Orthodox Economics Gone Mad

by Phillip Pilkington

A concentration camp is the complete obliteration of privacy.

– Milan Kundera

Imagine a world where everyone could read everyone else’s thoughts. There would be no privacy, of course, and no trust. We would all know what each other were thinking and would act accordingly. We would not be able to hide certain thoughts we had about others – and we would be aware of every intention others had toward us.

In Milan Kundera’s seminal novel The Unbearable Lightness of Being he explores privacy in great detail. Teresa – one of the novel’s main characters – is a deeply traumatised young woman. When she was growing up her mother allowed her absolutely no privacy and this invasion of her personal space haunted her into her adult life, colouring all her relationships.

Kundera:

Almost from childhood, she knew that a concentration camp was nothing exceptional or startling but something very basic, a given into which we are born and from which we can escape only with the greatest of efforts.

Kundera cleverly uses Teresa’s psychology to raise questions about what it means to lead a private life as a dissident under Soviet rule in Czechoslovakia in the late 1960s. The authorities there secretly record dissident’s personal conversations in order to broadcast on the radio; they trick dissidents into sexual encounters which they videotape and then report in the media. In modern democratic societies, we have institutions in place that do this, but they leave citizens alone and focus on celebrities (who, naturally, none of us sympathise with).

Kundera:

When a private talk over a bottle of wine is broadcast on the radio, what can it mean but that the world is turning into a concentration camp?

But the life of a dissident in the Soviet Union or the celebrity in a Western democracy would be nothing compared to a person living in a telepathic society. Toward the end of 1984 George Orwell makes the convincing case that we are still free when our thoughts are still our own. A person living in a telepathic society would not even have ownership over their own thoughts, which would be broadcast at every moment to everyone around them.

Tragically, there are indeed some who live in such a world. They are not telepathic, of course, but they may come to think that they are. These are people who psychiatrists refer to as suffering from a severe and usually chronic form of psychosis: paranoid schizophrenia.

The most famous case of paranoid schizophrenia in the case literature is that of Daniel Paul Schreber – a high profile judge who lived in Germany at the turn of the 20th century. Schreber is famous in part because his case was picked up on by Sigmund Freud, but his case was only picked up because it was so fascinating. Schreber – a highly gifted and intelligent writer – wrote a long book about what he had experienced while in the throes of paranoid schizophrenia.

Here is a good characterisation of the role of telepathy in the Schreber case by the psychoanalyst Michael Vannoy Adams, taken from his book The Fantasy Principle: Psychoanalysis of the Imagination:

[T]he essence of the ‘paranoid style’ is rampant, pervasive suspicion. Paranoid schizophrenics are suspicious that someone might ‘influence’ them. In just this way, Schreber suspects that his psychiatrist’s ‘nerves’ might influence his ‘nerves’ – that is, murder his soul or destroy his reason. Schreber believes that his psychiatrist has exerted the influence of telepathy. He assumes that his psychiatrist is attempting to read his thoughts for the purpose of, as he says, “appropriating his mental powers.” In order to defend himself, Schreber pretends that he is demented – that he has no thoughts that his psychiatrist might read. This is what Schreber means by “the so-called not-thinking-of-anything-thought.

Schreber’s delusional state, then, puts Teresa’s neuroticism and totalitarian state/celebrity culture invasion of privacy in their proper light. The latter are bad; but they’re not that bad.

In cases of paranoia, as the psychic structure disintegrates various last gasp defences are often summoned up. In cases where telepathy plays a role a typical manifestation of this is that the sufferer begins to think that they can read the thoughts of others. By assuming that one can read the thoughts of others, one insulates oneself from the notion that others might be reading one’s own thoughts. This gives the sufferer a defence with which they can (usually temporarily) control the disorder and maintain some sort of control over the world around them.

And this brings us to the case of John Forbes Nash Jr. Nash – who many will remember from the film (or the book on which it was based) A Beautiful Mind, which depicted his struggles with paranoid schizophrenia – played perhaps the most significant role in the development of post-war neoclassical economics.

On October 12th 1950, Nash delivered a paper on game theory to the Cowles Commission – a group of mathematical economists who were intent on formalising the discipline. What Nash gave this audience was a means to close off the theoretical edifice of neoclassical economics once and for all – something that previous generations of neoclassicals had been unable to do and which leading figures like John von Neumann and John Maynard Keynes had essentially declared impossible.

