Economic Dreams - Economic Nightmares

My Wars Against Economic Fundamentalism

I spent most of my working life in the US Forest Service, battling fundamentalism. Most of the battles dealt with economics. My first job was to coordinate use of a linear programming model (FORPLAN) in the development of forest plans. The model may (or may not) have been useful in projecting overall timber sales volumes from big-timber forests, but to have used it as an overall planning model was a mistake. Forests are not factories. Multiple uses for timber, recreation, wildlife, minerals and oil and gas, livestock grazing (and so on) must be carefully balanced against preservation and conservation efforts in the dynamic self-organizing systems that we call Nature—forest and grasslands in particular. That balancing act is not the stuff of simple, formulaic problem solving.

I remember one day in 1979, before I joined the Forest Service, having lunch with FORPLAN developer K. Norman (Norm) Johnson when a memo came down from the Forest Service Washington Office declaring FORPLAN to be the primary analysis tool for forest planning. Norm said, "My God, we've just lost the war." No truer prophecy was ever uttered. But that was just the beginning of my nightmares with what I call economic fundamentalism. The problem extended beyond the FORPLAN follies, into project and program cost-benefit analysis generally. When passion for this type fundamentalism began to wane, a new threat appeared in the form of free-market fundamentalism. That latter threat is still very real, while the two former threats have faded into memory.

The FORPLAN Fiasco
During the early years of US Forest Service "forest planning" (1979-1985, generally) there was a big problem with what we then called "analytical determinism." The problem, simply stated entails placing too much faith in narrowly framed analysis, with too little synthesis, ignoring broader contextual relevance. It is a problem that plagued the Forest Service practice of Operations Research, narrowly focused on the linear programming model FORPLAN (Forest Planning). No matter how hard some of us tried to get beyond mindless application of the FORPLAN model — set up with a maximize "present net value" objective function — the message never took hold. In retrospect, the whole agenda was wrong-headed, as Oregon State University Dean of Forestry John Beuter and I finally tried to show in a Critique of Forest Planning by contrasting FORPLAN with a model we called MARVIN. [See: Beuter, J.H. and Iverson, D.C. (1987): FORPLAN: an economic perspective. In: T.W. Hoekstra/Dyer A.A./LeMaster D.C. (Eds.) "FORPLAN: an evaluation of a forest planning tool," U.S. Forest Service General Technical Report IRM-140, pp. 87-95] Marvin was not a real model, in particular not an algorithmic or formulaic model, but rather the name of a wise fellow who used to manage the Oregon State University school forests. No model was ever going to replace Marvin. Finally, the Forest Service abandoned FORPLAN in favor of simulation models projecting forest ecosystem trajectories. FORPLAN died with a whimper, with no death announced. But by then I had moved on to other wars against fundamentalists.

Rational-Planning Economics
In about 1983 I took a step upward (so I thought) in the Forest Service, moving from Regional Operations Research Analyst to Regional Economist for the Intermountain Region. I was hoping for higher standards than were common among the Operations Research crowd. Instead, I found the broader economics practice at minimum every bit as backward. During that era, the Forest Service Manual and Handbook championed an obsolete branch of economic thinking called Neoclassical/Rational Planning (See Alan Randall's classic article on resource economics schools of thought, 1985). Interestingly, Alan Randall had already declared "economic rational planning" dead just about the time I arrived on the scene. I spent a couple of years trying to get my Forest Service economic colleagues to recognize the death, or a least to engage in dialogue about various schools of economic thought—and what each school believed relative to other schools. But it was not to be. Nobody wanted to hear that message, neither to engage in that conversation. Instead they just wanted practice their economic priestcraft, narrowly framed around so-called "efficiency analysis"—concocting Present Net Value indices, alongside "economic impact assessments," trying to associate jobs and income with forest-related programs. My major "beef" was with the "efficiency analysis." I left equally vexing problems with "impact assessment" to my colleague Hank Robison. Since I could not practice what the Forest Service Manual and Handbook mandated, I set out to develop an alternative practice. I initially set out my "advice" in a small publication that I handed to people whenever/wherever I felt the need. I finally framed my advice (Economic Advice for Forest Managers) as part of a three-part series that I aired on Eco-Watch,1995.

But long before then I began research into who else was in the battle against government rational planning economics. It turned out that many were (and had been for a long time) waging a similar war in broader government settings. I compiled their findings and reconfirmed my view that I would not help people jinn-up formulaic, cost-benefit analysis numbers. I also advocated against the practice: Cost-Benefit Analysis: Wonder Tool or Mirage?

Leaving stuff around on the internet became my common practice, since I'd grown weary of trying to publish in so-called "refereed journals"—each associated with its own narrowly framed version of economics. Of course, none of it would make a dent in economic practice in the Forest Service, since FS Manual/Handbook materials were considered gospel. I often referred to it as the Gospel According to Marx, not Karl but rather Groucho. Finally though, just before my retirement in 2007, we whittled the Forest Service Economics Manual/Handbook down to two pages, that said in essence, go forth and practice economics according to the ideas/philosophies/methods of whatever school of economic thought a practitioner aligned themselves with. (Assuming that the court of public opinion could sort out economic wheat from chaff). I wonder what has happened since? [Note: In a world of my design, I would have just banished the Economics Manual and Handbook, right alongside almost all (or all) of the rest of Forest Service Manuals and Handbooks. But that was not to be]. This saga doesn't end here, there was yet-another fundamentalism to deal with, the fundamentalism of right-wing free-market fundamentalists.

