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Ideas, Society and Economy
A SIMPLE OVERVIEW OF ECONOMIC HISTORY Notes (from July 2011) for a presentation about the TrueValueMetrics system. In this section Peter Burgess outlines many of the historic events that should be informing our understanding of social and economic history Original article: http://www.mediaed.org/assets/products/139/transcript_139.pdf Peter Burgess COMMENTARY This material was drafted in July 2011 Peter Burgess | ||
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A SIMPLE OVERVIEW OF ECONOMIC HISTORY Ancient empires Ancient empires came and went ... Egyptians, Greeks and Romans around the Mediterranean ... Aztec and Incas and others in the Americas ... the Asian and Middle Eastern civilizations of antiquity. Modern civilizastion rests on these ancient foundations, but too many of us have not learned the lessons of history very well. They came, they prospered ... but the big lesson is that they went, and we should know why! The agricultural revolution In recent times ... the past 400 years, it was modern agriculture that was the primary foundation for modern and increasingly rich societies. Without food security there would never have been much of what followed. Productivity improved and progress was constrained by the hours in the day and the people doing the work. The industrial revolution For hundreds ... thousands ... of years, production depended on manual labor and skilled craftsmen. Production was slow and quantities produced not enough for everyone. With the inventions of the industrial revolution more power could be used and everything to do with manufacturing and transport was able to change. First it was steam ... then electricity ... and petroleum energy ... and nuclear. Powerful new ways of doing everything were invented. Mass production ... economies of scale Most will probably think of Henry Ford as being the inventor of mass production, and it is a good answer. However, I also like to think it was the French who found the English way of cutting off heads one at a time using a block and axe far too slow and inefficient. They invented the guillotine which was a whole lot more efficient. Technological progress and mass production made it possible in due time for the world to move from a shortage economy to a surplus economy ... a change that should now be resulting in the happiest era in all of history. Banking, finance and robber barons Towards the end of the 19th century a small number of people controlled a massive amount of the wealth in the United States. They were referred to as the 'robber barons'. In many ways what is happening in modern banking and finance has the same elements that made the robber barons so unpopular more than a century ago. Trust busting In the late 1800s and the early years of the 20th century most of the oil industry in the United States was controlled by one man and trusted associates ... John D. Rockefeller and his Standard Oil Trust. In 1890 Congress passed the Sherman Antitrust Act. Eventually it was determined that Standard Oil was illegal and needed to be broken up, but this did not happen until many years later in 1911. This is old evidence that business entrepreneurs are more nimble than the organs of justice in society. Nothing much changes. This is also a reminder of the power of monopoly, cartels and scale to dominate society and accumulate massive profits at the expense of society at large. The roaring 20s The progress of productivity was in full force by the 1920s. Profits and wages were going up. Everything was perfect ... there was not a care in the world. But it ended in the stock market crash of 1929 which in turn led to bank and business failures and then into the unemployment and depression of the 1930s. Germany in the 1920s After World War I, the Versailles Treaty punished Germany and the German society and economy experienced out of control monetary inflation and economic disruption. This proved to be a breeding ground for Nazi faschism, which eventually led to the Second World War. The depression of the 1930s I studied economics at college in the late 1950s. Quite reasonably, the depression still dominated economic thinking and there was little concensus about what had caused the depression and what had got the world out of depression. I was at Cambridge where Professor Joan Robinson had a leading role in the analysis of the work of John Maynard Keynes. I was made to appreciate the complex dynamic of a modern economy and the role savings and investment play in achieving stability in the economy. Very little of what Keynes stood for was implemented in the early 1930s ... but later huge investments were made in public works and then war mobilization. The Second World War The Second World War was an economic event of gargantuan scale ... I recall in England the phrase 'total war' meaning that everyone and everything was committed to waging and winning the war. Profiteering was against the law, a treasonable offence. This contrasted with the United States where my impression is that the war was seen as a business opportunity to earn profits on a scale that had never been seen before and strengthen the US reserve position more than at any time before or since. Britain ended the war on the winning side, but nearly bankrupt with a huge overhang of debt to the United States Post war reconstruction There was a huge fear that the end of the war would mean a return to the unemployment of the 1930s. The United States addresses this with a range of programs that are generally regarded as highly successful ... the GI bill, housing, infrastructure ... and the Marshall Plan. In the US, investments were made, and the society and the economy started a period of about 30 years of increasing prosperity that lasted until the 1970s. Except for the UK, in Europe the Marshall Plan financed a big part of the rebuilding after the destruction of war. In a few years there was an impressive economic recovery. End of empires The old European colonial empires started to be unwound after the war. India became independent in 1947 and most of the British empire had become independent by the end of the 1960s. Other European countries granted indepenence over a similar time period. Each of the stories is different ... but it was all part of the same wave of global thinking. The promise of independence was compromised in large part by the way independence was 'organized'. Everyone was in a hurry, and a lot of the decisions were made in haste by 'experts' who only knew a bit of what needed to be known. Many of the mistakes made in the process of administering independence remain to be addressed ... and in some cases cannot even be discussed! Neo-colonial corporations While colonial government ended, global business reinventred itself, but in a different form. The rules changed and the business community adopted a different modus-operandi. This was not a level playing field and taken as a whole the neo-colonial corporation had almost all the advantages. Specifically, they had knowledge of essential technology, access to markets and deep management experience. Most of the newly independent countries had little of any of these critical elements for success. I argue somewhat provocatively that the old colonial firms were often better for the local economies than the new multinationals that have come to dominate the global economy. 1960s ... Music, Vietnam and Protest ... Civil Rights In many ways the 1960s were driven by young people. The first wave of electronic media was emerging ... TV and music are everywhere, as well as images of the Vietnam War. Young people were being drafted to fight in a war that seemed to make no sense. Protests grew because youth had a lot of questions that adults simply could not or would not answer. For the first time youth were substantially better educated and informed than their parents ... an essentially unstable situation. Fast forward ... does this sound vaguely familiar? The 'millenials' who have never known a world without PCs, the Internet and mobile phones do not relate well to an older generation that predates these modern technological innovationsPresident Lyndon Johnson, to his credit signed landmark Civil Rights legislation. Martin Luther King, a leader of the civil rights movement and an advocate for peaceful protest, however, was assassinated. Another leader, Pastor Leon Sullivan advocated for economic opportunity for African Americans and later on became a Director of General Motors. The 1970s oil shock In 1973 the Arab oil producers shocked the world by disrupting the flow of oil into world markets and creating the Organization of Oil Exporting Countries (OPEC) which was able to increase the price of oil in world markets from around $3.50 a barrel to about $13.00 a barrel. At the time I observed that this was the biggest economic event in all of history ... bigger even than the Second World War. Later I commented that while the Arab oil exporting countries were major beneficiaries and had much higher profits as a result of the OPEC action, some non-OPEC countries like Britain and Norway were even bigger beneficiaries. In the case of North Sea oil it would not have been profitable at the market price of $3.50 a barrel, but was reasonably profitable at the new higher price of $13.00 ... and very profitable when the price subsequently rose to around $20,00 a barrel. President Nixon ... price controls, environment regulation and China There was a huge disruption to the US and global economy with the oil shock. The cost of living and doing anything in business increased by an amount and faster than anything before. 