Nash employed some fancy mathematics to do this, of course, but, like all applications of mathematics, it was in the assumptions buried within the equations where the truly relevant assumptions lay.

First Nash assumed a fearful and paranoid universe where everyone was constantly scrutinising each other and weighing up what each would do next. In Nash – as in any paranoid universe – there was a total elimination of trust. In their book Modern Political Economics: Making Sense of the Post-2008 World the economists Yanis Varoufakis, Joseph Haveli and Nicholas Theocrakis, put it as such:

Nash proves that bargainers [that is, economic agents] will only settle for an equilibrium of fear agreement and then proves that there exists only one such agreement: his solution to the bargaining problem. [Authors’ emphasis]

In his book Machine Dreams: Economics Becomes a Cyborg Science, the historian of economic ideas, Philip Mirowski, ties this directly to the ‘paranoid style’, as portrayed by Vannoy Adams above:

The Nash solution concept was not a drama scripted by Luigi Pirandello or a novel by Robert Musil; it was much closer to a novella by Thomas Pynchon. Just as von Neumann’s minimax solution is best grasped as the psychology of the reluctant duelist, the Nash solution is best glossed as the rationality of the paranoid. Nash appropriated the notion of a strategy as an algorithmic program and pushed it to the nth degree.

From these paranoid premises where all trust is eliminated and all action taken on the basis of perpetual fear, Nash then slips in an assumption that completes the circle and makes his vision of the economic agent truly in line by assuming telepathy on the part of the actor. From Modern Political Economics:

[Nash’s proof] only holds water if we can assume that [the economic agents] can potentially share common knowledge of the probability of no agreement [taking place when one agents threatens another]. But how can they, given that [each agent] has an incentive to overrepresent it [in order to strengthen their bargaining position]? As rationality alone cannot bring about such common knowledge, something closer to telepathy is necessary.[Author’s emphasis]

Or, Mirowski again:

In the grips of paranoia, the only way to elude the control of others is unwavering eternal vigilance and hyperactive simulation of the thought processes of the Other. Not only must one monitor the relative ‘dominance’ of one’s own strategies, but vigilance demands the complete and total reconstruction of the thought processes of the Other – without communication, without interaction, without cooperation – so that one could internally reproduce (or simulate) the very intentionality of the opponent as a precondition for choosing the best response. An equilibrium point is attained when the solitary thinker has convinced himself that the infinite regress of simulation, dissimulation, and countersimulation has reached a fixed point, a situation where his simulation of the response of the Other coincides with the other’s own understanding of his optimal choice. Everything must fit into a single interpretation, come hell or high water.[My emphasis]

Welcome to the concentration camp in which telepathy reigns and all privacy melts into ether!

We should, of course, take this as a powerful critique of the game theoretic foundations of modern neoclassical doctrine – foundations which were then built upon by Nobel prize winners Kenneth Arrow and Gérard Debreu and many others. But we should also see this as something more.

Those who came before Nash recognised that the economy – inhabited as it is by people whose decisions are impossible to pin down – cannot be wholly reduced to some model or others. Keynes’ theories were the most eloquent expression of this, but even von Neumann who did develop game theoretic and general equilibrium models which he deployed for the purpose of economic explanation recognised the limits of this axiomatic way of portraying a capitalist economy. And yet, after the war, the neoclassicals pursued their closed, autistic models with gusto.

What we should see in this example is something about the very nature of trying to apply mathematical models to systems that are created and inhabited by humans. Modelling these systems is equivalent to trying to model those around us. And while many neoclassicals (we hope) would not try to write equations to explain their spouse’s or their child’s behaviours, they seem perfectly content to do so for everybody else – absurdity be damned!

Copyright © 2006-2012 Aurora Advisors Incorporated
http://www.nakedcapitalism.com/

Paul Davidson is America’s foremost post-Keynesian economist. Davidson is currently the Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville. In 1978 Davidson and Sydney Weintraub founded the Journal for Post-Keynesian Economics. Davidson is the author of numerous books, the most recent of which is an introduction to a post-Keynesian perspective on the recent crisis entitled ‘The Keynes Solution: The Path to Global Prosperity’.

Interview conducted by Philip Pilkington

Philip Pilkington: Keynes famously claimed that the ideas of economists are extremely powerful and have huge influence on the way policymakers think. What struck me about your book The Keynes Solution was how well you related Keynes’ theoretical ideas to the problems the world is currently facing – and the proposed solutions. Before we talk in any detail about these ideas let me ask you this: to what extent do you think that Keynes was right about the ideas of economists?