Free Market Fundamentalism
About the time my rational planning wars were winding down, the Republican "right" gained much power in the United States and around the world (late 1990s – 2008). Part of their pitch since at least the time of Ronald Reagan was that markets will free us, government with its red-tape will bury us. In short: Markets Rock! Government Sucks! The agenda, according to spokesperson Grover Norquist was to "Shrink Government down to the size that we can drown it in a bathtub." These some call free-market fundamentalists, or market fundamentalists, some call them theoclassical economists. In the mid-1990s, Dick Behan called them Economic Taliban.

Free-market fundamentalists believe that individuals are supremely qualified to make all value decisions — or at least almost all — and that allowing government to interfere is pretty much a slippery slope to socialism. They do allow for voluntary collaboration of individuals—as long as it is done outside the purview of "government." They elevate "the market" to the end-all-be-all for providing for social benefits (allowing minor space for faith-based and other non-government institutions), and denigrate government wherever possible. To earn the title free-market fundamentalists, practitioners must subscribe to some form of market worship.

Ed Cone sums up the idea of "market worship", talking about the 2007-2008 financial implosion:

[T]he latest iteration of the old boom-and-bust story has reached the part where a few people get led away in handcuffs, while the legal crooks on Wall Street slink into the background until the next promotional cycle begins. The plot is timeless even as the details change with the decades.

This time it was supposed to be different. This was the millennium of the market. That may yet prove true in some ways, as the market economy is not about to join communism on history's ash heap. But things look depressingly familiar here in the era of capitalism triumphant. America's near-religious faith in the magic of the market has been revealed as idol worship.

The truth is that markets and corporations are not good or evil. They are machines, often very powerful and useful machines, but no matter how well you build them, they are run by human beings, and they are thus subject to the frailties of their designers, owners and operators. Only a think tank economist could be surprised to discover that business people are venal more or less in proportion to the general population. Certainly this is not news to anyone who has ever spent time in close proximity to an actual business.

Market worship goes way beyond the belief that private property and open economies can do the most good for the most people, or the assumption that there is a moral quality to economic freedom. Even the no-more-business-cycle claptrap of the Internet bubble was just an offshoot of the ideological view of markets that took root in this country during the '80s, flourished in the '90s and was last seen buried beneath a pile of worthless WorldCom shares.

The greatest impact of this market cult has not been on the economy, which is, after all, treading a beaten path, but on politics. A corollary of market perfection has to be the undesirability of nonmarket forces, especially in the form of government. Whatever else was driving the anti-government fervor of the late 20th century, the certainty that markets always knew best was part of the equation.

Some have argued that Free-Market Fundamentalism died sometime in 2007-2008 with the implosion of world financial markets. But that tragic event more likely emboldened free market fundamentalists in their quest to return the world to what they perceived as the wonderworld of yesteryear, with small shopkeepers and other independent entrepreneurs—as if that could happen in a world ever-more globalized—ever-more dominated by large global corporations.

I believe that free market fundamentalists helped lead us to that 2007-2008 day of financial reckoning, postponed at minimum by bad decisions by the US Federal Reserve—led by a supposedly reformed free market fundamentalist, Alan Greenspan. Many of us thought that the financial market bubbles would burst in the late 1990s, but even with the dot-com bubble burst, the markets (with the help of the government) were just catching a second breath. And no, I don't let other government players off the hook either, neither Wall Street's self-proclaimed "titans of finance," nor the so-called independent ratings agencies. There is plenty of blame to go around, but free market fundamentalists get their fair share of this blame. The battle against free-market fundamentalists goes on. I do my small part.

Free-market Environmentalism
A curious branch of free market fundamentalism attached itself to public lands and the environment. It was/is called "free-market environmentalism."This group too are fundamentalists: too narrow a perspective, too much emphasis on exorcising devils they believe they know, while allowing devils they don't know to gain power.

Free-market environmentalists, like their broader libertarian fellows seem to cluster around a narrow "Austrian School" or "Classic Liberalism" view of economics.

Practitioners tend to demonize the role of the state, and champion the workings of the market, based on deeply help principles necessitating, then elevating to near divine stature the idea of private property ownership. They leave little room for public ownership or control—mostly just the military. The Cato Institute, a hotbed of Austrian economic thought and "dedicated to the principles of individual liberty, limited government, free markets and peace"—sounds good so far—favors abolishment of these branches of the US Government (partial list): Department of Education, Department of Energy, Department of Agriculture, Department of Interior, Department of Transportation.

As for the public lands, they want the government to disappear. Specifically they advocate for either privatization of public lands, else some kind of fiduciary trust where money is a main driver. See, Chapter 23 of the Cato Handbook for Policymakers, 2009 (pdf). Or for a shorter version, see here. And it's not just Cato. The whole crowd of self-proclaimed free-market environmentalists have a similar agenda.