'Inflation' went to record levels. Long term contracts were broken because the alternative was bankruptcy. Nixon tried to control inflation with price controls, but it was a dismal failure. It had to fail. Raw costs of energy and out of US control had quadrupled and everything in manufacturing was up for grabs. The US lost out, because years of sloppy use of cheap energy meant much of the industrial processes were energy inefficient. The war in Vietnam ended ... and then Kissinger and Nixon set the stage for normalizing relations with China. Secret missions were followed by what was referred to as 'Ping-Pong' diplomacy as the two countries played international table tennis! Petrodollar recycling My prediction that the OPEC price shock would change world economics was right, but masked for many years by the amazing performance of the world's money center banks in making themselves indispensable for the management of these funds. The world banking sector was awash with funds, and with so much money, they did what banks are meant to do ... they lent it. In many cases, however, the lending practices were not very good, and in due course there were repercussions Third World Debt Crisis By 1987 the servicing of debt to the international banks by developing countries had become problematic. They were able to cover up the problems by poor accounting and creative reporting for several years, but eventually it caught up with them. I am of the view that the sloppy lending processes of the World Bank, IMF, donors and banks made it possible for powerful people to tap into the fund flows in many inappropriate ways. The key 'checks and balances' of government accounting ... that is the Ministry of Finance, the Budget process and the Sector Ministries were systematically ignored in order to 'expedite' implementation of projects. The 'accounting' was dismal and hardly anyone in the official development assistance (ODA) community understood much about accounting even though many had PhDs in economics, health, anthropology, agriculture and all sorts of other disciplines. Surprise surprise ... projects do not succeed when the money has been stolen! 1980's deregulation and the financial crisis Under Ronald Reagan, there was a wave of deregulation that was intended to reduce the size of government and unleash the entrepreneurial potential of the economy. To my surprise ... and disgust ... the banks and business community almost immediately went into an 'anything goes' frenzy and bad things started to happen. Famous quotes like Ivan Boesky's 'Greed is good' are from this period. The financial sector became much more creative than in its more prudent past, and operators like Michael Milken made fortunes out of junk bonds. In turn junk financing helped create another fisco ... the Savings and Loan debacle. Post industrial productivity ... the emerging information age In the last 200 years there has been an amazing increase in productivity ... first the agriculture revolution and then the industrial revolution. By the 1970s another wave of productivity improvement associated with all sorts of modern technology was emerging. This was computerization ... and a post industrial information revolution. Right at the beginning, Ross Perot was a beneficiary of this revolution ... making huge profits first of all sorting out some of the back office operations in the stock market, and then with highly profitable contracts with the Federal Government. There were good and bad consequences of this energing information age. Productivity started to go up with more and more output for less and less worker work. Economies of scale were no longer compromised by paperwork constraints. Output could increase and profits grow. Less staff were needed ... less staff were employed. The investor profit boom Over the past 40 years investor profits have been going up ... constaints on growth were reduced or even eliminated with computerization. More revenues and less workers was a simple formula for profit growth. Better still, the idea of Economic Value Adding (EVA) was popularized and used to focus business on what it needed to do to increase stockholder value. [Note: EVA is intellectual property and may not be used by anyone without permission of the owners ... which is usually not forthcoming]Slump in worker wages Again even better for investors, for the first time in 150 years the United States became an economy with a surplus of labor. Labor lost its bargaining position as the supply - demand situation reversed. The price of labor, for the first time ever stayed more or less static and has been static now (2012) for about 40 years. The labor position has been aggravated by many other things.
Business revenues need markets ... need aggregate demand. In the modern economy the conventional thinking is that there are producers and there are consumers, and to the extent they are one and the same, they are 'prosumers'. But with the slump in worker wages the prosumer model no longer would work. The solution to this turned out to be the creation of 'consumer credit' so that sales could go on, and people could pay over time. In the UK this was referred to as the 'never, never' system and was frowned upon for some time ... but it is too good to pass up. Everyone loves credit ... buy now ... pay later. Instant gratification. And the banks liked it as well. Credit cards were real money makers ... often with financing terms that would have embarrassed even the old money lenders of Biblical times. Banks made money on credit cards 'hand over fist'! And then there was 'home equity' ... borrowing to spend now against the increased (notional) price of a house. The bank has a security interest in the house and a high interest rate ... and the bank is in a win-win position ... and the economy is going to get more aggregate demand to support the buying of goods and services that support business profit that supports investors' stock prices. Wastonomics The economics of Adam Smith, Ricardo, Marshal was based on the fact of shortage and the need for economy. Their world was one that was plagued by shortage. By the 1950s a new model of society was needed. The problem now was not shortage but surplus. Economic success was no longer based on economy, but based on consumption and waste. This should be called a wastonomy and the subject wastonomics, not an economy and economics. Advertising The consumerism of the United States was nurtured by 'Madison Avenue' which became synonymous with advertising. They became indispensable when the economy moved from shortage to surplus which happened in the USA some decades before it happened in Europe. While Europe was still preoccupied with long lasting durability, Madison Avenue and the American manufacturer were moving to built in obsolescence. Automobiles, for example changed every model year stimulating the market for the newest and latest automobile model. End of 'Cold War' For a period of about 75 years there were two primary competing economic ideologies: capitalism and communism. After the second world war the United States was the superpower using free market capitalism and the Soviet Union was using totalitarian communism. Both countries built up their military capacity and eventually the economic stress pulled down the Soviet economy. This was interpretted by many as a good example of how much War on 'Terror' The response of the Republican administration of Bush, Cheney, and Rumsfeld to the terrorist acts of 9/11/01 started well, but went badly wrong when the response was expanded to include an attack on Iraq because of allegations that Saddam Hussein possessed weapons of mass destruction (WMDs) and was involved with the Al Quaeda organization. Spending on 'Homeland Security' and the foreign wars in Iraq and Afghanistan has amounted to trillions of dollars. Unfunded spending The same Republican administration chose to finance the 'war on terror' using public debt that will be carried into the future rather than taxation of specific war financing. The Repubican administration also reduced taxation in a way that was very popular and politically expedient, but financially irresponsible.