Paul Davidson: He was absolutely right. All you need to do is look at the history of the US (and other developed countries) since World War II.

For the first 27 post war years, Paul Samuelson’s mistaken view of Keynes’ analysis reigned supreme as the Keynesian economic solution to all economic problems – and all politicians, whether Republican or Democrat, thought of fiscal stimulus as the correct response to recession. The Republicans via tax cuts and military spending, while the Democrats by more public spending.

The problem, as I indicate in my new book, was Samuelson got Keynes’ theory all wrong. Thus when inflation reared its ugly head in the early 1970s Samuelson had no idea as to Keynes’ solution to what Keynes called incomes inflation.

Instead Samuelson invoked the Phillips curve – which was not part of the Keynes analytical structure and was actually incompatible with Keynes’ General Theory – to advocate a trade-off between the rate of inflation and the rate of unemployment. When inflation rates increased as unemployment rates increased in the mid 1970s, i.e., stagflation – Samuelson’s Keynesianism was proved wrong and the door was open for Milton Friedman’s solution to all our economic problems; that is, the free market in goods and services, labor market free , and unregulated financial markets. Mrs. Thatcher and Ronald Reagan relied on this free market philosophy – as did to a large extent Clinton under the influence of Alan Greenspan and Robert Rubin.

As a result government regulations were reduced, labor unions were emasculated (remember Reagan and the air traffic controllers) the Federal Reserve aimed at targeting the rate of inflation (as Friedman’s quantity theory of money explained how the money supply did not affect real output and employment but merely affected the price level).

Milton Friedman and I had a debate about his theory vs. my view of Keynes in the Journal for Post-Keynesian Economics in the early 1970s which was then published as part of a book Milton Friedman’s Monetary Framework.

So we have two now defunct economists having the power to affect policies for more than 60 years through their academic scribbling – Samuelson for the first three decades after World War II and Friedman for the next three decades. Clearly this evidence of the power of economists – who Keynes claimed should be as humble as dentists.

PP: In the book you trace a lot of mainstream economics faith in markets back to what you call the ‘ergodic assumption’. Could you say something about the relevance of this concept to understanding mainstream theory – and why if this assumption is thrown out much of said theory has to go with it?

PD: Time is a device that prevents everything from happening at once. Economic decisions made today will have payoffs in days, weeks, months and/or years in the future. Mainstream economic theory presumes that decision makers can make optimal decisions regarding allocation of income and capital where the outcomes (payoffs) of such decisions are in the future. In order to make optimal decisions, these decision makers must ‘know’ future outcomes of all alternatives that they have to choose from. How do they ‘know’ these future outcomes?

To make statistically reliable estimates about future outcomes, the decision maker, following good statistical methodology, should draw a sample from the future and then calculate statistically reliable estimates about future probability of outcomes.

Since drawing a sample from the future is impossible, mainstream economists impose the ergodic axiom as a foundation of MAINSTREAM theory. This ergodic axiom states that the past, present and future economic events are all determined by a pre-existing and unchanging probability distribution. Therefore if one calculates probabilities on the basis of existing past market data, then , assuming the economic system is an ergodic system, this calculated probability distribution is the same as one would get if it calculated a probability distribution from a sample drawn from the future. In other words, the mainstream ergodic axiom presumes that data samples from the past are equivalent to drawing data samples from the future. Consequently the future is readily ‘knowable’ and decision makers will not make any mistakes.

Given this ergodic presumption individuals make the best choice possible to maximize their income and profits in markets free from government regulations and interference. This results in the rhetorical question that Ronald Reagan would often ask: “Why should bureaucrats in Washington know better than you do in how to spend your money?” The ergodic axiom is the basis of the laissez-faire philosophy that underlies mainstream economics.

[Note the risk management computer models used by large financial institutions such as Citibank, Lehman Brothers, etc. involved calculations of risk probabilities based on past financial market data to warn management about the future risks of any decision regarding future portfolio changes. These models, however, failed to warn these large financial institutions of the financial crash of 2007-2008. The result was that government had to bail out these large financial institutions in order to prevent a bigger economic disaster from occurring.]

On the other hand, if the future is uncertain as Keynes insisted is the case – i.e. the system is nonergodic – then there is a positive active role for government to produce market rules and regulations that prevent individuals from taking decisions that can cause markets to crash! [Similar to the government enforcing traffic rules to prevent auto accidents.] There is also a role for government to clean up the mess if the system does crash – via fiscal ‘stimulus’ policies and easy monetary policies!!

