Capitalist Realism & economics

rumble

Well-known member
I really enjoy K-punk's blog (as well as the other 0 Books related blogs). The cultural analysis is great, but I find that the reliance on cultural studies and philosophy a little bit ineffectual as a means of mounting a serious critique of the capitalist system, or eventually providing alternatives. It seems like an instance of "when the only tool you have is a hammer, every problem looks like a nail".

If I'm interpreting K-punk correctly, he views the main problem as an ontological one: "there is no alternative" (to capitalism). I view ontologies as expressions of underlying economic conditions. While the dominant ontology does reinforce the economic conditions, I view the economic conditions as prior to the hegemonic ontology that they produce. I think that attacking the ontology itself is doomed to fail, so long as the underlying conditions make the ontology "true" persist.

In an important sense, Thatcher was stating an empirical fact (even if she didn't mean it that way, and even if it was not universally true) when she said that there was no alternative. She was right, there was no alternative (for Britain). The economic conditions had fundamentally shifted from a Fordist to Post-Fordist system, and there was no choice but to get with the program. K-punk's comment that woebot highlighted was quite correct IMO: "when the Federal Reserve raised interest rates by 20 points on October 6th 1979, a shift was made to the Post-Fordist industrial climate and employment was increasingly out-sourced."

When the US, the global hegemon, decided to go this route it forced the same decision on all others through its position as producer of the reserve currency and largest market for finished goods. If you wanted to have any economic growth, you had to play by the new rules (neo-liberalism). There was an alternative for the United States itself, the metropole, but for all others there really was no alternative, unless you wanted to end up like Cuba, locked out of the world trade system and consequently impoverished.

Even though people have internalized neo-liberalism to a certain extent, I don't think that is what blocks out alternatives. The alternatives are blocked, at the highest level, by the Federal Reserve and the US Government, which are controlled by the elite for the benefit of the elite. The ideology that they work under is mainstream economics, and it is a sham. The last crisis provided a fairly clear exposition of its faults, and has left the profession in disarray.

The thing that most on the left are unaware of, or ignore, is that free market economics has been completely and utterly debunked for over 20 years now. Joseph Stiglitz won a Nobel Prize for his papers with Greenwald that systematically dismantled the core of free market economics. His arguments have never been disproved, and are even grudgingly respected by mainstream economists. They are just ignored. If you want to watch any top-rate economist squirm, just mention Greenwald-Stiglitz.

Anyways, my point in bringing this up is that k-punk and co. could use some modern heterodox economics to fill out their narratives. It would tie in quite nicely, and probably yield some useful results.

Here's an example of Stiglitz, effortlessly demolishing the entire concept of "the invisible hand":

The Invisible Hand and Modern Welfare Economics - Joseph Stiglitz
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand

In terms of the larger project of providing alternatives, and the implications of his work for modern marxism/socialism, Whither Socialism is the one:

Whither Socialism - Joseph Stiglitz
http://books.google.com/books?id=Bp...whither socialism&pg=PP1#v=onepage&q=&f=false
 

vimothy

yurp
K-punk's comment that woebot highlighted was quite correct IMO: "when the Federal Reserve raised interest rates by 20 points on October 6th 1979, a shift was made to the Post-Fordist industrial climate and employment was increasingly out-sourced."

Could you explain in a bit more detail why you think that this is correct? Also, it looks to me as though the Fed Funds rate only shifted 5 bps in total over the whole of 1979, and about the same in total over 1980:

el2004-35b.gif


What is the transmission mechanism you are envisaging here?

EDIT: That looks like percent: so a 50 bps move in '79 and again in '80...
 
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rumble

Well-known member
sorry, yeah that statement isn't entirely correct, it never rose by 20% at any one meeting. I did sort of breeze by it and assume that he was talking about the Fed Funds rate starting its ascent to 20%.

The transmission mechanism is obviously the strangulation of credit through punitively high interest rates (with the aim of eliminating inflation) leading to unemloyment. that's not really controversial at all.

Inflation was the main worry of capital, by which I mean capital in the very concrete sense of the US bond market, while employment was the main worry of workers. Volcker made a clear decision to defend the interests of capital at the expense of workers.

I think that dynamic is fairly well illustrated in the chart you put up.
 

vimothy

yurp
The thing that most on the left are unaware of, or ignore, is that free market economics has been completely and utterly debunked for over 20 years now. Joseph Stiglitz won a Nobel Prize for his papers with Greenwald that systematically dismantled the core of free market economics. His arguments have never been disproved, and are even grudgingly respected by mainstream economists. They are just ignored. If you want to watch any top-rate economist squirm, just mention Greenwald-Stiglitz.

I think that this is a bit of an over-exaggeration...

