’re mostly absent from politics. The US Fed is using a small amount of inflation, presumably to reduce damage to the real economy, while the fabulously independent European Central Bank insists on a hard Euro and austerity. The ECB is working as intended, since the whole point of an independent central bank is to avoid stealth taxation of capital in situations like this. On the whole, current monetary policy is strongly in favor of wealth and against social cohesion or development.
Why WikiLeaks is important The WikiLeaks intelligence documents have started appearing in the papers. There’s no earth-shattering revelation, yet this disclosure to the public is extremely important because it brings to light our two alternative conceptions of democracy. In the classic idea of democracy, the one you learn at school and the one reflected in the structure of electoral institutions, participatory democracy is the ideal and representation is merely a device to make democracy practical at large scale. In classic democracy, the public is at all times the source of authority and arbiter of decisions. Openness is essential, and the role of the media is to keep the representatives in line with the wishes of the public. In classic democracy there is no question that the information recently released by WikiLeaks should be routinely open. While that might make the work of government at times inconvenient, this type of democracy is the safest and least oppressive form of government we have so far discovered.
The alternative view of democracy, now prevalent de facto, is the democracy of the management firm. The state is governed like a large public firm. Political parties are management consultancies bidding for contracts to run the firm for a number of years. Elections are the general meeting, where citizens vote one share but large investors (businesses) vote according to their share of the economy. The role of the media, if it’s not the firm’s own newsletter, is to carry advertising. In this kind of democracy, the management firm, once hired, is allowed and expected to work behind closed doors. Their performance is judged only by aggregates, such as economic growth. Citizens are certainly not routinely informed, and have no say unless some investor lobby (large business interest) feels that the management performs poorly and calls for an early general meeting. If that is the democracy we have, WikiLeaks is wholly irresponsible and out of place.
Which type of democracy do you think we should have?
I don’t believe this idea that a firm exists to maximize shareholder returns. If the entire economy was structured on that principle, the world would be dominated by exploitative, rent-seeking organizations even more than it is.
The reason for a firm to exist, primarily and sufficiently, is to produce goods and services that are needed or desirable in the world. There are several ways of judging and directing the firm according to this principle.
The market is a very good indicator of what the world needs or wants, especially when it comes to the detailed and diverse wishes of individuals. It’s not sufficient, and certainly not right by definition, because the market is prone to manipulation, irrationality, and social injustice making the difference between true wishes and buying power.
Critical opinion, commentary, or goodwill towards a firm and its activities. It’s no accident that quality consumer goods firms are held in higher regard than most banks.
An objective analysis of the firm’s product and activities with respect to life, well-being, human fulfillment, and the environment.
Policy. Companies need to be comissioned to create large-scale infrastructure where the market would yield lower-investment, higher use cost solutions
A second reason for a firm to exist is to provide comfortable and fulfilling employment to the people directly involved in the firm. Balance is the measure here. The firm is not a vehicle to get rich, nor is crushing, subsistence-level employment a goal.
The way that the state of Israel conducts itself would be perfectly reasonable, for the year 1910.
Israel was formed by people who shared enough of a language, culture, and religion to see themselves as a nation even though they were a diaspora, or an ethnic group living in imperial lands. They revived or manufactured a national ideal on dubious claims of historical continuity. They created their state through sheer determination and no small amount of treachery and underground support. They defended and grew their state against destruction using ardent, incontestable violence.
That’s how every other nation state in the old world came to be. Greece did exactly the same things in the 1820s, as did the Balkan countries. The nation states of Europe had formed in similarly violent ways, justified on similarly new and artificial national identities, only a century earlier. This behaviour was thought normal of nations until the 1920s. If Israel had been formed in the 1840s, say, and it was still extinguishing its Arab minority in 1910 by interning them and blockading their supplies, no-one would protest. That’s what nations did, back then.
Unfortunately the world’s experiments with ethically pure nation states are over. This idea burned with the houses of Dresden and Tokyo, and in two large explosions over Japan. By the time the war was over it was clear to all technically advanced societies that another round of tribal warfare between nation states would negate them, if not all life on the planet. In a world of six billion people, half of them commanding nuclear arms, the unfettered nation state is practically untenable.
Where’s the pressure on Thailand?