Accordingly, if one rejects the ergodic axiom as not relevant to our money using capitalist system, then all of mainstream theory is mere fiction.

[Note George Soros has argued that mainstream financial market theory is not applicable to real world financial markets because actions taken by market participants today can change the future outcomes in ways that are not predictable today – Soros calls this his ‘reflexivity’ concept. Thus Soros is in essence rejecting the ergodic axiom of mainstream theory.]

PP: Together with the ergodic axiom there is another key tenet of mainstream economics that you highlight in your book The Keynes Solution and that is the ‘neutral money argument’. Could you briefly explain this concept and why it is so important for mainstream economic theory?

PD: A second fundamental axiom of new and old classical mainstream economics is that “money is neutral”. For example, Milton Friedman asserted that money was always neutral – at least in the long run.

This neutral money presupposition of mainstream economics assumes that increases in the supply of money will affect neither the volume of goods produced nor the level of employment in the economy – even if there is significant unemployment and excess capacity to produce goods in the economy. In other words, the mainstream axiom of neutral money asserts as a universal truth that does not have to be proven that any monetary policy that increases the quantity of money available in the economy in order to increase market demand for the products of industry will have absolutely no effect on employment and production.

Consequently, the neutral money axiom is a presumption that any easy monetary policy is always inflationary. Thus when the Federal Reserve invoked what was called a ‘quantitative easing’ [often called QE policy] where the Central bank ‘printed’ money to finance an increase in market demand for goods, believers in mainstream classical economics insisted that the result of quantitative easing will be only to increase the inflation rate dramatically.

When inflation did not increase after QE and QE2 in 2010 and 2011 respectively, logically consistent mainstream economists said that the inflation rate increase was just around the corner and we will see it soon.

For Keynes and his Post Keynesian followers, inflation is not a matter of increasing the money supply. Inflation is the result of either speculation regarding stocks of existing commodities – what we call ‘Commodities Inflation’ and/or increases in profit margins and increases in wages relative to productivity increments – what we call ‘incomes inflation’. Consequently, anti-inflationary policies, as I explain in my book The Keynes Solution, involves a buffer stock policy for commodity inflation and an incomes policy for incomes inflation

Blind adherence to the neutral money axiom prevents mainstream theorists from recognizing that if there significant unemployment and idle capacity then additional government and private spending financed by the quantitative easing of the central bank will create profit opportunities for entrepreneurs to expand output and employment – and, of course, will not necessarily be inflationary if the government has a buffer stock policy and an incomes policy in action.

PP: Yet, Bernanke et al seem to be mainstream economists. Why is it that they occasionally advocate expansionary policies and yet continue to believe in their doctrines rather than scrutinising them in light of both their prescriptions and the evidence that emerges as a result of thee prescriptions?

PD: A sage once said: “Consistency is the mark of a small mind”. Nobody ever called Bernanke et al ‘small minded’. Yet there often appears to be an inconsistency with the policies Bernanke et al advocate and their logical theory.

Most mainstream economists such as Bernanke et al who call themselves [New] Keynesians never read Keynes’ General Theory. [Someone once said a ‘classic’ is defined as a book everyone cites but no one reads. For mainstream Keynesians Keynes's book The General Theory of Employment, Interest and Money is definitely a classic.]

Most post-WWII ‘Keynesians’ learned their views of Keynes – not from reading Keynes – but from what Nobel Prize winner Paul Samuelson said Keynes’ theory was. As I indicate in my book The Keynes Solution, in an interview in 1986 Samuelson specifically stated he found Keynes’ analysis ‘unpalatable’ and not comprehensible. Samuelson therefore stated “I finally convinced myself to stop worrying about it… I was content to assume that there was enough rigidity in relative prices and wages to make the Keynesian alternative to Walras operative.”

In other words, Samuelson merely assumed the system was a classical model but with [in the short run] rigidity in money wages – so that the classical market ‘solution’ only came about in the long run. This despite Keynes having an entire chapter in the General Theory entitled ‘Changes in Money Wages’ which analyzed how flexible wages (and prices) still did not automatically restore full employment in Keynes’ general theory. [Did Samuelson ever read Keynes' ‘classic’?]

