Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The Dull Compulsion of the Economic (#11)A series of blog entries by D&S collective member Larry Peterson.With all the turmoil on the markets over the past week, a bit of attention has been diverted from the labor unrest taking place in France. Last Thursday, transport, electricity and gas unions led a one-day strike against the new Sarkozy government's attempts to pare back so-called "special regimes" for public sector pensions. These arrangements allow workers in these sectors to retire at a much lower age than is the norm in the private sphere, as well as other privileges not generally available to other workers. Though the response of other unions was enthusiastic (teachers and others joined in, and the electricity workers actually switched off the power going to Sarkozy's own private residence), many commentators were quick to discourage any comparison to the mass strikes of 1996, which toppled the government at the time. Today's strikes, crowed The Economist ("Sarkozy's Bad Week," October 20th), are "not justified " according to a poll in Le Figaro. The same poll reported 59% as saying that the unions were defending their special interests, not protecting social benefits in general. The public has thus shifted against the strikers, and now sees the pension perks as unfair. Such a switch should give Mr. Sarkozy the popular support he needs to stick to his guns." But there may be more here than just "the last gasp of a union movement that faces a changed political outlook in France" (The Economist again). The Financial Times, in its coverage of the strike ("French Strikers Test Sarkozy," October 18th), quoted a teacher marching in Paris who said that Sarkozy was "trying to pit private sector workers who do not have special pension privileges against those who do. Even if this does not directly concern us, we have to show our solidarity. If not, the government will just keep increasing the number of years we have to work." Her remarks, noted the FT, amplified those of union leader Bernard Thibault, who expressed the belief that workers throughout the economy were being made the scapegoats for the France's economic troubles. This is a sentiment that has been growing in France. As I wrote during the strikes of March, 2006, workers in France are becoming "resistant to gamble away any security they still enjoy every time the bosses and politicians can point to a nonperforming economic indicator." And though I have been critical of U.S. unions' tunnel vision in their quest to secure their retirees' benefits (ceasing to call for the same benefits and pay for new workers, so as to ensure older ones and retirees are paid off, etc.)—benefits that were, after all, were promised by employers themselves—it is equally important not to let governments and employers divide the labor movement with talk of exclusion and privileges. And a timely article in the Guardian tells us why. In his piece "The Slow Death of the Real Job is Pulling Us Apart" (The Guardian, October 19th), columnist John Harris shows that in Britain—so often considered a model for France regarding labor market reforms—the issue is not whether or not a privileged group of workers is sapping the energy of the economy by wasting its resources and denying others both opportunity and security; instead, all workers are feeling downward pressure on their living standards as protections are eroded. He says: "a few months ago I spoke to a manufacturing employee from the West Midlands who works in a factory producing car parts. Three years ago, the bosses began the recruitment of a new kind of worker. A dwindling number of long-standing staff were on 11 [pounds] an hour; the new arrivals—many of whom barely knew what they were doing—worked 12 hour days for 4 [pounds] an hour less, had none of the usual entitlements to paid holidays or sick leave, and were seemingly arriving and leaving through a revolving door. Within 18 months, for every "core" worker, there were two supplied by the agencies, many of whom were from Poland, Cameroon or Senegal. The walls were quickly smattered with racist graffiti and the level of scrap increased fast. Under union pressure, the company relented and proposed a scheme whereby long-standing agency workers could eventually join the accredited workforce, and, in its wake, the rancorous atmosphere began to improve." But one settlement does not mean the overall trend is any rosier. Accordingly, Harris goes on: "these people were lucky. Trade unionists cite no end of altogether bleaker case studies: three-tier workplaces in which indigenous British employees sit precariously at the top, flimsily employed Poles come further down, and thoroughly casualized Hungarians and Slovakians are left fighting at the bottom...On the stories go: meat-processing workers in Monmouthshire threatened with redundancy unless they downgraded to agency terms, and then fired." But it is a comment that Harris makes before embarking on this pitiful recital that I think is useful to cite in opposition to the Sarkozys and all the others who attempt to pit workers at each others throats (for increasingly paltry spoils). For, as the British