Financing that is too clever by far
Awakening December 2010 Tunisia was followed by Egypt in January 2011 and then events in Yemen, Bahrain, Libya, Syria and essentially everywhere. Some others places were Spain, Chile, Greece, UK, USA, Columbia ... all INCOMPLETE IDEA
State, Progress and Performance
State TVM State for an individual, a family or a community is similar to a money accounting balance sheet of a business. but it goes it bit further by valuing everything rather than only those things that are part of the money transaction economy. Happiness cannot be bought with money, but it is a real value when it exists. Hate is not part of money accounting, but it is a real liability in a value based system. Progress TVM Progress for an individual, a family or a community over any period may be determined by comparing the balance sheet at the beginning of the period to the balance sheet at the end of the period. This is a routine that is very similar to the work of financial statement preparation using the method of 'incomplete records' in money accounting.
Performance MISSING TEXT Value chain One of the features of the TrueValueMetrics methodology is value chain analysis. While the methodology is still rather primitive, the idea of value chain analysis is very important, because it relates the benefits, profits or value at one stage of the value chain with the benefits, profits and value arising at another point in the value chain. Simply put ... when I buy something at a very low price, and I am happy ... there is someone else who has sold at a very low price and is unhappy. Worse, this might be a zero sum situation, or it might be something where my increment in happiness is smaller than the decrement for the other person.Supply and demand Economics is all about the behavior of economic factors in a market, but a society is made up of many of these separate markets all interacting at the same time. It is Three ... the dynamic of business and capital market
There was a time when physical issues determined where industry was located. Maybe it was the raw materials ... or available energy ... or proximity to market. This was rapidly changing when I was a student 50 years ago and wrote that location increasingly was based on 'where the boss wants to live!' In the present time, choice of location is going to be determined by a variety of different elements:
Three ... wages and the working family
Cost, revenue and profit Value consumption, value creation and valueadd Needs, resources and unmet needs I take it as my task this evening to try to present a sense of what is going on in the American economy – and around the world – since the United States plays such an enormous role in the world economy; to give you a sense of how we got into this situation; and give you some help, I hope, in navigating where we go from here. And if that suggests to you that you yourself are going to have to play some sort of role, then I have gotten my thought across – since the people who are in charge are completely without any idea of what to do, which if you pay attention, you will notice. 3 THINGS THE ECONOMIC CRISIS IS NOT This is the most severe economic crisis of capitalism in my lifetime, which means, as I look around the room, in yours as well. And it has to be understood and approached in that framework if it’s going to be taken seriously and if people are going to have a reasonable shot at coming out on the other end of this process in something less than a devastated personal, social situation. So let me start by suggesting to you some things that this economic crisis is not.
Some history of society and economy In my view the phrase 'AMERICAN EXCEPTIONALISM' is misunderstood ... it is not at all that 'American' people are exceptional, it is simply that people in America had almost unlimited access to resources for about two centuries. So let me begin by telling you what I understand to be the historical framework out of which this crisis comes. And I think you need to see it historically to get a sense of how big it is, how profound it is, how serious this is. Worker pay from 1820 to 1970 To do this, let’s go back briefly to the period from 1820 to 1970. A hundred and fifty years that are astonishing in the world and in our country. Here’s how and why it’s astonishing. Over that period, every decade, from 1820 to 1970, every decade, the American working people enjoyed a rising level of wages. It’s astonishing. Every decade, even the great depression of the 30s, this was true. Because in those days, while wages went down, prices went down further. It’s probably the only society in the history of the world that can say that. It made the United States remarkable. It drew people to this country in successive immigration waves that are also astonishing, starting particularly after the Civil War, but even earlier.
The notion began to be normalized that my children will live better than I do, and my grandchildren still better – that there’s something built into the United States about a rising standard of living. And so it becomes reasonable to measure your own worth as a person, your own success, in terms of the clothing you can buy, and the house you can live in, and the car you can drive. The measure of yourself becomes this achievable remarkable quality of American life. You might understand the basis of our consumerism in all of this – that we became a society that celebrates what we can achieve here, which is a rising standard of goods and services we can buy and we can consume. That’s why this is the country in which advertising is born and becomes something we can give the rest of the world – perhaps a dubious gift. But we’re the society of consumption. Par excellence, the model for the rest of the world to this day. 1970s: WAGES STOP RISING Okay, let me turn then to the trauma that afflicts a population that has internalized – and has come to expect – a hundred and fifty years of rising standard of living, in which workers every decade could enjoy more because their wages rose, and their wages allowed them to buy more. And they understand work, more and more, as that which allowed you then to go out and buy. In the 1970s, that history of the United States stopped. Real wages stopped rising in the 1970s, and they have never resumed since. This is a fundamental change in the United States, which the majority of our people probably have not yet come to terms with. Would they give up the culture of rising consumption? Would they be able to say, ‘I’m gonna measure my own wealth and my own worth as a person no longer in my rising standard of living but some other way.’ And if nothing in this society were to help you to do that, a task that would be difficult under the best circumstances, but if there’s no help, the chances are, and indeed that’s our history, that the population wouldn’t accept giving up a rising standard of consumption. They wouldn’t have the wages to do it, so they have to find another way, which we as a nation did. But before I go through that with you, let me answer the question I hope is in your mind: Why did the wages stop going up? Basically, there are four reasons.