Of course, 19th century economists already knew that if wages and prices were not flexible, unemployment could occur – so if Samuelson was correct in his interpretation of Keynes, then Keynes had nothing new to add to already well established classical theory! Consequently, if Samuelson was right, Keynes was a charlatan when he claimed to having provided a revolutionary new general theory.

Since the ‘master’ American post-war Keynesian, Paul Samuelson, was inconsistent between his short-run analysis and the long run, it is no wonder that his ‘Keynesian’ students and followers such as Bernanke, Krugman, Stiglitz, etc. are also inconsistent. As John Williamson [the originator of the so called ‘Washington Consensus’] once wrote to me: his view was that American Keynesians are too impatient to wait for the long run to solve the recession and unemployment problems. This ‘impatience’ is, I think, why Bernanke et al demand active government policies even though in the long run – according to their doctrine – no government intervention is better. I believe that is why Bernanke et al are inconsistent between their short run policy desires and the long run logical conclusion of their theoretical doctrine.

PP: Yes, that would explain it perfectly. While they find such solutions theoretically unpalatable, they nevertheless think them eminently practical. Interesting.

Moving on. You talk a bit in the book about commodity price inflations. What do you have to say about these and is there a Keynesian solution?

PD: Commodity inflation is identified with rising market prices of durable standardized commodities such as agricultural products, crude oil, minerals, etc. Typically these commodities are traded in public markets similar to the liquid asset security markets. These commodity markets tend to have prices associated with a specific date of delivery – either delivery today or at a specific date in the future. Markets for a future date delivery are limited to only a few months in the future.

Since most commodities tend to take a significant length of time to produce, the supply of commodities for any future date in these markets are fixed by already existing stocks plus any semi-finished product that are currently in the pipeline and are expected to be finished by the date of delivery. Accordingly, if there is any expectation of an increase in market demand for these commodities in the future, then people can speculate on these markets that the prices will rise.

Accordingly by buying a purchase contract in a market for future delivery the purchaser (speculator) believes he/she will make a large capital gain when he/she sells the product at the future delivery date in the spot market at a higher market price. In sum, any expected increase market demand will only inflate the price of these commodities today.

To prevent commodity price inflation requires the government to maintain an inventory of the commodity as a ‘buffer stock’ to prevent changes in demand and/or supply from inducing significant commodity price movements. A buffer stock is nothing more than some commodity shelf-inventory that can be moved into and out of the market to buffer the market from disorderly price disruptions by offsetting the previously unforeseen changes in demand or supply as they occur.

For example, since the oil price shocks of the 1970′s, the United States has developed a ‘strategic petroleum reserve’ where crude oil is stored in underground salt domes on the coast of the Gulf of Mexico. These oil reserves are designed to provide emergency market supplies to buffer the market price of domestic oil if there is a sudden decrease in oil supplies from the politically unstable Middle East. The strategic use of such a petroleum reserve means that the price of oil will not increase as much as it otherwise would if, for example, a political crisis broke out in the Middle East.

In other words, oil price inflation could be avoided as long as the buffer stock remained available to offset any immediately available commodity shortage. Thus, during the short Desert Storm war against Iraq in 1991, U.S. government officials made strategic petroleum reserves available to the market to offset the possibility of disruptions (actual or expected) from affecting the market price of crude oil. The Department of Energy estimated that this use of a buffer stock prevented the price of gasoline at the pump from rising about 30 cents per gallon during the brief Desert Storm period.

Use of buffer stocks as a public policy solution to commodity price inflation is as old as the biblical story of Joseph and the Pharaoh’s dream of seven fat cows followed by seven lean cows. Joseph – the economic forecaster of his day – interpreted the Pharaoh’s dream as portending seven good harvests where production (supply) would be much above normal causing prices (and farmers’ incomes) to be below normal. This would be followed by seven lean harvests where annual production would not provide enough food to go around while prices farmers received would be exorbitantly high. Joseph’s civilized policy proposal was for the government to store up a buffer stock of grain during the good years and release the grain to market, without profit, during the bad years. This would maintain a stable price over the fourteen harvests and avoiding inflation in the bad years while protecting farmer’s incomes in the good harvest years. The Bible records that this civilized buffer stock policy was a resounding economic success.

PP: There is a concern that, should governments pursue full employment policies we might see inflation arise due to wage-bargaining by workers. What do you think of this argument and how would you suggest dealing with this problem should it arise?