Thailand is a relatively modern developing country. It’s a coherent state, rather than a colonial mash-up of the type found in Africa or the Middle East, with a rich history and reasonably friendly to the West. There’s no indication that Thailand may be heading towards a different ideology, such as totalitarian communism or an islamic theocracy. Thailand is much more open and closer to the West than China. Why, then, do we sit idle while its government is using its army to shoot and kill protesters who are occupying the streets of central Bangkok asking for democracy? It’s a clear enough and understandable (to us) demand. The protesters feel that the ruling regime is illegitimate and want open elections whose outcome is honored. What could they ask for that’s more in line with our highest values, in the West, when it comes to governance? Why aren’t our governments sanctioning the Thai regime already? Why aren’t American and European leaders making it absolutely clear to the Thai elite that from our point of view their time is up, and they must accept a UN-run election if they want constructive engagement with the world?
The concept of a state that we’re carrying into the 21st century is out of date. We need to examine what a state is today and, to the extent that we need governance, what form a state should take in a globally connected world.
The state that we think we have, the nation state, has only had a short and brutish existence. European nation states took their present form in the 18th or 19th century. Before this there were other forms of governance — empires, city states, feudalism — with varying degrees of size, ethnic cohesion, strict or lax laws, open or closed borders, etc. The most striking difference though has been the relationship of people with government, ranging from equal partnership to open exploitation. The nation state brought three centuries of coercive policy making coupled with paternalistic welfare.
Today the nation state is in crisis, not so much because of open borders or because the clan wars that it caused threaten to tear the world apart, but because its social contract is in crisis. The modern state can neither enforce policy nor provide welfare with credibility, and we’re not collectively sure if it should. We need a clear model of the state and its role.
Where’s the $100 million a day fine?
BP makes about $250 billion in sales per year, of which $25-$35 billion is profit before tax. Currently it spends $10 million a day trying to contain the oil spill in the Gulf of Mexico. For some reason it’s not achieving very quick results. Obama said that they would “pay the price” but so far the price is at least an order of magnitude too low! If BP were fined $100 million a day, minus whatever they actually spend on containment of course, then you might see some action. That amount would wipe out the year’s profits if they did nothing at all to fix the spill for about a year, so it’s a very conservative number. Fines should be high enough to make BP consider options that seal the well permanently, forfeiting its value.
You may have heard that there were huge protests in Greece over the financial measures, basically pay cuts, that the government put in place to get its finances under control. A minority of the protesters were violent. Someone set fire to a bank, there were staff inside, and three people died.
This must seem like tragic madness to outsiders, and even to many who live in Greece. When societies fail, it’s easy to conclude that people are irrational, that therefore there’s no prospect for improvement, and that imposing a basic plan or order upon them might be a good idea. Let me try and allay these notions.
The core problem is that the Greek economy is unproductive in structure and ethos.
Greece will probably have to default against the debt market, if not now then later.
It would be better if the EU dealt with the issue instead, by taking over and restructuring some debt.
The EU should probably create a framework to deal with national solvency in a consolidated way.
Fortunately the Greek economy has poor coupling, and could be protected temporarily by price controls.
In the long run the solution is to make Greece more productive by fixing exactly that – creating high coupling of innovative firms with the international economy. The best way to do that is probably to create international economic zones, which work in English by Western rules.
I wrote this an for a while there was no example of the attitude that I advocate to security. Then the Norwegian massacre occurred and the Norwegian people responded by standing for more freedom, more openness, more democracy. That’s what I mean when I say that a society must strive for the minimum of security that it needs, not the maximum it can have.
Suppose that you’re a young member of a family – a fairly traditional family – and one day dad says: “You know, the world has become a really dangerous place. In order to keep you safe we have to install bullet-proof windows and 24-hour security”.
What do you make of that? Well, there are four explanations.
Dad is a hero. He’s a judge in a high-profile corruption case. You need the protection for noble reasons, and you need courage.
You live in a really rough neighbourhood and need the protection just because the family is well off, which is sad and cause for thought.
Dad has his priorities misplaced. Maybe he’s too afraid of other people, or maybe he needs to care for the family more in other ways.
Dad is a gangster. He knows just why there may be bricks or bullets coming through the window and, in order to continue being a gangster, he needs to arrange security.
If dad is your government, especially the government of the United States, I think the last explanation is most likely.
You’re in a gangster family. It may look cosy and civilized at home, and dad may be treating you and mom very well, but on another part of the neighborhood dad’s goons are breaking the arms of anyone who tries to develop in a socialist way (Vietnam), sell its oil to the wrong people (Iraq), or simply stand up and defy the racket (Serbia).