Given Cato and fellow travelers' "abolishment agenda" I find their public lands ideas disgusting. Wallace Stegner once declared the national parks our nation's best idea. The national forests/grasslands are just a step removed, and often provide a scenic/re-creational "context boost" for the national parks. Call me a public lands fundamentalist if you wish, but I find no meaningful rationale for Cato's stand. I can not stand idly by and let CATO and friends denigrate our public lands institutions based on a flawed reasoning. It is the stuff of a "leap of faith," justified in the main by a predetermination that "Markets rock! Government sucks!" that seems to drive them into their dreamland. Instead I side with Thomas More in his paper "Privatization of Public Lands," which ought to be subtitled "A bad Idea,"

[Note: For more on why some things ought to be dealt with as "public interest" and not left to the vagaries of the market, see in particular Mark Sagoff's The Economy of the Earth, Elizabeth Anderson's Value in Ethics and Economics, and Margaret Jane Radin's Contested Commodities. Note too that not all who are heavily influenced by Austrian economic thought fall into the fundamentalist trap. To fall into that trap, one must, like CATO, declare government to be the enemy.]

I continue a long-standing joust with the free-market environmentalists, which for me began many years ago at Utah State University, and will not end soon. I fully expect them to once-again serve up the public lands for privatization (in whole or in part) as the Congress begins to grapple with US national debt that has for too long been ignored. If/when that prospect becomes reality I'll be back on the battleground. In the meantime I'll continue my studies in heterodox economics.

Heterodox Economics
As for me, I believe in economic heterodoxy. Like Stephen Jay Gould I view economics as a history of technology and development, not as some formulaic quest to tame wicked social problems via mathematical economics. I believe we can learn from various schools of economic thought, as long as we remember that much of our study is to "avoid being deceived by economists" as Joan Robison once put it. I've learned much from various schools of economic thought including Austrians, Marxists, Keynesians and Post-Keynesians, practitioners of Ecological Economics, Institutionalists (including Evolutionary Economics), Behavioralists, Complexity Theory economics, from Information Economics. I base my own practice on a belief in separation of powers. Markets AND governments are both beneficial and necessary, but both also tend to abuse power. I believe that a natural tendency (in our age) is for business/industrial combinations to get big and powerful and corrupt. So too with government. The best we can do is to be ever mindful of power and its tendency toward corruption. We can not abolish either government or markets by administrative or legislative fiat. On the other hand we can work toward ever-better checks and balances on abuse of power wherever it arises.

Making Sense of Economics

[Updated Mar. 7— Draft: in flux!]

Not too long ago a friend asked how to make sense of economics. After my laughter subsided, I recommended two books by Robert Heilbroner: The Worldly Philosophers:The Lives, Times and Ideas of the Great Economic Thinkers (Wiki Link) and Behind the Veil of Economics: Essays in the Worldly Philosophy (NY Times Books). I said, "Start with these, and then we can talk more." If my friend had been more inclined toward Financial Economics I might have added Peter Bernstein's Against the Gods: The Remarkable Story of Risk (my assessment) to the list.

To effectively make sense of economics one must realize that Economics is both a history of technology and development, and a study of how people in societies provide for their sustenance. Neither of these two studies necessarily relies on money, although in most cultural practice money is near center stage.

Since money is center stage in most economic chatter, it proves useful to better understand both the contributions and the blindspots in the various "schools of thought" that make up what we call economics.

Blind Men and the Elephant

Consider "the blind men and the elephant" metaphor as applied to economists. Austrians (Wiki Link) (and Neo-Austrians) emphasize market mechanisms and market cycles. Unfortunately, they tend to overemphasize the importance of markets and under-emphasize the role of government. At least they are accused of such by other economists. Often there is outright hatred of government (sometimes with the exception of National Defense) apparent in their writing.

Monetarists (Wiki Link, NS Link) focus on the role of the "money supply" on national output and longer-term price trends. Monitarists tend to focus too narrowly on money and its supposed ability to heal all social problems. At least they are accused of such by other economists.

Keynesians (Wiki Link) (and Post-Keynesians, and Chartalist cousins) emphasize the role of government in setting up mediums of exchange (currency, monetary accounting systems, credit systems, taxation, etc.) and in moderating market behavior when things get too wild. Unfortunately, Keynesians seem too often to err on the government side of the cultural power balance between government and markets. And some Keynesians, like there monetrist antagonists are prone to overplay the "money card" when faced with economic problems. At least they are accused of such behaviors by other economists.

Complexity-theory economists (Wiki Link), focus on "complex systems" and the complexity of human interaction that is sometimes framed as "wicked problems". They are accused by other economists of bringing too much information into their frames of reference, thereby disabling predictive capabilities that theories/methods from other schools of thought enable. Complexity theorists, like other economists, are often so caught up in the mathematics of their vision quest that they are accused of methodological blindness.

Behavorial economists (Wiki Link) bring psychology to center stage in talking through behavior of individual and group actors. I was particularly glad to see them emerge — so too complexity theorists —to move economics thought forward.

Information economists (Wiki Link) put information and information transfer at center stage. Some emphasize the importance of "information asymmetry" as power in both markets and government.

Finally Institutional economists (Wiki Link) focus on "institutionalist political economy", affording much space for politics and political theory in the study of economics.