PD: Full employment might strengthen the bargaining power of labor sufficiently so that workers demand money wage increases which exceed the increase in the rate of productivity increase of labor, This will result in higher labor costs of production and therefore higher prices of products produced in firms throughout the economy. This increase in money wage rates that exceeds productivity increase is what Keynes called ‘incomes inflation’. Accordingly the government will have to institute some form of an ‘incomes policy’ to limit wage increases to not exceed productivity increases. A so called tax-based incomes policy or TIP policy would prevent this incomes inflation. TIP would use the corporate income tax structure to penalize the largest domestic firms in the economy if they agreed to such inflationary wage demands. If money wage increases could be limited to overall labor productivity increases, then workers end all other owners of inputs to the domestic production processes might willingly accept noninflationary money income increases.

PP: In your book you are sceptical about using a devaluation of the US dollar to decrease the trade deficit and raise employment. Yet many economists think that this would be a good strategy. Could you explain your scepticism and lay out briefly an alternative arrangement?

PD: There are several reasons for my scepticism that devaluing the US dollar is a desirable policy for reducing the US trade deficit by making imports sufficiently more expensive and making US exports cheaper to foreigners so that Americans reduce their total US spending on imports and foreigners increase their total US spending on US exports, until spending on imports equals what foreigners spend to buy US exports.

The first reason this is not a desirable plan is based on a technical condition called the ‘Marshall-Lerner condition’. Basically this condition says if the sum of the price elasticities for imports and exports is less than unity, then devaluation will increase the trade deficit. One need only note that in the 1980s when the US dollar exchange rate tended to decline rapidly, the US trade deficit increased! Consequently, from an empirical point of view, the Marshall-Lerner condition seems relevant to the USA trade balance problem then and therefore devaluation could worsen the US trade deficit, as it did in the 1980s. A sage once said: “those who do not study history are bound to repeat its errors”. The many economists you cite as thinking devaluation is a good strategy, obviously want the US to repeat the errors of the 1980s.

Secondly, those who argue that devaluation would end the US trade deficit are essentially arguing that if US exports become cheap enough to foreigners then US made products and their labor input would become ‘competitive’ with foreign produced goods’ labor costs. Since labor productivity in most manufactured goods is the same whether produced in the USA or in China, this means that the US labor costs per unit of output when measured in a single currency must be competitive with the labor costs , say, in China in order for US produced goods to be able to compete in the global marketplace.

In other words for US goods to be competitive, devaluation must reduce the value of labor income in the in the US to the equivalent of what is earned in China (where a recent New York Times article indicated workers in a Chinese factory were paid $15 a day for a 12 hour work day and 6 day work week). But do we really want a policy which reduces the average American worker’s annual income to less than $5000 per year? (The economists who say ‘yes’ really mean as long as we don’t reduce economists incomes!)

I should think that we don’t want to advocate a policy that reduces American workers income to the level of a Chinese ‘coolie’. Especially when there is a simpler way to correct the US trade deficit. This alternative is what I have called the International Monetary Clearing Union [IMCU] where the trading nations would essentially enter into an agreement to spend all their income earned on exports on the purchase of imports from foreigners. [The details of my IMCU plan can be read in my book The Keynes Solution]. Accordingly no nation could run a persistent trade imbalance. While at the same time no nation need depress their workers income.

Copyright © 2006-2012 Aurora Advisors Incorporated
http://www.nakedcapitalism.com/

by Paul Buchheit

A cynic might argue that business leaders and their friends in Congress weren't expecting different results.

In either case, we've become a bipolar nation, 1% manic and 99% depressive. Our affliction is caused by a 30-year experiment in the dismal economics of delusion. Deregulation for corporations and tax cuts for the wealthy have defined conservative policy since the 1970s, when University of Chicago economist Arthur Laffer convinced Dick Cheney and other Republican officials that lowering taxes on the rich would generate more revenue.

Ronald Reagan complied in the 1980s by dramatically reducing the top marginal tax rate. And while declaring government "the problem" he eased a half-century of protective regulations on mortgage lending.

In the Clinton years, Larry Summers and Alan Greenspan and Phil Gramm and others lobbied against regulations on the derivatives that evolved into toxic assets a decade later. A lonely voice of opposition, Commodities Trading Commission head Brooksley Born, was denounced by the powerful Treasury men, who were shocked by her affront to the nation's "financial stability."