The 1970s oil shock and remapping global energy power
COPING WITH TRAUMA: THE PEOPLE’S RESPONSE Not really people responding ... but something a lot more sinister. People stayed the same, but they were given access to new ways of improving their standard of living. So the 1970s, our wages stopped rising, and now something as basic as that – that had not happened for 150 years – plunges everybody into coping with it. So I’m gonna look at it now by telling a story in two parts. I’m gonna first look at how working people coped with the end of rising wages, and then I’m gonna look at how the business community coped with it. Because in their two responses, the ingredients for the crisis we’re now in will be laid bare. So let’s start with the people. First response What did the American working class of people do now that their wages stopped rising? First, the American working people did more work. If the wages you get per hour are fixed, don’t go up anymore, one solution is more hours. Have more people in the house going out for more hours – which is what the American working class did.Between the 1970s and today, the average number of hours worked per year by an American rose by about 20 percent. That’s a lot. We worked 20 percent more hours on the job than we did thirty years ago. By comparison, for example, if you look at France, Germany, and Italy, over the same period of time, the average number of hours worked by those folks dropped by 20%. Americans who are fortunate enough to go to Europe on summer vacations often come back scratching their heads about the wonderful way those people have of living at a more humane pace. There’s nothing mysterious about it. Americans are working their rear ends off, and the rest of the world – the industrial world – isn’t. They have time for those languorous meals. We invented fast food. The hope of the American family was, by sending everybody out many hours, it would allow rising consumption. The hope proved unfounded. Why? It turns out that if you’re working a lot of hours, you have to find other ways to solve the problems that used to be solved when you weren’t. If the woman goes out of the house to take a job, she needs a set of clothes, she needs her own car, especially for a country that doesn’t do well with mass transportation. It turns out that doing more work, more hours, has costs attached to it that undercut the whole point of it, which was to bring in more money. It turns out there are more costs. Second response So if it didn’t solve the problem, what was the second thing that the American working class did to cope with the end of the rising wages? So that they could continue to consume. Well, you all know the answer. The answer is that the American working class proceeded, starting in the 1970s, to go on a borrowing binge that no other working class in any country at any time in the history of this race – the human race – ever did before. Americans started borrowing. At first, of course, they borrowed in the way that the lender prefers. They offered collateral. So the basic way the Americans solved the problem was to borrow against the house – to borrow a lot against the house. Keep in mind that the crisis exploded around something called a mortgage – the sub prime mortgage. But the American working class could never have increased its consumption simply by borrowing against the house. They basically didn’t have enough wealth to borrow enough. Something had to be invented, a way to lend to the American people massive amounts of money with no collateral at all. And that way was found. It’s in your wallet. It’s called a credit card. It is a mechanism to allow banks to lend to the working class with no collateral at all. It’s unsecured debt in economic terms, your credit card. But of course, no lender will lend to you without collateral unless there is something in it for them to do that risky thing. And the answer is the rate of interest. What is the average rate of interest on a credit card today? Ready, 18% per year. That’s why there are credit cards. So the American working class was given loans, hundreds of billions of dollars in unsecured credit, in order to allow the rise in consumption. And the American working class did it. They went for it. And the reason I told you the history is that that’s the best way I know how to understand why that kind of a borrowing activity was possible in this society. It solved a problem deeply embedded in the history of the United States. But it did produce, by the early years of the 21 st Century, now, a working class exhausted by the amount of work it does, with a collapsing personal life, because of the strains and stresses of what it meant to send everybody out to do all this work, and now to that we add the anxiety that now afflicts a population whose average level of debt exceeds its annual income. Stressed, exhausted, this is a population that has reached the limits. It cannot carry more debt and it can’t do more work. That’s why this is not a temporary problem. This is not a blip along the way. We have reached the limits of the kinds of capitalism this society has become. THE MEANING OF THE “TRAUMA” FOR BUSINESS Let me turn now to the business community. Well, for the business community, the last thirty years have been spectacular. Everything I’ve told you about the working class, now we’re gonna go to good news. With the introduction of computers, American workers became more and more productive. We had a thirty-year period of rising labor productivity. But now stay with me. Each year the worker produces more, and what do you pay the worker each year? The same. That’s what no more rising wages means. The workers get paid the same. They produce more and more and more, but they get the same. That is, the gap between what the workers produce for their employer, which the employer sells and what they have to pay the worker to do it, the gap is getting bigger. What the workers get is flat. What they produce is more. That bigger, friends, is called profits. So the last thirty years of flat wages and rising productivity are the greatest profit boom in the history of American capitalism and quite possibly any capitalism. This is not a crisis of Wall Street. This is not Wall Street doing something that Main Street is left out of. Not at all. This is a crisis of a system that is as busy on Wall Street as it is on Main Street. Every employer on Main Street participated in this dream. This is an employer’s fantasy come true. I paid my workers the same, and they work more and more for me. They produce more and more for me, and I don’t have to give them more at all. This can’t be real. Pinch myself. It was. And it produced in the business community a kind of wild euphoria. Nobody could quite understand it. As the 70s became the 80s, and the 80s became the 90s, the profits were unbelievable. And we know what they did. We all do. First thing they did, understandably. They began paying themselves levels of wages and bonuses nobody ever heard of before. Large corporations paid their people tens, hundreds of millions of dollars, in annual salaries. Where did that money come from? I just told you. What else did they do? They began to go through an orgy of something that’s called mergers and acquisitions. They bought each other. Companies had huge amounts of money and bought other companies. Are you annoyed by a competitor? Buy them. Are you troubled by a foreigner who is stealing your market? Buy them. And you had the money to do it. What else did they do? Interesting. They put their money in the bank. And the banks suddenly discovered wild amounts of money coming in from corporations. Deposit it in the bank. That’s what you do with your profits while you’re figuring out what else to do with them. You put them in the bank. And the banks became repositories of enormous amounts of money. And then the corporations and the banks, about the same time, discovered a remarkable thing that they could do with these profits. And if I can get this across, I think you will see and be able to hold in your mind the touchstone of the new American economy, which is now collapsing. Banks and large companies discovered a very profitable way to use their new, huge profits. They would lend them to the employees. That is the way the employees could raise their consumption when their wages didn’t go up anymore was to borrow the money that their frozen wages made possible to their employers. To understand the American economy in the last thirty years, then, amounts to this. Employers