But we can't stop here. These few hints just begin to explain the various schools of economic thought. See also: Heterodox Economics, which includes the "schools" where I spend much of my time.
  [ Notes: The word "hate" as used above is probably too strong. Alternates include: despise, belittle, "can't stand", etc. Also, there are practitioners in all of the economic schools of thought who are much better than the caricatures I present. Still, when I wander through the blogs, I'm struck by how nearly the term "hate" fits. I should mention that there is a strong tendency toward turf protection among economists — many spend much time dishing dirt on other schools of thought, and on prominent economists not from their school. This is understandable, since economics sits just behind much of the power money in the world today.]

Too often economists fail to adequately embed political and psychological reasoning into their arguments. In every case they so fail, their reasoning ought to fall on deaf ears. But it doesn't. Witness the mess we are in today and the impact too-blind economic reasoning — pontificating really — has had. Audiences listen too well to half-blind (or worse) economic reasoning. Such arguments are amplified by the media, and continue to befuddle and enrage. This proves true whether we look to the so-called general public or to the halls of legislative, administrative and judicial governments around the world.

Learning from Economists

Despite the chaos of economics, the nastiness of politics, and the aberrant nature of the human psyche, there is much we can learn from economists. Austrians help us to better understand the creative destruction (Wiki Link), to use Schumpeter's words, of market cycles. They help us understand information theory: the use and transmission of knowledge via market mechanisms. [ What else? both here and in other schools] They also help us to be wary of moral hazard (Wiki Link) . Keynesians help us better understand important roles for automatic stabilizers (Wiki Link when market cycles tend toward "irrational exuberance" and "irrational pessimism". Monetarists help us better understand that if we are going to base a social system around money, we had better damn well understand the plumbing of the system. Institutionalists help us better understand that we had better understand much beyond money when we are dealing with political economy. Behavioralists and information theorists help us better understand that there are bounds on individual and group rationality (Wiki Link). Complexity theorists help us better understand the chaos/order balance of the world we live in — i.e. complex systems — and the added individual and group psychological "systems effects" that are inherent in social system.

Other schools of thought add spice, nuance, and sometimes insight to discussions within any school. And remember that many economists don't fit well within any "school".

Policy makers need to better understand the ideological/methodological roots of economics reasoning. They need to better understand, as do we all, the "frames" that economists use to bound their discussions — frames that sometimes blind those who work and talk within them.

[Need to add something about The Shock Docrtine, The Wrecking Crew, etc. and the havoc that half-blind ideology and power can unleash.]

Why I Still Believe in Team Obama

For quite some time I have been giving Ben Bernanke and Tim Geithner passes, every bit as much as I did not give passes to Alan Greenspan. I believe that Team Obama—Larry Summers, Christina Romer, Ben Bernanke, Tim Geithner—see the error of their past ways, AND are savvy enough to guide us, in concert with others, however painfully into the next era of regulated finance.

I am not yet ready to declare capitalism dead. Still, I am very glad to see the gleeful "free market screech-monkey" chatter quieted.

But I just watch this stuff. I'm no expert. I glean advice and seek wisdom from post-Keynesian and other economists, from financial historians, and from those who dabble in complex system theory. I am first to recognize that what I hope to be true will likely not be—In this case trusting my (and your) fate to Team Obama.

If Paul Krugman is right, then I'm wrong to trust in Team Obama. If Jamie Galbraith is right, then I will be most certainly proven wrong if only for this reason:

…The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?

End Note on Free Market Fundamentalism: While looking for a good source on Free Market Fundamentalism, I found this note (5/23/2007) I dropped into Yves Smith's naked capitalism:

[W]e Americans have gravitated to a faith-based society/culture. And a big part of that "faith" transfers directly from religious fundamentalism to free-market fundamentalism (Wiki link): Government sucks, markets do it best/right.

If that thesis is correct, then American politicians (whether pandering to the religious right or themselves "true believers" in free-market fundamentalism) tend to shy away from redistributive policies/practices.

What will shake the faith, I don't know. I've been a believer for quite some time that we've got a hell of a problem here in the US with theological Millennium fever. Free-market fundamentalism is symptomatic of the bigger problem.

See also Market Fundamentalism v. Sustainable Development and my Economic Fundamentalism: Too Many False Prophets.

{Update, 3/24/07}: Better Still, read Steve Keen's recent Neoclassical Economics: Mad, Bad, and Dangerous to Know

Bushed

One or two of you may have noticed that I have stopped posting lately. I'm "Bushed", both physically due to some way overdue yard and family maintenance projects, and politically due to almost EIGHT YEARS of Cheney and Bush and the many, many wounds this Administration has inflicted on middle class Americans—not to mention unconscionable wounds done to others around the world due to unbridled fundamentalist ideology (theological and economic) and war-mongering. And also not to mention environmental wounds that now can't even be discussed as we try to dig ourselves out of holes dug by the military industrial complex, the medical industrial complex, the energy industrial complex, the financial industrial complex…. So I've been working quietly on my "projects" and doing a bit of summer reading. And I've been watching the market melt down, but that is stuff for a later post.