workforce is in fact being segmented—not so much by any privileges that might accrue to them as mere protection from blatant, and often-times illegal exploitation on account of their status as full citizens (protection which is itself eroded as wage pressure continues to be brought on them by the growing employment of those with less protection, thereby lessening native workers' wage-bargaining position, and, eventually, even employability) with more access to the law courts, media or publicity, what are the politicians talking about? Harris provides a withering answer: the political class is "blithely yakking about 'rising expectations,' while millions of people's hopes are plummeting at speed." Now this is truly an example of division and special interests workers should pay attention to. Labels: France, pensions, Sarkozy, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (#10)A series of blog entries by D&S collective member Larry Peterson.The Nobel Prize in economics was awarded Monday to three Americans (one Russian-born) for their work on "Mechanism-Design Theory." The three, Leonid Hurwicz, Eric Maskin and Roger Myerson, developed sophisticated mathematical models derived from game theory in an attempt to reveal rules and conditions under which scarce resources can be optimally put to use or divided when each person bidding for a share has an incentive to conceal how much s/he is actually willing to pay for that share, (by concealing this price, other bidders will be misled about the actual demand, and tend to make their own bids lower in turn, resulting in lower sale prices). Accordingly, the actual costs of employing the resource will have to fall on others. Mechanism-Design theory is, then, an attempt to articulate what types of rules will rectify this mismatch. Although set in the context of an auction, many claim the theory’s insights can be used to design econmic policies and even innovations: for example, it can suggest ways liberalization of labor markets may be countered by re-distributive tax policies favoring the less-well off to get those benefiting from either exclusively to negotiate and compromise; and eBay seems to be a business innovation, with its clever bargaining checks and balances, that looks a lot like Mechanism-Design theory. Democratic elections themselves, according to proponents of the theory, may sometimes fall within the theory’s explanatory power. What are we on the left to think of all this? Personally, I had never heard of any of the three (and I follow these things as much as any layman can) before the announcement, and I have no doubt that the mathematics involved are way, way beyond my capacity to remotely understand, never mind evaluate. Still, I think there are three points for non-specialists to ponder. First and foremost, the theory doesn’t seem to offer room for any capacity for participants to change their own preferences, or even process of preference-formation as their participation in the decision-making process deepens (and they learn more about the other participants, and what their common interests might be). All the participants seem forever bound by the incentive to conceal their estimates of worth in attempts to get a bargain; no other motivations matter, or emerge from the nature of the interaction itself. This may be the case when we’re talking about auctions; but it tells us little—in most cases, one hopes—when we try to construct a democratic workplace, say. On a more positive note, the eldest of the three, Hurwicz, was influenced by the socialist-calculation debate of the mid-twentieth century, and, influenced by Friedrich von Hayek and Ludwig von Mises, provided criticisms of Oskar Lange and others on the socialist side. What’s important here is for us to recall that socialism in its "actually-existing" form all too readily pursued the abolition of scarcity by wastefully and even dangerously employing limited resources, especially of the natural and environmental, but also of the human variety. Within this context, maybe we could revisit the debate in attempts to reimagine how socialist production could--and must—become environmentally sustainable, and what the most pressing problems in this quest might turn out to be. Finally, it is interesting to juxtapose the work of the three with Naomi Klein’s new book The Shock Doctrine: The Rise of Disaster Capitalism (which I haven’t read yet, but I have read several reviews, and I saw Klein speak recently). Klein states that neoliberal reforms championed by another Nobel laureate, Milton Friedman (1976), have often been adopted under circumstances in which visible—often overwhelming—opposition to them is rendered ineffective by some sort of catastrophe: a war, a military coup, an economic panic, even a natural disaster. Only with the opposition shocked into silence will elites be able to impose such unpopular reforms, whose costs tend to be borne overwhelmingly by the less-well-off majority. The three laureates, as we have seen, tend to finesse this issue somewhat: they claim that they want to reveal ways whereby optimal solutions emerge from markets and democratic elections, not after the latter have failed; they want to keep all sides