The repeal of the Glass-Steagall Act in 1999 removed long-held protections for commercial bank deposits, as the newly liberated financial institutions now coveted the unprecedented profits in high-risk investments. Soon after, the 2000s brought us the Bush tax cuts, which have cost the nation over two trillion dollars, and a further assault on the Securities and Exchange Commission by Goldman Sachs and other financial institutions committed to "self-regulation."

So what's the result of all this? The financial collapse of 2008, of course. But it goes way beyond that. Tax cuts and deregulation led to the worst inequality since the Great Depression, with the top 1% nearly tripling their income while wages leveled off. The richest 10% own 80% of the "unearned income" that gets taxed at rates lower than those for teachers or health care workers. Corporate profits are at a record high, having accounted for 88% of the recovery after the 2008-9 recession.

Yet taxes on corporate income have been shrinking dramatically. The total tax revenue derived from corporate taxes has dropped from about 20% in the 1960s to under 9% in 2010. From 2008 to 2010, the top 100 U.S. corporations paid only 12.2% of their income in taxes, and thirty of them paid nothing at all.

The lack of SEC regulation has also allowed corporate America to seek tax dodges beyond our borders. Citizens for Tax Justice reports that the 280 most profitable U.S. corporations sheltered half their profits from taxes between 2008 and 2010. The "Ugland House," a single building in the Cayman Islands, is now the 'home' of 18,857 corporations. While the worldwide average corporate profit per employee is $40,000, in Bermuda in 2007 it was $5.4 million per employee.

But corporate heads, especially in the financial sector, keep lobbying for more deregulation, often infiltrating the regulatory agencies with former employees to get their point across. The Washington Post reported on the clamor by business leaders to link regulations to job losses. Congress listens. "Dodd-Frank obviously is a disaster," proclaimed Ron Paul. "But Sarbanes-Oxley costs a trillion dollars, too. Let's repeal that, too!"

Ironically, even earnest attempts at regulation can be foiled by big business. The Daily notes that "Stringent regulations tend to protect incumbent firms from...innovative start-ups that could drive them out of business...Google, Apple and other technology giants, for example, have spent billions of dollars on software patents to defend themselves against pointless litigation. Shoestring entrepreneurs can't even begin to do the same, so many new tech firms are never established."

We don't have the political will to regulate greed in a reasonable and effective manner. Instead, wealthy Americans continue to insist that more for them is better for everyone, and that the system will work if we just leave it alone. As Rachel Marsden said, "If capitalism is perceived to not be working in America...it's because the system isn't capitalist enough."

After 30 years of economic devastation for most Americans, it's sad to watch our rapid fall from sanity.

http://UsAgainstGreed.org

Paul Buchheit is a college teacher, an active member of US Uncut Chicago, founder and developer of social justice and educational websites (UsAgainstGreed.org, PayUpNow.org, RappingHistory.org), and the editor and main author of "American Wars: Illusions and Realities" (Clarity Press). He can be reached at paul@UsAgainstGreed.org.

by Doug Harvey

One thing about an election year, particularly this one, is that it reveals the fallacy that humanity has somehow emerged from “mere animal conditions.” We may have comfortable homes, climate-control, exo-skeletons (known as automobiles) to allow us to move about rapidly and move objects many times our own weight, etc. But beavers, ants, and foxes have these things. One thing that humans have the capacity for, if they strive to use it, is being able to see life from another’s viewpoint – we have the capacity for compassion. If anything would allow us to rise from a “mere animal condition,” it is this compassion. But under the capitalist model, currently the dominant paradigm in the world, the priority is put on expropriating land and labor in order for a small group to accumulate wealth they did not produce. In our deluded national narrative, these people are said to be “job creators.” In fact, their access to wealth and power has allowed them to create a sort of neo-feudal system that can be aptly called, “Trickled-On Economics.”

In this dominant paradigm headed by Big Capital, compassion is highly discouraged. There is a tendency among the politicians, managers, and overseers of capitalist institutions to live like there is no tomorrow and pretend like there was no yesterday. After all, the working class – those who actually produce wealth – can be depended upon for a source of insurance in the event the gaming schemes of Big Capital fail. This attitude of borrow now (“leverage” if you are rich), worry later, unlike the wealth itself, has trickled down, or should I say “trickled on” the general public.