My Summer reading includes three depressing books, two that I found and one that a coffee buddy sent my way. They are

• American Fascists: The Christian Right and the War on America, by Chris Hedges
• Grand Theft Pentagon: Tales of Corruption and Profiteering in the War on Terror, by Jeff St. Clair
• Free Lunch: How the Wealthiest Americans Make Themselves Rich at Government Expense (and Stick You with the Bill), by David Cay Johnston

Hedges is perhaps the darkest prospect, one that could only be triggered, potentially, by much more unrest than we Americans have seen in our lifetimes. Still, like the others it is a warning that we ought not to dismiss lightly. Here is an 10 minute YouTube interview with Chris Hedges on American Fascists to whet your appetite.

If these prove too dark to even get you to follow the links, then maybe the lighter fare of the most recent JibJab political satire about the American Silly Season: Time for Some Campaignin' (ongoing through least early Nov) will prove easier to digest. Happy Summer..

Cassandras Tire of Repetitive Stories of Gloom and Doom

For the few who tune into my musings, you may have noticed that I'm not posting much lately. This will likely continue for some time. The Epicurean Dealmaker summed up a shared blogging problem nicely yesterday. It was fun to be a Cassandra when no one would do so. But now we Cassandras grow weary of all the fuss and bother when it appears so late in the game — perhaps too late to avoid severe recession and pain. Preventive medicine would have been best, but would-be regulators were not be be seen for all the same reasons they were absent in the 1920s run-up to disaster.

So now we wait to see what will be done (amid all the talk) in the wake of the credit-crunch disaster that began last August. Later we may have more to talk about, but for now this blog will likely just track potential, much-need regulatory changes and the many stumbling blocks in the path to decent regulations (or institutional change for self-policing) as per: leverage, margin and reserve requirements, executive compensations, firewalls between managers and accountants, auditors, and insurance brokers, etc. Here is the ever-eloquent Epicurean Dealmaker:

Admit it, now, how many of you are enthralled to pick up your morning newspaper to read the 337th story this month on the subprime/mortgage/CDO/CDS/auction rate security crisis du jour and whether it is a) over, b) just getting started, or c) all Ben Bernanke's fault? Even the perma-bearish Bloggers of the Apocalypse, like Nouriel Roubini and pals, have become tired and tiresome to read; now, in what should be their hour of glory. They were a lot more fun to listen to when the party was in full swing, and their jeremiads carried the desperate tang of Cassandras who know they are right but can get no-one to listen.

Meanwhile, the rest of us soldier on, heads down, with appropriately downcast and guilty expressions painted on our faces to show that we, too, realize we were at fault in this and therefore should not be sacrificed on the General Altar of Economic Contrition. Even the profiles of potential villains of the month we read nowadays, like those of mortgage meltdown lottery winner John Paulson and evil-genius-turned-bumbling-oaf Stephen Feinberg, carry all the gustatory excitement of cold mashed potatoes on a dirty plate. Who cares?

It is against this cheerless background that your Dedicated Correspondent finds it difficult to lift the proverbial pen and dash off yet another scintillating missive from the frontiers of Vanity, Hubris, and Financial Shenanigans. …

But I have high hopes that this condition is merely temporary. Neither economic recession—whether in progress, merely looming, or just a figment of anti-capitalist scaremongers—nor a newly discovered probity and sobriety among the Captains of Finance and Industry can persuade me that Human Folly has been repealed in perpetuum. I am unshakeable in my belief that there are individuals out there, right now, who are planning their own apotheosis and subsequent self-immolation on the field of Mammon with such a grandeur and flair that my very fingertips tingle with excitement. I promise you, Faithful Readers, that as soon as they lumber out I will set forth, quill and keyboard in hand, to puncture their pomposity and skewer their self-regard as of old.

In the meantime, I can do little more than paraphrase the Immortal Bard:

"An ass, an ass! My kingdom for an ass!"

Speaking of John Paulson and Stephen Feinberg, here they are again, compliments of Andrew Samwick: Top ten hedge fund managers with the highest personal earnings in 2007

Moving Back to Fundamentals: End of Speculative Excess?

It won't happen easily and won't happen soon, but let's hope 'Hellasious' at Sudden Debt and 'Reality' at Financial Reality have it right that the age of financial excess is over. Joseph Stiglitz once called it "a form of looting". Both are suggesting that once this long-term train wreck is over, we will have learned a lesson from the excesses of the 70s through the present and will then be ready to return to those more stable days and ways of yesteryear'. Hellasious:

It's About Fundamentals, Again, Hellasious, Sudden Debt, Jan 22: …

• Western consumers will revert to spending within their means. It is possible that they will cut even further, in order to repair their overstretched household balance sheets. Saving rates will rise in the US and EU.
• Fiscal policy "boost" initiatives that are based solely on tax cuts/rebates will be proven ineffective, as the bulk of the money will be saved instead of spent.
• The BRIC economies will suffer from slowdowns induced by overcapacity and bad business loans.
• Credit crunch and risk aversion will spread to more sectors and more economies — it will become a wider global phenomenon.
• Interest rate cuts will bring western economies closer to ZIRP and liquidity holes, instead of inducing credit expansion and consumer-lead growth.
• We will see significant further deflation in asset prices, and may even see bouts of deflation for consumer goods, brought upon by excess capacity.
• Commodity prices may decline, particularly where marginal demand is directly tied to robust economic growth conditions (energy, metals, etc.).

In the days, weeks and months to come it may become very tempting to misinterpret the temporary gyrations of share indices, thinking them guides to future economic activity. I believe times are changing, back to when real economic fundamentals determine asset and commodity prices instead of the other way around. The cart is going back behind the horse, where it properly belongs.