no longer raised the wages of their workers. Instead, they leant them the money. That’s why it’s an employer’s fantasy come true. Instead of raising my worker’s wages, I lend him the money, which he has to pay me back with interest. Isn’t that better than paying them wages? This is nirvana, or as close as business gets to nirvana. So the American business community became excited that the money they got from the wages they didn’t have to pay could now be doubled. We not only got more output from the worker without paying him, but we could lend him at high interest on top of it. And we had a working class desperate to borrow. Perfect. We’ve got the money to lend. They’re desperate to borrow. A marriage made in heaven. And so it was. The American business community, directly or through the banks, got into the business of lending. You all know that corporation, or some of you can remember it, General Motors, famous for producing automobiles. Over the last thirty years, General Motors became a very different entity. It created a subsidiary called GMAC, General Motors Acceptance Corporation. It is a bank. It lends money. It began by lending money to people to buy cars, because their wages couldn’t pay for them. Then it discovered you could make more money off the interest of the loan then you could make profit from the car. And so General Motors became a bank, became much more interested in being a bank than being a car. Something we now notice the results of. They don’t make cars very well. But they’re a great bank. Their only mistake was, about 10 years ago, they branched out, they were making so much money, and instead of just lending to people to buy cars, they became a general lender and went into the mortgage business. Wrong decision, wrong time. But General Motors has specialized in wrong decisions at the wrong time for thirty years. Banks got into it, lending to everybody. We all became used to the following phenomena. I don’t know about you, but I must get two to three solicitations for credit cards a week in the mail – none of which I request. It’s so profitable to push debt on the American people that everybody does it. It is a society out of control. It is a profit bonanza looking for more ways to make money. And the financial sector on Wall Street responded to this situation. It didn’t create it. It got its hands on the money and found new ways to lend new people new loans at high interest rates. “IRRATIONAL EXUBERANCE” OR BUST AND NO BOOM IN SIGHT This is a craziness. This is a wild out of control, but we shouldn’t be surprised. If we create a anomalous situation of exploding profitably on the one side, and a desperate exhausted population wanting and needing and measuring its own self in terms of rising consumption, we have a lethal combination. And so, of course, in the enthusiasm of business and the banks to lend the money and make more money in a time of so much money, and hundred billion dollars here and a hundred million dollar executive package over there, we’re surprised that they ended up lending to people who couldn’t pay it back? Oh, come on. The history of capitalism is punctuated by booms and busts. Where do you think that word comes from? Boom and bust is built into this system. The only difference now is it comes at the end of this long, historical period when it has reached its outer limits. So of course, in the rise of all this profit, we had what? I’ll quote Mr. Greenspan: “We had irrational exuberance.” Okay, that’s a polite way of saying what my hands are gesturing at. That’s what we had. And first it expressed itself in one kind of lunacy, and then another. This is the lunacy of the business community. Lunacy #1: In the 1990s, as these profits were building up, suddenly our business community decided that the new internet is going to revolutionize the universe. It really isn’t just an expanded yellow pages. It’s really a radically new thing. And so they invested in companies – funny companies with little names – usually two or three initials. Companies that had been around three or four years, had never made any profit, and who said in their annual statements, we don’t expect to make any profit for ten years. Who cares? Their stocks were bid up to $500 a share. And you all know what that was. That was the boom of the late 1990s, and in March and April of the year 2000, the stock market crashed. We’d had our first bubble of this latest profit boom period. A wild excess. The index of the Nasdaq, the most important stock market for these kinds of firms, reached $5000 in March-April of 2000. Today, it is less than half that. It never recovered. That’s a drop of the proportions of the great depression. Our stock market hasn’t recovered. So terrifying was the collapse of the stock market in early 2000 that our government reacted in terror by saying, oh my god, the economy is going to fall apart. We have to save it by getting people to spend, so we’re gonna lower interest rates. We know what will happen if you lower all the interest rates, people will borrow like crazy. And they did. And what they spent their money on was housing. So after the collapse and the bubble of stock market, we had another bubble of real estate. It went crazy. Everybody buying housing, building housing, everywhere. Cheap money to borrow, build, buy, build, buy, and now we have the collapse of the real estate bubble. And there’s nothing left to bubble. What are we going to do? There isn’t anything. The stock market’s finished. Real estate is finished. There were people who thought we might have a new bubble called exports. Collapse the value of the dollar, make our goods real cheap, and the rest of the world will buy them. Unfortunately, the rest of the world refuses to play. Won’t do it. So we don’t have it. We’ve run out. And so we sit a collapsed bubble, the wealthy having produced an armada of new instruments that are now not worth very much. So that our business community is aghast with staggering losses and so, in its own peculiar way, has come to replicate the exhaustion and anxiety of the working class. For different reasons, heaven knows. But we have an economic landscape that is littered with corpses. ENERGY Modern society has become energy intensive and energy dependent There was a time when most work was done using manual labor and horse power ... as in using horses ... or windpower, as in sailing ships and windmills. It is only relatively recently that steam became a way to power machinery and drive trains and ships ... and to produce electricity that could be used in all sorts of way at convenient locations. All of this change has taken place in the last two hundred years. By some reckoning, the pace of this change is faster now than at any time since these changes started. Where will it end? How will it end? When I was an economics student in the late 1950s is was reasonable to use the generation of electricity as a reasonable proxy for the progress of the economy ... but at some point this no longer became reasonable. More and more power was being applied to frivolous activity that added nothing to the performance of society. I do not get enough exercise so I drive my car to a gym where I can walk or run on an electric powered treadmill to get some exercise.In the 19th century there were no cars ... moving around was not as technically easy as it is today. But in order to get from where we live to where we work all sorts of transport technology is required. To change this is a substantial system change and will happen over time if the incentives are right to encourage this. What happens when the price of energy goes up? The immediate thing that happens when the price of energy goes up is that the cost of energy for users goes up and they have less to spend on other things. For organizations and people that are financially solid, this may not matter very much, but when the organization or person is financially strapped, this is a big problem. For this group, the increase in revenue to energy suppliers goes up, but the revenue to other suppliers of goods and services goes down by an equivelent amount. When the price of energy goes up and the cost of energy stays the same, then the profits for the organizations in the supply chain goes up. Why does the price of energy go up when the users of energy are having difficulty paying for energy. This seems to be a reflection of something quite wrong with the way in which the markets for energy products function. While 'markets' are always right, they are also subject to being 