negotiating, rather than simply forcing the will of one faction on the other(s). But it’s hard to see how a theory that is so complicated that, as one practitioner (Hans-Peter Gruener of the German weekly Der Spiegel, whose interview provided me with most of the background for this blog entry) put it, it requires two full lectures for economics students to begin to understand it, can allay the fears of the sort of actual hard-hitting impositions of neoliberal policies that have actually come to pass, as Klein documents. Labels: Disaster Capitalism, Eric Maskin, Leonid Hurwicz, Mechanism-Design Theory, Naomi Klein, Nobel Prize in economics, Roger Myerson, Shock Doctrine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (#9)A series of blog entries by D&S collective member Larry Peterson.A couple of weeks ago I went to see my dad for his birthday, and there I came across an article in Newsweek from May (for some reason, Dad keeps issues from months ago strewn around the living room, while more recent issues are nowhere to be seen) that seemed to contain just about every major misrepresentation and simplification concerning the history of trade in the last 60 years. In the article "China's Wrong Turn on Trade," economics journalist Robert J. Samuelson (no relation to Nobel laureate economist Paul) claims that China's trade strategy "threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: it's designed to benefit China even if it harms its trading partners." Samuelson goes on to say a lot of other things, including a kind of defense of the law of comparative advantage, and a denial that he is a protectionist, but I'd like to focus on the claims I quoted. For it's not difficult to find dissenters to this view, even among conventional economists. For instance, Alice Amsden of MIT has just published a book (Escape from Empire: The Developing World's Journey Through Heaven and Hell) in which she divides the US-led global trade system into two periods, one in which developing countries largely benefited, and a subsequent one in which they have clearly suffered. In an interview in the latest issue of Challenge magazine, she claims that, during the first period, which lasted from 1950 to 1982, developing countries—and one would have to count some of the more backward European countries, like Italy, and possibly even Japan in this category, though Amsden doesn't say this—were more or less allowed by the United States and the international financial institutions it dominated to pursue an import-substitution policy that led to historically unprecedented levels of growth. Amsden claims that import substitution was largely successful because it "gave something to just about everybody:" it gave workers jobs, small capitalists a market for parts and components, and training possibilities for a lot of people. These processes, in turn, allowed skill levels to migrate beyond those more appropriate for labor-intensive industries, which meant more opportunities to enter more export markets. And though there was less (foreign) competition, Amsden points out that "[n]ot having competition does not mean that many companies ceased trying to reduce costs…" But the companies that succeeded in this were precisely the ones that had some manufacturing experience before decolonialization started, because they recognized that the protection they received from the import-substitution programs, and the money they would receive from state subsidies and state-directed lending would give them access to far greater earnings via foreign markets and growing domestic ones, than some others, with no similar experience had: these would tend to be tempted by what Amsden calls "a little piddling corruption." This all came to an end in the early 'seventies, according to Amsden. To her, the inflation of this period had much to do with the fact that the Vietnam War and the rise of OPEC caused demand in the US to exceed supply for "so many goods:" not merely oil and guns. And it was just at this time that many foreign manufacturers had fully recovered from the devastation of World War II, or had developed competitive export industries with the aid of import-substitution and other forms of state-led assistance, so that they provided cheaper imports for American consumers. But cheaper imports couldn't fully offset the deeper inflationary pressures caused by growing US budget and trade deficits, and this led to what other economists have come to call the "great reversal": Fed chairman Paul Volcker's jacking up of interest rates in 1981 and 1982 (which reversed the inflows of capital into developing countries, and in fact resulted in net capital inflows from developing countries to developed ones: a seeming violation of basic capital theory, which stipulates that capital will tend to go where it is relatively scarce in relation to labor—i.e. to the developing countries). These large rate rises increased the cost of capital in many developing countries to a prohibitive (Amsden says they in fact prevented emerging economies' companies and industries from restructuring) level, while dampening demand in the United States. And this led to an almost generation-long period of slow or even negative