The so-called “debt crisis” currently providing rationale for cutting social programs was created by capitalists manipulating the housing and financial markets for short-term profit, a scheme that crashed the global economy. While they were doing that, working class people struggled with a steady decline in income resulting from off-shoring American manufacturing, union sell-outs, and outright union-busting. To make up for this decline, they were handed credit cards, deregulated during the Reagan years, and usurious lending became the order of the day. In addition, instead of providing education for its citizens as some social welfare states of western and northern Europe have done, the student loan industry was created, with student loan giant Sallie Mae becoming a for-profit corporation by 1995. As if this was not enough (it never is), for-profit health care, starring Big Pharma, has become ensconced in Congress, K-Street, and Wall Street. Also, moving in from the desert is a dust devil known as the for-profit prison system. Examples of profiteering from others’ misfortune, or indeed manufacturing misfortune for profit, (note: I do not even broach the war profiteering game in this essay), has no limit in the capitalist paradigm.

With the declining share of wealth enjoyed by the working class, it was logically reasoned that higher education was a way out of mind-numbing, dead-end jobs and into a better life. Both federally-insured and private loans for education skyrocketed. For some, this better life came to pass, for others it became a trap and in some cases a death-trap. Student loans do not have bankruptcy protection, and the collection agency can seize your home, your social security, your disability income – pretty much anything they want to seize. There are numerous horror stories out there, including many suicides. Indeed, as Alan Collinge has written in his book The Student Loan Scam, defaulted loans are more lucrative than those not in default because assets can be seized.

Credit card debt, which now ranks behind student loans in consumer debt as of the summer of 2010, is the result of falling wages and job loss. By 2012, there were well over a half billion credit cards in use in the U.S. alone. That is double the total population of the country. Bankruptcies were down in 2011; with a mere 1.37 million filings in the U.S. (it was 1.55 in 2010). Many bankruptcies were brought about by medical bills contracted in a system that preys on the sick.

A compassionate set of policies that would address these issues would not include taking billions of dollars in tax revenue from the working class and handing it over to Wall Street bankers to cover their failed schemes and scams as has been done more than once since 2008. In this paradigm of the Bean-counter, we can hand $700 billion at a pop over to criminals in suits, but we cannot help struggling college graduates or families stranded without gainful employment.

It is not hard to see that the issue is systemic. Capitalism has no built-in moral code other than maximizing profits. Whatever morality exists is brought to the table by individuals, but the system itself does not reward compassion; indeed, ruthlessness and cruelty are central features of the game. Capital has been engaged in a long-term struggle to deprive people of access to the resources they need to build a good life for themselves. It creates an environment that allows a small group or even one person to live extremely well on the backs of those whose access to resources they control. Once people become separated from the resources that they need to live, they must re-acquire them on terms favorable to the capitalist. In some cases, the result is modern-day slavery. The separation of people from the resource base is a central theme in the human history of the world and at the heart of our systemic problem today.

This system has led to the abuse of the non-human resources, as well. Humans and their resources are, ultimately, not separate at all. Labor is the interaction of humans with the non-human world and the results are often very beautiful, profound, poignant, moving, powerful, and on and on – in a word: art. Forcing human beings to interact with resources on terms favorable to the Capitalist is hardly emerging from “mere animal conditions.” It results in environmental degradation of both human and non-human. Degrading and dangerous sweatshops, mines, oil rigs, etc., have increased because of deregulation and defunding of safety oversight. Environmental oversight has been rolled back, defunded, or ignored. These underscore the systemic nature of the dual expropriation of labor and resources for the sake of the wealth accumulation of a very few.

From mountain-top mining to clear-cutting rainforests, the systemic unsustainable use of resources creates an oppositional relationship between humans and their environment. “Man vs. Nature” is a conflict drilled into our heads from an early age, but it is this term “Versus” that needs to be questioned and studied. A political economic system in which compassion features predominately would institutionalize such introspection. We have examples from our past. Agriculture, for instance, traditionally employed the concept of “husbandry.” Farms were once places where abundance was possible for all species involved and sustaining this human and non-human natural order was the priority. Under capitalism, agriculture has industrialized and cold, hard numbers dominate decision-making processes.

Under a more humane system, labor would be an extension of the production of nature; indeed, human labor is an expression of nature. But its usurpation by a few is like the felling of the forests, the leveling of mountains, the making of war, or the building of sweatshops: we trade our humanity – our compassion – for the sake of accumulation by an ambitious and even sociopathic few. If we are serious about emerging from a “mere animal condition,” we need to “think outside the box,” and box is the capitalist paradigm.

Doug Harvey is a historian and musician teaching, writing, and performing in the Kansas City area. He can be contacted at dharvey@ku.edu