That may cause bricks, or even bullets, co come flying through the window. That’s why you need Homeland Security. The honorable TSA who protects you in good faith, and the high-tech scanner, are there so that dad can continue being a gangster while having a normal family life. Domestic security is a moral hazard.
I’m worried about the future. Not mine, since I’m almost 40 and have a kid so it’s pointless and selfish to worry about my future, but the near future of humanity. I feel the world will see some challenging decades ahead. The three big risks are:
The oil running out. As we run out of fossil fuels, we’ll see an “oil endgame” played out across the world. The seizure of Iraq by the US over the past two decades, as well as ongoing control over the Middle Eastern oil reserves, are mid-game steps along the way. As we get into the endgame, I expect there will be sharp imbalances of power between those that play the endgame well and those who lose out. Overall, I see the US as excessively focused on winning the endgame, as zero-sum, and would rather see a more cooperative plan to bring the world safely over to sustainable energy.
The top-heavy Western economies. One might title this the crisis of capitalism, but I think that would be inaccurate. The issue is not about the normative system of property that we use in the West but about the emergent distribution of ownership that has resulted over the years. It is top heavy. The major part of western economies is not primarily productive but is a superstructure that concentrates wealth. This doesn’t mean everyone in the superstructure is rich – they might be an ordinary bank clerk, but still fundamentally unproductive. The crisis is that the primarily productive layers are increasingly unable to support the passive consumption of this superstructure, or their occasional abuses such as the recent financial crisis.
Conflict between the West and Asia over property rights. China, India, Korea, and some other Asian economies already control the world’s means of production. These consist in productive capital, such as factories and industrial techniques, and the exploitable labor of their people. These economies, by being younger, are not as top-heavy as western ones. What prevents, say, China from selling their own Macs and iPhones is a system of intellectual and other property rights organized mainly by the US. I expect the Asian powers to challenge that, either by disobedience or more forcefully. Also, wars are started when a military power such as the US wants to take over an exploitable resource such as Chinese labor from the power that’s currently exploiting it.
So, the future will probably bring forced lifestyle changes, serious economic discomfort at least for us in the west, and possibly a kind of war. A global war may be too destructive to undertake (and I hope it is thus averted) but I think a more limited conflict such as the one that keeps the Middle East under US control may unfold in Asia, to the misery of billions of people.
My short advice to you is stop worrying about terrorism, healthcare, global warming, and other minimal threats and start worrying about these real problems that will jeopardize life in the 21st century.
Barack Obama has the easiest and at the same time the hardest job of any leader in recent history, possibly since WWII. He can use all the goodwill and support that we can give him.
At one level, his new job is stupidly easy. Obama could be anywhere from a grey centrist-conservative like Bill Clinton all the way to a towering historical figure like Abraham Lincoln, and in any case the world will be delighted. We are all just so happy we got rid of George W. Bush. Just by being elected, Obama has already delivered what the world expected of him, and he has his entire presidency ahead of him to use as an opportunity. That doesn’t happen often.
Posted on LJ in July 2005. Not edited. If I had to leave behind just one political text, it would be this one.
Myth 1: Privatisation makes things efficient
Good management, consolidation, low corruption, and a strong drive to work (whether spontaneous or coercive), make things efficient. These factors may be present in private enterprises or state-managed ones (including science, military, transport, or healthcare). The converse problems may also plague both private and state enterprises.
The only parameters where there is an identifiable difference is corruption. Capitalism institutionalises the self-interest of managers and owners as a controlled (mostly) inefficiency called profit, whereas the same motives in public institutions result in unofficial profiteering called corruption. It’s debatable which kind of inefficiency is worst.
However, efficiency is an academic point or a red herring. The main purpose of privatisation is to increase the value of money, by allowing wealthy individuals to buy high-quality services without having to subsidise similar, or indeed any, services for the majority. Education, transport, and healthcare are the most common examples. Once private services are established, political pressure from the rich to scale down and gradually abandon the public systems is inevitable, and usually results in a two-tier system. Maybe this is “efficient” in the sense that the system only has to provide good services to a few people.
A second purpose of privatisation is to increase the value of capital by replacing nominally efficient (non-profit), in practice somewhat corrupt enterprises with officially exploitative (profit-oriented) ones. This process thus expands the scope of capitalism to the detriment of consumers. In developed countries the rich feel they can tolerate this cost as consumers, and in poor countries it’s not their problem.
Fascists are like rats. Once you see them rally in the public square you're left knowing that they are hiding in the surrounding buildings, and there's little you can do about it.
2011-08-16
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