Anyways, my point in bringing this up is that k-punk and co. could use some modern heterodox economics to fill out their narratives. It would tie in quite nicely, and probably yield some useful results.

Yes, I want to see them reading Hayek, Schumpeter and especially Bohm-Bawerk!
 

baboon2004

Darned cockwombles.
Here's an example of Stiglitz, effortlessly demolishing the entire concept of "the invisible hand":

The Invisible Hand and Modern Welfare Economics - Joseph Stiglitz
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand

In terms of the larger project of providing alternatives, and the implications of his work for modern marxism/socialism, Whither Socialism is the one:

Whither Socialism - Joseph Stiglitz
http://books.google.com/books?id=Bp...whither socialism&pg=PP1#v=onepage&q=&f=false

Thanks for the links. the World Bank didn't like his ideas much though...
 

rumble

Well-known member
"EDIT: That looks like percent: so a 50 bps move in '79 and again in '80..."

I think you might be reading that chart backwards. Fed Funds rate is the left scale, unemployment is the right scale. Fed funds increased by about 5% each year to go from around 10% to around 20%. 50 basis points is only half of a percent
 

vimothy

yurp
sorry, yeah that statement isn't entirely correct, it never rose by 20% at any one meeting. I did sort of breeze by it and assume that he was talking about the Fed Funds rate starting its ascent to 20%.

The transmission mechanism is obviously the strangulation of credit through punitively high interest rates (with the aim of eliminating inflation) leading to unemloyment. that's not really controversial at all.

Actually, you've not quite got the stylised facts correct. Prior to the Volker era, it was thought that there was a direct trade off between inflation and unemployment. More inflation, less unemployment. In the '70s, this relationship (known as the Philips Curve) broke down, and the US experienced both high unemployment and high inflation. This preceded the attemepts of the Volker Fed to properly anchor inflation expectations. It also did for old school (pre-1978) Keynesianism, and allowed for the rise of monetarist monetary policy (now also largely discredited since everyone figured out how little the aggregates tell you).

Inflation was the main worry of capital, by which I mean capital in the very concrete sense of the US bond market, while employment was the main worry of workers. Volcker made a clear decision to defend the interests of capital at the expense of workers.

No, look, it's more complicated than that. Firstly, interest rates move inversely to bond prices. Everyone holding bonds loses money in the short term when interest rates rise.

Secondly, please supply a quote where Volker (Volker!) says that he is defending the interests of "capital" at the expense of workers.

Finally, both you and K-Punk are completely ignoring the structural reasons that caused high inflation, unemployment and the Fed's policy response.

I think that dynamic is fairly well illustrated in the chart you put up.

Yes, but were we to extend the time series data,

LNS14000000_181203_1260970797899.gif


We can see that unemployment recovered. Does this mean that Volker was bad at his job or that he was really defending the interests of workers?


I think you might be reading that chart backwards. Fed Funds rate is the left scale, unemployment is the right scale. Fed funds increased by about 5% each year to go from around 10% to around 20%. 50 basis points is only half of a percent

No, you're right. I'm trying to figure out what 20 points means. In Spetember they allowed a 50 bps range, and in October they allowed a 400 bps range. From here. None of that adds up to 20% or 20 bps though.
 

zhao

there are no accidents
the reliance on cultural studies and philosophy a little bit ineffectual as a means of mounting a serious critique of the capitalist system, or eventually providing alternatives.

you know what's coming but i'll say it anyway: because those are categorically things he, and theorists like him, is not really interested in.
 

rumble

Well-known member
"No, look, it's more complicated than that. Firstly, interest rates move inversely to bond prices. Everyone holding bonds loses money in the short term when interest rates rise.

Secondly, please supply a quote where Volker (Volker!) says that he is defending the interests of "capital" at the expense of workers."

It doesn't matter where interest rates on bonds move vs. bond prices, what matters is the PV of the bond, which takes both into account along with the rate of inflation. Volcker ushered in THE golden era of bond trading that brought about the rise of Salomon, Drexel and all of modern structured finance. It's pretty much absurd to argue that high interest rates harm the bond market.

In terms of "defending the interests of capital", of course Volcker never said this explicitly, but it was well understood by all. Have you never heard of the "bond vigilantes"? This isn't even a controversial concept, and in fact it is playing out again today with the deficit hawks and inflation hawks whining that "the bond market is getting nervous".

"Finally, both you and K-Punk are completely ignoring the structural reasons that caused high inflation, unemployment and the Fed's policy response."

Probably because those "structural reasons" were wrong IMO. A supply shock leading to cost-push inflation and unemployment (which makes sense) was misdiagnosed as accelerating demand-pull inflation and unemployment which are two phenomena that cannot coexist, yielding a contradictory non-concept of "stagflation".