'gamed' and this is what is taking place throughout the supply chain of all energy products. The purpose of 'gaming' and speculating is to generate profit from the market transactions. The more there is 'talk of risk' the more there is volatility in the market and the more there is potential to profit in the market. The profit that arises in these transactions is a cost to the supply chain of energy, even though the perceived risk never turns into a realized risk The costs in the supply chain of energy are a result of physical realities. If the oil is easily accessible with simple drilling, the 'cost' is realtively low, while the 'cost' of the same amount of oil from a well that has to be drilled in the deep ocean is much higher. To put this in some perspective, before the 'oil shock' of the 1970s the vertically integrated oil companies were able to earn profits when the price of oil was just $3.50 a barrel. When OPEC established a oil exporting country cartel to control prices and the price was increased to $13.00 a barrel, the profit increment for those that had a supply of oil was huge. A the time North Sea oil was just coming on stream and it was generally believed that the economics of this were problematic because the costs exceeded $3.50 a barrel ... but at the new OPEC cartel price of $13.50 they could now profit handsomely. While the OPEC countries increased their profit earnings substantially, the countries that were exploiting North Sea oil and gas were able to move from an uneconomic situation to one that was quite profitable. The conventional approach to energy economics is encouraging profligate use of available fossil energy resources in two ways:
WHAT WON’T WORK: REREGULATION Okay. I don’t think, for the reasons that I hope have become clear, that we’re gonna get very far, and we’re certainly not gonna solve our problem by having some monetary and fiscal policy along the lines we’ve just seen. They’ve been failing. My guess is they will continue to. So the question we can pose is: What might be done other than these attempts to stimulate that don’t succeed, these attempts to bailout that don’t seem to succeed, and now even these steps of government buying shares in AIG and the banks that doesn’t seem to succeed? I don’t find it surprising, and I hope you don’t, given the history and the whole context, why these small, hesitant, halting steps do not add up to a solution. And I’m not the only one who sees it. Many in Washington do as well. And they have begun to put their faith in something else, and it’s an interesting story, and I want to conclude by trying to explain why it won’t work either. This is the notion of regulation. And this notion works as follows. The argument is made that in the first thirty years after World War II, we lived in a regulated economy. Coming out of the great depression, the regime of Roosevelt had after all introduced all kinds of regulations, and that’s true. Regulations governing what banks could do, regulation governing what boards of directors of corporations could do, should do, might do. Whole new institutions, social security, unemployment insurance, we never had that before. So there were lots of regulations that came out of the desperation of the great depression. And those regulations were enforced from the 30s to the mid-70s. So that was a period of a regulated American capitalism. And so the argument goes, that was a good time. And what terrible thing happened was, at the end of the 70s, beginning with Reagan, was an era of deregulation. So the argument goes, okay, our problem is just that we deregulated under Reagan, Bush, Clinton, and Bush, and so now maybe with Mr. Obama, the era of deregulation will be put behind us, and we will return to the re-regulated good old days brought back. The idea here is that the deregulation of the last 30 years needs now to be undone. We need to have a new collection of regulations, telling the boards of directors of corporations what they should and shouldn’t do, giving the government all kinds of new powers, to control, to regulate, to observe, to monitor. And if we only do that, we will undo all the damage and all the terrible situation we now face as a nation. A part of this is understandable. We did regulate out of the last great depression. But another part of it is blind. Let’s see why. Those regulations that were put into affect by Roosevelt, and even some later, even by Truman, even by Kennedy, even by Johnson, those regulations did indeed limit, constrain what boards of directors of capitalist corporations could do. They did. But here’s what they also did. They gave corporate boards of directors an immense and instantaneous incentive to defeat those regulations, to evade them every chance they had, to weaken them every chance they have. And when the political conditions were possible, to get rid of them. And those boards of directors went to work – having tried to prevent those regulations in the first place – they went to work to evade, weaken, and destroy them. The last 30 years were the success. They were finally politically powerful enough that they could get rid of most of them. In other words, to pass regulations while leaving in place the boards of directors of private corporations is a bizarre policy that guarantees that you’ve left in place the absolute sworn enemy of the regulations. But you have not just left in place people who want to undo the regulation. Let’s remember what a board of directors is. The board of directors of a corporation are the group of people – usually numbering between fifteen and twenty-five persons – into whose hands flow the profits of enterprise. So to regulate our kind of economic system is to impose limits and rules on a group of people with every incentive to undo them and all the resources needed to realize their incentives. So of course the regulations become a dead letter. It’s as if you had mounted a military campaign, but you decided not to defeat the enemy but to establish an awful lot of rules while allowing the enemy to have free supply lines from everywhere needed to undo you. A general who did that would be sent to an insane asylum. But in our country, we want to believe that a regulation system that we have just gone through 50 years of observing its complete evisceration, we’re going to do that again? I don’t think so. The American working class supported Roosevelt in regulation. They had great hopes. But to re-regulate now will get from the American working class, and I think rightly, the nasty remark, “No, thank you. We’ve been there and we’ve done that and we’re not going to do that again.” If we’re going to deal with this problem, we have finally to face, and here’s my conclusion, that if we leave the structure of enterprise in our society unchanged, we will not be addressing what’s at the base of this whole story, the conflictual relationship between the people who run the production enterprises of our society and the people who work in them. That’s why the wages didn’t go up anymore when it was possible not to do that. That’s why debt was substituted for rising wages. That’s why jobs were moved and destroyed. And that’s why regulations are simply objects to be undone. SO WHAT MIGHT WORK? So what are the possible solutions? I have hopefully made the case that the problem is a system problem rather than a simple situation with just one single thing wrong. System problems need to be solved with system solutions. Satisfying needs There is a huge need for the things that go into a better quality of life for several billion people who are currently deprived of adequate basic goods and services. Billions of people are 'hungry, inadequately sheltered, sick, uneducated and poor'. People like J.K. Prahalad have written about the economy that is at the 'bottom of the pyramid' ... but a profit focused economy has to ignore this because the profit opportunity is too little. On the other hand the valueadd when a person moves from the state of being 'hungry, inadequately sheltered, sick, uneducated and poor' to being 'reasonably fed, reasonably sheltered, reasonably healthy, reasonably educated and no longer extremely poor' is huge. We have ubiquitous metrics for the calculation and reporting of money profit, but nothing equivalent for the calculation and reporting of social valueadd. Imagine the difference if a new system of regulations, say passed by Mr. Obama, were to confront a different organization of production, one in which not a board of directors responsible to shareholders ran the