The three-phase crisis cycle

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: The bubble. Creation of false assets by financial capital, mostly banks and smaller players in the property market. These assets have a nominal value way in excess of their real earnings potential, and that gap in value is hidden.
  • Phase Two: The stall. Transfer of the deficit of those assets to state balance sheets under emergency conditions. Private insolvency becomes state liability, while the gap between nominal and real wealth remains outstanding and is now visible.
  • Phase Three: The payback. Closing of the gap by a transfer of funds from the public to states. This may be achieved by means such as austerity, taxation, write-off, 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 the payback phase serves to consolidate the gains that capital made in phase one, such that the whole cycle is a transfer of real funds from the general public to capital. Austerity is the “hard money” way to close the cycle. It’s the only way to close it that refuses to accept nominal losses.

Using inflation (by printing money), taxation of capital gains, debt write-off, or controlled default would allow the valuation gap to close by eroding rather than consolidating the nominal gains made in the bubble phase. 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 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 taxation of capital in situations like this. On the whole, present monetary policy is strongly in favor of wealth and capital and against social cohesion or development.

Continue reading

A lost sense of property

Property means several things to people. It has at least three meanings:

  • Personal safety and dignity: My clothes, my house, my money, my computer. These are mine in the sense that I need them to go through life and I need reassurance nobody will take them away from me. Actually I don’t own my house; I prefer to invest on my skills. But it’s the same idea.
  • Control over resources: My project, my team, my blog, my plan. I want to control these things. If I had a business it could be my business in this sense of controlling what the business does. These things are controlled by me and I want them free from interference so that I can pursue my goals.
  • The right to exploit: My shares, my invention, my song, my contract, my land. These are artificial rights that let me exploit resources, or the activities of others. If the thing is mine I can take any profit I can extract from it as mine to keep. This type of property is an exemption from the duty to share.

Only the first two are natural. The first is needed to have a society with human rights, although the boundary could vary. For example some people feel a strong need to own their house, and some don’t. But a desire for security of your immediate needs is universal.

The second right, right to control resources and keep them free from interference, is needed to form an advanced economy. You can’t build any kind of elaborate production or a complex technological product like a plane if you can’t control the resources and the activities that bring it about. This type of property is the necessary foundation for firms. Even things that appear to be free are based on property as control. Google services are free, but they control the site and it’s designed so that you keep visiting it rather than take the data from it and go your own way. Linux is free in the sense that someone could copy the bits and start a rival project, but the actual Linux project is well controlled.

Property as the right to exploit is different. There’s nothing intuitive or natural about it, except perhaps that it formalizes feelings like “survival of the fittest”. Normally, if you have an idea that is successful or as a group you produce valuable things, you share. When nature yields oil or fish again the normal thing is to share. Perhaps in these cases we have yet to discover how to do so in a controlled and equitable way. To these productive activities, property is an overlord. Property claims what would otherwise be shared among the people directly involved, on behalf of one or a few people who are distant. It’s no accident that most property of this type is indeed derived from lordship over land.

Continue reading

On Business

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.

Continue reading

Twelve myths of capitalism

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.

Continue reading