As much as the Monetarists wanted to declare the death of the Phillips Curve, it is still the basis of most modern inflation targeting regimes, while monetarism been tossed on the trash heap.
 

rumble

Well-known member
"Also, Cuba locked itself out of the world trade system. That's what communism is."

No, that's what autarky is. Communism and autarky are not the same thing.
 

vimothy

yurp
It doesn't matter where interest rates on bonds move vs. bond prices, what matters is the PV of the bond, which takes both into account along with the rate of inflation. Volcker ushered in THE golden era of bond trading that brought about the rise of Salomon, Drexel and all of modern structured finance. It's pretty much absurd to argue that high interest rates harm the bond market.

Because he allowed interest rates to float, leading to opportunities to create wealth out of the movements of bond prices.

And PV is the price of a bond. That's why it moves inversely with interest rates [C/(1+i)^t]

In terms of "defending the interests of capital", of course Volcker never said this explicitly, but it was well understood by all. Have you never heard of the "bond vigilantes"?

You said,

Volcker made a clear decision to defend the interests of capital at the expense of workers.

This isn't even a controversial concept, and in fact it is playing out again today with the deficit hawks and inflation hawks whining that "the bond market is getting nervous".

And obviously they all had a really hard time when interest rates were low...

Probably because those "structural reasons" were wrong IMO. A supply shock leading to cost-push inflation and unemployment (which makes sense) was misdiagnosed as accelerating demand-pull inflation and unemployment which are two phenomena that cannot coexist, yielding a contradictory non-concept of "stagflation".

Not enough time to get into this now, but will pick up after my meeting...

As much as the Monetarists wanted to declare the death of the Phillips Curve, it is still the basis of most modern inflation targeting regimes, while monetarism been tossed on the trash heap.

On the contrary, both are present in the most popular model used by central banks (New Keynesian DSGE models).
 
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vimothy

yurp
This probably going to go nowhere except endless hair-splitting. Let's just return to the OT--Volcker was defending the interests of capital against labour. Both inflation and unemployment were rising prior to Volcker's appointment (in '79). Both fell after he rose interest rates. Obviously, some people made out like bandits (I have read Liar's Poker, you know). But it's clear just from looking at the long run unemployment data that the fight against inflation didn't come at the expense of labour. Furthermore, Salmon Bros does not equal "Capital". Plenty of firms in America's protected markets were earning healthy rents from a system that was gradually destroyed by a long trajectory of deregulation and liberalisation (a process that ultimately went to far, alas). But this loss for entrenched interests at the expense of newcomers is, as I've suggested, a complicated thing, more complicated at least than bad guys making out at the expense of the good guys. Finally, to turn to K-Punk, the reasons that America moved to a post-Fordist system encompass far more than any 5bps move or even a 500bps move interest rates. I think that it's insane to think that you can put something of this magnitude on an FOMC meeting. But then I doubt that K-Punk is drawing on any scholarly research here.
 

rumble

Well-known member
Because he allowed interest rates to float, leading to opportunities to create wealth out of the movements of bond prices.

And PV is the price of a bond. That's why it moves inversely with interest rates [C/(1+i)^t]

...

You said,

Volcker made a clear decision to defend the interests of capital at the expense of workers.

...

And obviously they all had a really hard time when interest rates were low...

Typed that too quickly, but I think you know what I mean. The discount rate in that equation is determined by the nominal required rate of return on similar assets, which is in turn partially determined by inflation expectations. While higher interest rates at the Fed push up the discount rate, and hence lower the bond price, the lower inflation that high interest rates cause lowers the discount rate and pushes up bond prices, so it's not a simple linear relationship. this is why you see big bondholders like Bill Gross pushing for higher interest rates: rates can go either way, but what they really hate is inflation, and high interest rates kill it. High interest rates and low inflation are in the interest of the bond market, thats just a basic fact.

Vimothy, in another thread, weren't you going on about the idiocy of inflation hawks? I find it surprising that you don't recognize that the bad, self-serving arguments that they are putting out now are basically the same as those in the early 80s.
 

vimothy

yurp
Vimothy, in another thread, weren't you going on about the idiocy of inflation hawks? I find it surprising that you don't recognize that the bad, self-serving arguments that they are putting out now are basically the same as those in the early 80s.

No, I still firmly believe that they are idiots!

However, I just can't get behind an analysis that says that a single Fed Funds rate decision in 1979 was responsible for long-term structural changes in the US economy. I think it was a rhetorical flourish on the part of K-Punk and I don't think he really believes it either.

As for right now, I think that the situation is quite different. There is almost no expected inflation (see forecasts in Joseph Gagnon's recent paper), so no reason to hold back when unemployment is so high. I am 180 degrees from them, but I'm not at all convinced that what Volcker did was wrong. Unemployment was already rising along with inflation. Post Volker, both of those things were brought down and the US entered a long period of stable growth.
 
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