We should keep our eyes fixed on the real economy "horse", instead of the market "cart". Some economists and policy setters had become very lazy of late, thinking the Dow told all. It doesn't, and it's high time they started earning their keep honestly, once again…

Note that Hellasious prefaced his remarks with a heavy dose of skepticism:: "How are things going to proceed from here? What follows is my personal opinion which, as all views of the future, should be taken with properly-sized doses of skepticism (jumbo-pack recommended)." Indeed, it is very hard not to be skeptical given the past decades of excess, greed, speculation, corruption and more. Still, we have to think forward and try hard to be optimistic about what needs to be built in the wake of this nightmare we've been living through. To 'Reality':

Bottom Picking, Financial Reality, Jan 21: … Asset markets are crumbling. First the housing market, then the credit markets, and finally the stock and commodity markets. The "real economy" will follow.

There will be bounces and big rallies in all of these markets at various times. Gurus and analysts will swing between depression and euphoria, just like everyone else. But the mood swings are only for trading. The real issue is the establishment of a sound basis for future growth, which is what is needed for the return of investment, as against speculation. We need to see:

• A healthy environment for, and a respect for, work and saving. The economy is sick because it has been overdosing on credit. People need to return to making what they spend and spending less than they make. Personal savings rates well north of 10%.
• A return to responsible lending practices, where borrowers have "skin in the game" and are not being fooled by "teaser" rates, and lenders have a reasonable expectation of being repaid.
• A reduction in the burden of government, which spends 44% of U.S. GDP in non-productive ways, like wars.
• Acknowledgment by the monetary authorities around the world that they cannot manage the economy and a sincere commitment to stop trying.
• A return to historical compensation practices, so that income inequality is reduced and daylight robbery by corporate executives, the financial industry, lawyers, doctors, politicians and government employees is brought to an end. The "Second Gilded Age" must come to an end.
• Reform of the inbred and non-responsive political system, so that is not just a spoils system but a government of the people, by the people and for the people.
• Share prices that offer the prospect of a return on investment based on dividends and growth, not illusion and speculation. This includes the end of option-based employee compensation that is a hidden tax on shareholders.
• The return of inventory levels of housing back to normal, that is in the 6-month's supply or less. And the same for the glut of commercial space which is just now starting to become apparent.
• Substantial reductions in the financial services industry, including banks, brokerages, hedge funds, mutual funds, real estate agents, mortgage brokers, attorneys, planners and all the other financial parasites. We need to see bankers driving taxis (and we will, count on it).
• Substantial reduction of the hidden tax on business otherwise known as the plaintiff's bar. Way too much money flows into the hands of 'trial lawyers' without any redeeming social benefit.

A reader at Financial Reality noted that their list looked like a letter to Santa Claus. So be it. If ever we are to rid ourselves of the "party on" attitude that has been a hallmark of American existence — and the antithesis of sustainability — there is no better time than in the wake of the likely nightmare now unfolding before us.

Marx and Engels' Insights into Globalization

Today while looking for scraps of evidence to finish my income taxes, I stumbled into a copy of Marx and Engels' The Communist Manifesto, written in 1848. Some time back I must have dropped the little book into a basket in a corner. As I will do just about anything to avoid dealing with taxes, I re-read it. What amazed me was the parallels Marx and Engels (and others?) drew between the mid 1800s and today's globalization.

To illustrate, let's condense a bit of Chapter I, "Bourgeois and Proletarians". In addition to condensing, I will embed a few notes to highlight particular points of similarity that I find noteworthy. For those who don't know, I'm drawn to post-Keynsian thought. Still, I find the Marx and Engels' circumstantial descriptions of mid-century 1800s too compellingly similar to what we are seeing today to not share their view with you. At the end I point to some books that may help others see why "free market" capitialsim isn't the end-all, be-all some make it out to be. Marx and Engels:

[Bourgeois and Proletarians:] The history of all hitherto existing society is the history of class struggles. … Our epoch [and continuing until today], the epoch of the bourgeoisie, possesses … this distinctive feature: It has simplified the class antagonisms. Society as a whole is more and more splitting up into two great hostile camps, directly facing each other—bourgeoise [ruling classes under capitalism] and proletariat [the working classes]. …

Modern industry has established the world market, for which the discovery of America [and most recently the opening of China and India] paved the way. This market has given an immense development to commerce, to navigation, to communication [or has been aided an abetted by such immense developments,. Which comes first, chicken or egg?]. … [I]n proportion as industry [and] commerce extended, in the same proportion the bourgeoisie developed, increased its capital, and pushed in the background every class handed down form the Middle Ages. …

Each step in the development of the bourgeoisie was accompanied by a corresponding political advantage of that class. [Remember Warren Buffet's 2004 remark, "If class warfare is being waged in America, my class is winning."] [T]he bourgeoisie has at last … conqured for itself … exclusive political sway. …

The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound men to his "natural superiors." and has left no other bond between man and man than naked self interest, than callous "cash payment." It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value. And in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom—Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation.

The bourgeoisie has stripped of its halo every occupation hitherto honored and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage-laborers.