growth in many developing countries. Needless to say, Amsden's view is far more complicated than I can render it here, but the point remains that the idea that the US-led trade system was largely beneficial to just about everybody is simplistic in the extreme. The tensions created within that system were, in fact, a consequence of its successes, according to Robert Brenner. In a magisterial study published in a special issue of New Left Review in 1998 ("The Economics of Global Turbulence: A Special Report on the World Economy, 1950-98"), and later turned into a book—with a sequel on the dot.com era and its aftermath, Brenner sketches the development of a global trade system doomed to stagnation, overproduction and increased competitive pressures and protectionist threats as time went on, which we in fact see today. This was the case because the postwar reconstruction of Germany and Japan would eventually result in the decimation of the manufacturing base in the United States: "the international economic arrangements constituted at Bretton Woods turned out to instantiate an informal bargain: on the one hand, the US, with its dollar key currency, was enabled to run large balance of payments deficits to finance its overseas military bases and its foreign aid, as well as the foreign direct investments of its corporations; on the other hand, those countries which were once its allies and its economic rivals were allowed to control in various ways access to their domestic markets for commodities and capital. On the condition that its allies/rivals would not seek to cash in too many of their dollars for gold, the US government opened up the US market to their exports, while accepting without complaint their protectionism and their restrictions on the outward and inward mobility of capital, even forbearing to push too hard or too fast for the re-establishment of currency convertibility. It thereby helped to create the conditions for the secular decline of the competitiveness of US domestic manufacturing." (p.43) This decline in manufacturing, in turn, played no small part in the run up of fiscal and trade deficits, and this led, again, to the Volcker shocks of the early 'eighties, which reined in inflation at a huge cost: the de-industrialization of much of America, along with the wage stagnation, increased indebtedness and all the other evils that accompanied it, which largely fell on—and continues to fall on—the backs of the poor and middle-class. What finally undid the system has been aptly summarized by Robert Pollin in a recent piece ("Resurrection of the Rentier," New Left Review 2:46, July/August, 2007), which, I believe is largely in accord with Brenner's thesis: "The golden age model was premised on the continued economic leadership of the United States and the commanding role of the dollar in international finance. When Western Europe and Japan began to challenge US firms in global markets—including those in the US itself—this meant that the Bretton Woods system of fixed exchange rates based on the dollar was no longer sustainable. This in turn created growing cracks in the entire edifice in what had been tight financial regulatory regimes throughout the OECD." So Brenner, Pollin and Amsden give us a far more complex picture of a global trading system: one designed with a whole host of competing, and at times contradictory motivations: to rebuild societies devastated by war (and sell them US surplus production); to contain communism by rebuilding these countries; to give access to US multinationals to foreign markets; to allow US financial institutions growth opportunities financing deals beyond US borders; to secure a US security apparatus dependent on the maintenance of a host of foreign bases; and so on. Far from Samuelson's cartoon sketch of a more-or-less seamless global trade fabric which benefited all, these authors reveal a conflict-ridden, contradictory mess that was to no small degree a victim of its very successes and even good intentions, and whose breakdown has led to a major intensification of competitive pressures and financial swings, not to mention decades of lost growth after the US pulled the plug on the deal. One further aspect of this more complex picture I would like to emphasize (and I realize that I have only given the most rudimentary sketch of it here) is provided by Vivek Chibber, in a study of South Korean development ("Building a Developmental State: The Korean Case Reconsidered." Politics and Society, Volume 27, Number 3, September 1999, 309-46). So far, I have failed to mention the many protectionist measures all countries employed until quite recently (the early 'nineties or so), including the United States. Chibber documents how Korean manufacturers were able to penetrate the US market by forming alliances with Japanese firms that enjoyed preferential access to US markets (which Korean firms didn't). In return, of course, Japanese producers were able to take advantage of much lower Korean labor costs. Once again, we see here the workings of a far more fragile—and potentially conflict-ridden—system than the one conjured up by commentators like Samuelson. 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