business, but instead the people who worked in every business ran the business? Because they all have to live with the consequences, then you’d have people on the inside of every business partnering with the government to make sure that the point of the regulations was realized, rather than a group of people who would function to undo and thwart the whole point and purpose of the regulations. Why don’t we ask that question? And I suggest we ask it because even though I’m aware it’s a daring question, we are in daring times. We face some really heavy problems in our society. We don’t have many choices. What else might be said for reorganizing our production system so that the people who work at an enterprise become their own board of directors? Let me suggest to you three things to think about. First, to the extent that we are serious when we talk about democracy, that is the people who have to live with the decision should be able to participate in making it. Why have we always limited that to the political sphere and excluded it from the economic sphere? After all, the place we spend most of our creative lives, 9 to 5 Monday to Friday, is the place where we work. And if we’re not going to have democracy there, then how much of it can we have anywhere else? So the business ought to be democratically responsible to the people who work there, at least on a fundamental proposition. Here’s another argument. Many American workers – more than you might think – have already done what I’m describing. Let me introduce you to them, if you’re not already familiar with them. Over the last 30 years, every year, hundreds and in some years thousands of engineers in that little strip of land between San Francisco and San Jose called Silicon Valley, have done the following interesting thing. They quit their jobs working for big companies like Cisco or IBM or any of those, and together with a few friends, having walked away from those jobs, they set up a little enterprise amongst themselves, working out of one of their garages. And they come to work each day, not wearing a suit and tie, the way they used to when working at IBM, not taking their orders as to what to do as software engineers from a supervisor, whom they didn’t like. Instead they came to work, with their laptops in tow, at the garage of their friend, wearing Hawaiian shirts, grasping a Frisbee, maybe with a dog, maybe with a toddler, and having a wonderful time in a new little enterprise.And it’s peculiar when you think about it, because in one frame, one way of thinking, this could be called Marx’s idea of a communist enterprise. That’s pretty much what he meant. But in another way of speaking, we could describe the same thing, and I’m now going to quote to you from a number of magazines produced in that area. Here we go, “This is a remarkably successful entrepreneurial initiative.” We’re describing the same thing. It’s an entrepreneurial initiative because the people writing these articles are Republicans. And they want to see it that way. I appreciate that. They’ve never read Karl Marx, so they are not troubled by what this might look like to somebody else. And they’ve been very successful. So successful these little businesses that a Marxist, if there were such a thing, might say, “Gee, all those basic breakthroughs in computer technology that are typically boasted of as the achievements of modern capitalism aren’t. They’re the achievements of communist enterprises, operated by Republicans in Bermuda shorts in California.” So it turns out that this new way of organizing enterprise isn’t so new, and isn’t so terribly daring, and offers us a better chance to deal with the level of severity our current situation presents us with, than anything else of which I am aware, so that I leave you with a bit of a challenge. If we don’t take basic steps of this sort to deal with a crisis that has built over this length of time in the depths and breaths of our economy, if we keep tinkering at the edges with our monetary system, because we need to call this a financial crisis, rather than a crisis of capitalism, which is what it is, we will all be very sorry. BEYOND FREE MARKETS AND REGULATION My very last word. I’m a professional economist. I’m a professor of economics. It’s what I do. And I’m therefore a product of the economics profession in our society. That profession for the last 50 years has oscillated between those who believe that an unregulated economy, with free markets and private enterprise is a magic road to prosperity and growth. Particularly in the last 30 years, that has become a mantra. It’s the Morning Prayer with which every economics department begins. That’s smashed beyond words now. Keynesian economists On the other side have been those that have said, “You have been wrong, and there needs to be government intervention and control.” They typically go by the name Keynesian economists, in honor of that British economist in the 1930s, in response to the Great Depression, who came up with recipes for what the government should do, monetary and fiscal policy to stimulate the economy. Economists engage in vigorous debate between those who believe in unregulated, who are now feeling very badly, and those who believe in regulated, who now see an opportunity to return to greater regulation. What I want you to think about is, they both may have made a terrible mistake, by not asking about the underlying structure of our economy that renders both of them inadequate to dealing with what actually happens in a capitalism that runs the way ours does How did we get into the position of polarization between a bankrupt business community on one side and an exhausted and anxiety-ridden working class on the other. Both sides seem to have no solution to the situation ... and there is none as long as the accumulation of wealth and the production of waste remains the primary set of metrics for measuring success and progress. What there is at the moment is a recipe for social disaster. Professor Wolff has observed that if we don’t deal it in a serious way, we’re going to have to live through some of the hardest economic times that anyone alive today has ever been has this nation has ever had to go through.With higher productivity less workers are needed to make the products. This reduces the wage costs of the business and is part of the equation that results in higher profits. But technology does more than this ... it starts to make it possible for a supply chain to 'go global' and still be managed effectively. Instead of needing to make the product near the market, the product can now be made where the costs are going to be lowest ... where wages are lowest ... where the other costs of doing business like environmental regulations, workplace safety and rigorous enforcement do not exist. Especially in the United States around the 1970s, the labor situation went from labor shortage to labor surplus. This was due to the computer and factory and office automation, women becoming a major part of the work force, and lower wages resulting in many people working longer hours to make up for the lower rate of pay. Essentially a perfect storm around worker wages. Real wages for people working in the United States had gone up decade over decade for 150 years, but in the 1970s this stopped and for the past five decades there has been no growth in real wages for the American worker. Many people know what the symptoms are While many people know what the symptoms of the modern economic malaise are, rather few know much about all of the underlying problems that have made the modern capitalist market economy so dysfunctional. One of the things we have tried to do at TrueValueMetrics is to pull together ... or curate ... a lot of the information flow that talks about the state of society and the economy, both locally and around the world. It is obvious from this rather modest effort that there is no shortage of information and knowledge about the problems ... but not very much at all about how these problems might be addressed. The sections of this presentation