The bourgeoisie has torn away from the family its sentimental veil, and has reduced the family relation to a mere money relation. [For a modern-day version see, e.g. Gary Becker's "household production function" and related literature. For a contemporary view similar to that of Marx and Engel's see, e.g. economic imperialism] …

Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all the is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life and his relations with his kind [now when all is reified into "commodity"].

The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establishes connections everywhere.

The bourgeoisie has through its exploitation of the world markets given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production. The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural….

The bourgeoisie keeps more and more doing away with the scattered state of the population, of the means of production, and of property. It has agglomerated population, centralised the means of production, and has concentrated property in a few hands. The necessary consequence of this was political centralisation. Independent, or but loosely connected provinces, with separate interests, laws, governments, and systems of taxation, became lumped together into one nation, with one government, one code of laws, one national class-interest, one frontier, and one customs-tariff. ….

… Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. … [Rendering an] epidemic of over-production. … The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented. …

Why was The Communist Manifesto kicking around my house? Years ago, my good friend and then co-worker Hank was finishing his PhD in Economics at the University of Utah, curiously then and now a hot-bed of Marxian thought. [Note: It proves curious that the U of U Econ Department leans left, since Utah is a bright red Republican stronghold.]

Hank and I used to spend many an hour debating economics, me from my Milton Friedman-influenced libertarian perspective, and Hank from a Marx/Engels' leftest perspective. Hank has since moved, as he says, "from Marx to Mastercard", and is now comfortably running a growing business. I, on the other hand, and in large part due to Hank's insights, have moved considerably in the direction of what might be called the "new left" despite the political incorrectness of the label.

Here are some of my favorite books — that some argue lean "left of center" as well. They have proved their worth to me in helping figure out where we might go from here, faced with similar conditions to those Marx and Engels saw long ago. Coincidentally these books help debunk today's round of "free market fundamentalism" that seems too pervasive these days.

Deborah Stone. 2002. Policy Paradox: The Art of Political Decision Making (revised edition).
Margaret Jane Radin. 1996. Contested Commodities
Thomas Prugh. 1995. Natural Capital and Human Economic Survival
James G. March. 1994. A Primer on Decision Making: How Decisions Happen
Elizabeth Anderson. 1993. Value in Ethics and Economics
Andrew Bard Schmookler. 1993. The Illusion of Choice: How the Market Economy Shapes Our Destiny
Herman E. Daly and John B. Cobb. 1989. For the Common Good
Robert L. Heilbroner. 1988. Behind the Veil of Economics
Mark Sagoff. 1988. The Economy of the Earth: Philosophy, Law and the Environment
Andrew Sayer. 1984. Method in Social Science: A Realist Approach
E.F. Schumacher. 1977. A Guide for the Perplexed
E.F. Schumacher. 1973. Small is Beautiful: Economics as if People Mattered

If these books don't shed light on where we might go next, maybe I'll once again have to retreat to the desperation of Kurt Vonnegut Jr.'s Player Piano saga. I found Vonnegut's books helpful, long ago, to counteract the propaganda I was getting from business school when studying or my MBA. But that is a story for another time/place.

Those Who Think They Know: A personal reflection

I've spent my adult life wondering about and studying the state of the US economy. When I was in college in the late 60s and early 70s times seemed "interesting," but no more so than they had been for decades, perhaps forever. The 60s just weren't the 50s and that's all I'd seen up to that time. Vietnam, student unrest, and all stood in sharp contrast to the seemingly tranquil homogenous 50s. When I graduated in 1972 I remembered wondering what I might do for a living. The advice I got then was, go back to school, the economy is not strong and jobs are few. So I went back to school and stayed there until about 1980.

During graduate studies in the 70s I didn't bother much with the economy, other that what an MBA student in a second- or third-tier business school might. When I finally decided to get a 'real job,' after completing my MBA and most of the stuff necessary for a PhD in forestry and economics, I once-again pondered the fate of the economy when choosing between a job with Weyerhaeuser and the US Forest Service. I chose the Forest Service, wondering whether we would be able to pay off enough of our home before the economy imploded. We financed our home with sweat equity and a bit of a bridge loan from parents and the folks we bought the fixer-upper from. Interest rates were almost 14% when we bought our home. The economy did not implode—although the commodity markets did, and the fellow who took the job at Weyerhaeuser was out of a job a short nine months after he took it.

Environmentalism Without Government: Good or Bad Idea?

As I was looking through the RGE Economics blog rollup (see sidebar) today I found this dandy at the Ludwig von Mises Institute blog: “Environmentalism without Government” by Tibor R. Machan. I should have quit then and there, but I didn’t. I read the article knowing what to expect. Still, I was surprised by the narrowly focused reasoning and conclusions.

Maybe it’s the literature and commentary I read and watch. Or maybe it’s true that we polarizing, turning everything into good v. evil, right v. wrong, etc. I always thought that we were transcending that tendency. I thought a decade ago that we were moving into the space of both/and rather than either/or?

Maybe it’s just too scary to admit that some things just don’t sort out into convenient taxonomic form. Maybe it’s too scary to admit that some problems are wicked enough that they can’t be solved without society and politics. Or maybe we are now so dumbed-down by TV that we have little capability to deal with complexity, nuance, ambiguity, and so on.

Markets are fine for what they do. I hope we can find means to adequately bound them, and keep them from doing more environmental and social harm than good. Voluntary cooperative efforts are also good, but limited in application. Machan see the world differently. He begins with, and pretty much ends with:

A free market, capitalist, exchange, political, economic system is far more environmentally friendly than any statist system, including the welfare state, socialism (whether democratic or centrally planned), or fascism. To demonstrate this, I would like to engage in some conjectural history, that is, to imagine how the world might be different had government never intervened to protect the environment but rather left all matters to property owners to sort out.

Most of us sometimes engage in conjuring up a utopian fantasyland. My usual fantasyland is that of organizational cultures along the lines of organizational learning and betterment in public and private institutions. Machan’s fantasyland is to conjure up a utopian scene where government gets the hell out of the way, allowing markets to work unfettered magic on all fronts. If markets aren’t to be the solution, then perchance all of us can find the will to work up what Machan calls “a great variety of voluntary cooperative efforts.”

Both of us would be more credible, I suspect, if we would offer up dark side scenarios, counter arguments to accompany our cheerleading. For my organizational learning stuff, it would be good to recognize that people, particularly those who seek power in public and private bureaucracies, tend to thwart the noble intentions and simple schemes often described by learning organization theorists. (See, e.g the collective works of Chris Argyris and Donald Schön, who advocate organizational learning, but go to great lengths to explain how very hard it is to get people to change behavior).

In Machan’s case it would be good to note that only a handful of practicing economists believe in the unfettered goodness voluntary cooperative efforts, free markets and private property rights as end-all, be-all solutions to every social problem. Most economists believe that markets work and do much good, but have to be bounded by the norms and customs of the cultures they work in. Similarly for cooperative efforts. They are good, but hard to effect. I suspect that Ronald Coase was right in that transaction costs tend to make cooperation on all, all the time, a bit difficult. Most economists also believe that there is a role in all this for government. Unless I misread Frederich Hayek (von Mises’ Austrian sidekick) he too held out a role for government.

None of this would be even of passing interest, except that Machan’s views are shared by high-level Bush Administration officials. If the views are unnecessarily narrow or off-base, then we all ought to stand up and take note. It could be that contrary views like those of Richard Behan (Plundered Promise: Capitalism, Politics, and the Fate of the Public Lands) and David Bollier ( Silent Theft: The Private Plunder of our Common Wealth) deserve more attention both in the press and in governance.

Governmental practices ought to be moving us toward sustainability both in terms of awareness and actions to get us on a path toward it. If indeed we need more environmental awareness and action both at the individual and institutional level, as both Machan and I believe, then we should be talking more about this and just maybe a little less about how we can chase yield and make our individual pocketbooks fatter.

Where do we go from here? Scenarios

I'm a believer in scenario planning, wherein one refrains from locking into any one future. Instead of using planning to build "plans," as most bureaucracies do, scenario planners use planning to do two simple things: to rehash the past, and to rehearse the future.

The trick with scenario planning is to lay out several plausible scenarios and use them in the rehashing and rehearsing. Here are four scenarios, laid out tentatively so that we can play with them (and add to them or abandon some) in this blog.

Continuity: Soft-Landing Escape from the USA-China "Dance of Death"

"In the continuity view, the recent experience of longer expansions, more volatile financial markets, and possible increases in the growth rate of underlying productivity are seen, for the most part, as simply reflecting the specific configuration of exogenous shocks hitting economies against the background of a broadly unchanged set of structural relationships." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

Hard-Crash Replay of the 1920s-1940s

The hard-crash view relies on theories of continued long-wave cycles of optimism followed by irrational exuberance, followed by irrational pessimism, followed by pessimism, followed by optimism, and so on. Human psychology, human politics, and human economics go hand in glove: cycles will continue. There will be differences in each wave to be sure, but don't bet on “new economy" thinking. Consider writings of the great economists, and don't leave out Joseph Schumpeter, John Kenneth Galbraith, and Hyman Minsky.

See: Doug Noland's Conundrums, 5/20/2005 – Scroll Down two-thirds of the way to subheader, Marshall Auerback's 'Bretton Woods II' is not a Monetary System, it's an Excuse, 5/24/2005, and Marshall Auerback's Debt Trap Dynamics: Time To Think The Unthinkable, 2/15/2005.

Snippet from "Debt Trap Dynamics":

So the problem is likely to get worse, which could ultimately lead to "solutions" that prove highly disruptive to the existing system of multilateral trade and cooperation which has developed over the past several generations. A resort to out and out military force cannot ultimately be ruled out.

New-Environment: Frothy Replay of the late 1800s

"The new-environment view emphasizes endogenous forces in the system rather than external shocks, and it stresses the conjunction of three factors taking shape over the last decade or so: liberalized financial markets, low and stable inflation – underpinned by higher credibility of central banks' anti-inflation commitment – and positive supply-side developments." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

Stagflation Replay of the 1960s – 1970s

"1960s and early 1970s: excessively easy US monetary and fiscal policy leading ultimately to a global liquidity overhang, substantial spikes in commodity prices and inflation, followed by stagflation." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

My dream is for some form of continuity, some magic to pull us through and beyond "Bretton Woods II." My nightmare is that we are not set up well politically to deal with the type imbalances that existed just before both World War One and World War Two. Things could get wild indeed.