Capitalism Hits the Fan Transcript of a lecture by Richard Wolff (UnabridgedVersion) This transcript may be reproduced for educational, non-profit uses only. © 2009 MEDIA EDUCATION FOUNDATION 60 Masonic St. Northampton, MA 01060 | TEL 800.897.0089 | info@mediaed.org | www.mediaed.org Economists engage in vigorous debate between those who believe in unregulated, who are now feeling very badly, and those who believe in regulated, who now see an opportunity to return to greater regulation. What I want you to think about is, they both may have made a terrible mistake, by not asking about the underlying structure of our economy that renders both of them inadequate to dealing with what actually happens in a capitalism that runs the way ours does How did we get into the position of polarization between a bankrupt business community on one side and an exhausted and anxiety-ridden working class on the other. Both sides seem to have no solution to the situation ... and there is none as long as the accumulation of wealth and the production of waste remains the primary set of metrics for measuring success and progress. What there is at the moment is a recipe for social disaster. Professor Wolff has observed that if we don’t deal it in a serious way, we’re going to have to live through some of the hardest economic times that anyone alive today has ever been has this nation has ever had to go through.The renowned University of Massachusetts Economics Professor Richard Wolff, is one of few economists that seems to be able to explain what happened to the global economy over the years and what there was an implosion in the period 2007 - 2008 In a movie prepared in 2009, Professor Wolff breaks down the root causes of today's economic crisis, showing how it was decades in the making and in fact reflects seismic failures within the structures of American-style capitalism itself. With breathtaking clarity, Professor Wolff traces the source of the economic crisis to the 1970s, when wages began to stagnate and American workers were forced into a dysfunctional spiral of borrowing and debt that ultimately exploded in the mortgage meltdown. By placing the crisis within this larger historical and systemic frame, Wolff argues convincingly that the proposed government 'bailouts,' stimulus packages, and calls for increased market regulation will not be enough to address the real causes of the crisis - in the end suggesting that far more fundamental change will be necessary to avoid future catastrophes. Richly illustrated with motion graphics and charts, this is a superb introduction designed to help ordinary citizens understand, and react to, the unraveling economic crisis. With higher productivity less workers are needed to make the products. This reduces the wage costs of the business and is part of the equation that results in higher profits. But technology does more than this ... it starts to make it possible for a supply chain to 'go global' and still be managed effectively. Instead of needing to make the product near the market, the product can now be made where the costs are going to be lowest ... where wages are lowest ... where the other costs of doing business like environmental regulations, workplace safety and rigorous enforcement do not exist. Especially in the United States around the 1970s, the labor situation went from labor shortage to labor surplus. This was due to the computer and factory and office automation, women becoming a major part of the work force, and lower wages resulting in many people working longer hours to make up for the lower rate of pay. Essentially a perfect storm around worker wages. Real wages for people working in the United States had gone up decade over decade for 150 years, but in the 1970s this stopped and for the past five decades there has been no growth in real wages for the American worker. ENERGY Modern society has become energy intensive and energy dependent There was a time when most work was done using manual labor and horse power ... as in using horses ... or windpower, as in sailing ships and windmills. It is only relatively recently that steam became a way to power machinery and drive trains and ships ... and to produce electricity that could be used in all sorts of way at convenient locations. All of this change has taken place in the last two hundred years. By some reckoning, the pace of this change is faster now than at any time since these changes started. Where will it end? How will it end? When I was an economics student in the late 1950s is was reasonable to use the generation of electricity as a reasonable proxy for the progress of the economy ... but at some point this no longer became reasonable. More and more power was being applied to frivolous activity that added nothing to the performance of society. I do not get enough exercise so I drive my car to a gym where I can walk or run on an electric powered treadmill to get some exercise.In the 19th century there were no cars ... moving around was not as technically easy as it is today. But in order to get from where we live to where we work all sorts of transport technology is required. To change this is a substantial system change and will happen over time if the incentives are right to encourage this. What happens when the price of energy goes up? The immediate thing that happens when the price of energy goes up is that the cost of energy for users goes up and they have less to spend on other things. For organizations and people that are financially solid, this may not matter very much, but when the organization or person is financially strapped, this is a big problem. For this group, the increase in revenue to energy suppliers goes up, but the revenue to other suppliers of goods and services goes down by an equivelent amount. When the price of energy goes up and the cost of energy stays the same, then the profits for the organizations in the supply chain goes up. Why does the price of energy go up when the users of energy are having difficulty paying for energy. This seems to be a reflection of something quite wrong with the way in which the markets for energy products function. While 'markets' are always right, they are also subject to being 'gamed' and this is what is taking place throughout the supply chain of all energy products. The purpose of 'gaming' and speculating is to generate profit from the market transactions. The more there is 'talk of risk' the more there is volatility in the market and the more there is potential to profit in the market. The profit that arises in these transactions is a cost to the supply chain of energy, even though the perceived risk never turns into a realized risk The costs in the supply chain of energy are a result of physical realities. If the oil is easily accessible with simple drilling, the 'cost' is realtively low, while the 'cost' of the same amount of oil from a well that has to be drilled in the deep ocean is much higher. To put this in some perspective, before the 'oil shock' of the 1970s the vertically integrated oil companies were able to earn profits when the price of oil was just $3.50 a barrel. When OPEC established a oil exporting country cartel to control prices and the price was increased to $13.00 a barrel, the profit increment for those that had a supply of oil was huge. A the time North Sea oil was just coming on stream and it was generally believed that the economics of this were problematic because the costs exceeded $3.50 a barrel ... but at the new OPEC cartel price of $13.50 they could now profit handsomely. While the OPEC countries increased their profit earnings substantially, the countries that were exploiting North Sea oil and gas were able to move from an uneconomic situation to one that was quite profitable. The conventional approach to energy economics is encouraging profligate use of available fossil energy resources in two ways:
I have hopefully made the case that the problem is a system problem rather than a simple situation with just one single thing wrong. System problems need to be solved with system solutions. Satisfying needs There is a huge need for the things that go into a better quality of life for several billion people who are currently deprived of adequate basic goods and services. Billions of people are 'hungry, inadequately sheltered, sick, uneducated and poor'. People like J.K. Prahalad have written about the economy that is at the 'bottom of the pyramid' ... but a profit focused economy has to ignore this because the profit opportunity is too little. On the other hand the valueadd when a person moves from the state of being 'hungry, inadequately sheltered, sick, uneducated and poor' to being 'reasonably fed, reasonably sheltered, reasonably healthy, reasonably educated and no longer extremely poor' is huge. We have ubiquitous metrics for the calculation and reporting of money profit, but nothing equivalent for the calculation and reporting of social valueadd.
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