The Whole Enchilada...

h/t Matías Vernengo (Naked Keynesianism).

Matt Taibbi (Taibblog) provides an example illustrating why there is no reform that can fix capitalism. It complements my previous post magnificently.

It shows that it's not a matter of creating better models, explaining and convincing some misguided academics and technocrats. Patching up a few things here and there will not do either.

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I suppose people could say many things about Glenn Hubbard. His Wikipedia profile, for instance, says he is the dean of the Columbia University Graduate School of Business, and Russell L. Carson Professor of Finance and Economics. So, the man has more than enough academic credentials and I am sure he has an intellect to match.

Until a few months ago, Taibbi adds, he "was a leading economic advisor to Mitt Romney and a rumored (perhaps even consensus) candidate for the Treasury Secretary job". Therefore, he is also successful in policy and political circles.

From reading the fragments of Hubbard's deposition in the lawsuit against Bank of America and Countrywide Financial (currently, Bank of America Home Loans), fragments which Taibbi presents, one can confirm that Hubbard is highly intelligent, plus being good with the words, and able to keep his cool under pressure.

Furthermore, one can see that Hubbard is a man who is paid handsomely for his services (but no more than high-end escorts, who charge for their services around the same):

"He took $1200 an hour specifically to not learn how subprime loans were created. Moreover, he did this non-learning for Countrywide years after the financial collapse, long after the truth about that company had already become common knowledge pretty much everywhere in the world outside Hubbard's office (...)"

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Smarter people than me can theorize and create new models; they can teach and preach until they are blue in the face, but they will not convince Hubbard and others like him. Neither will they convince think-tankers, shock-jocks or politicians (of both "liberal" and "conservative" persuasions) of their mistake, because it is not a matter of lack of brains, as Hubbard's example demonstrates. "It is difficult to get a man to understand something, when his salary depends upon his not understanding it", as Upton Sinclair once said.

It is not a matter of patching up the financial services alone, either. For one, Taibbi mentioned the connection between the financial services, universities and parties. Reform the financial services, without severing its links to universities and parties, and you'll have gained little, if anything.

But Taibbi didn't mention the notorious bureaucracy-private enterprise revolving door. He wasn't, either, speaking of climate change, or taxation and public services, industrial relations or a range of things where the same things happen.

Paraphrasing Cathy O'Neil, no "financial services reform" band aid will fix this boo-boo.

So, dear smart people, by all means, theorize, create new models, teach and preach. Technocrats, propose better regulations. But don't fool yourselves, with luck, if you are persistent, right, and communicate your ideas really well, you may convince people like me.

Don't get me wrong, this may help, but it is not enough.

Moreover, forget about convincing people like Hubbard, let alone those paying his fees. Upton Sinclair learned this without spending years studying; you should be able to do the same.

And whatever you achieve will last exactly until these people tolerate it.

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Perhaps it's time to think about a more enduring solution.

It's the Whole Enchilada, Sister.

Since he correctly predicted the re-election of Barack Obama, American meta-pollster Nate Silver has become a bit of a cult-hero for the ill-defined left in the US and even abroad.

In part, that's understandable, considering the bullying Silver endured from the Republican commentariat.

That's why also American lefty Cathy O'Neil's smackdown on Silver catches my attention powerfully.

I haven't read Silver's book on modelling (the object of O'Neil's fury). But O'Neil makes a quite negative review of it, not on the technical aspects (which she evaluates positively, in essence), but on the general political and philosophical orientation of Silver's work.

I can't say how fair are O'Neil's criticisms of Silver's politics (or his alleged "technocrato-philia"), but I sympathize with her when she says things like these:

"We didn't have a financial crisis because of a bad model or a few bad models. We had bad models because of a corrupt and criminally fraudulent financial system.
"That's an important distinction, because we could fix a few bad models with a few good mathematicians, but we can't fix the entire system so easily. There's no math band-aid that will cure these boo-boos."

I won't pretend that I know much about the mathematical details. But what O'Neil says is evident to anyone following the news. I don't know about you, but I still remember Goldman Sachs' Fabrice Tourre's emails to his then girlfriend, made public in 2010:

"Darling you should take a look at this article... Very thoughtful... More and more leverage in the system, l'edifice entier risque de s'effondrer a tout moment... Seul survivant potentiel ['the whole building risks collapsing at any moment, the only potential survivor', my translation], the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me, just kindness, altruism and deep love for some gorgeous and super-smart French girl in London), standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities [sic]!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!"

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Unfortunately, O'Neil's criticism itself falls short of the mark. It's not just the financial system that stinks: it's the whole capitalist enchilada that is rotten to the core.

Let's put this "monstruosity" out of its misery, before it drags us all even deeper into shit.

Krugman, Robots and Exchange Value.

Again I will break a promise. Instead of finishing my 2-part comment on Berlin's 775th anniversary, I will write about something that caught my attention and that of my friend Ramanan.

Paul Krugman recently posted a couple of pieces on technology and inequality. Those two pieces are valuable in themselves and I recommend them to my readers. (See here and here)

Unbeknown to me, both pieces were part of a larger debate, of which I became aware thanks to Ramanan. At one hand, Izabella Kaminska (FTAlphaville) and a group support a "technological unemployment" thesis, with clear Marxian overtones (apparently, perceived by Krugman). At the other hand, Tim Worstall (Forbes) and others oppose this. Kaminska herself offers a brief background here.

Frankly, I haven't got a clear picture on the whole debate. Therefore, I will abstain from general comments. I will, however, comment specifically on today's Worstall post, "That Robot Economy and the Rentier Class". (See here)

Worstall summarizes Kaminska's party's view thus:

"The argument is that as robots become capable of doing everything then there will be two very stark classes. The ones who own all the robots and thus get all the money and then the rest of us who live on whatever scraps anyone bothers to tax out of the robot owners".

I am in no position to comment on the fairness of Worstall's summary; so, I'll take his word for it.

After that summary, Worstall goes on to argue that machine-produced goods would become cheaper faster than workers would lose income. So, for instance, if cars are entirely made by machines, their prices would fall faster than car-buyers' income. In other words, real wages, measured in cars, rise.

The first point to make is that that is an assumption which Worstall did not argue. Here, I'll make mine his words: "I'm afraid I just don't see it".

The second point is that Worstall inadvertently stumbled upon a proof, by reductio ad absurdum, of the proposition "labour is the source of all value" (proof sketched by Ernest Mandel in 1967 in his "An Introduction to Marxist Economic Theory").

Let's assume the negation of the proposition (i.e. "is not the case that labour is the source of all value"). Knowing of this, capitalists everywhere invest in machines and sack all their staff.

Now, machines make everything: cars, washing machines, iPods, clothes, medicines, sausages; they write news stories (see here) and even books, diagnose and treat diseases, work the land; run movie-theatres, shoot the movies, compose their sound track, write their script and act; they make and pilot commercial planes; run radio and TV stations; cook, clean and look after babies at home, and have sex for money, in the streets; teach at schools and universities, keep law and order and break them, as required; sweep the streets and help in shops, and design other machines.

In a society where no one works, because machines do all the work (as said literally by Worstall himself in his summary), no one earns wages. Leaving aside "whatever scraps anyone bothers to tax out of the robot owners", if such scraps were forthcoming, no one has incomes.

Now, if no one has incomes, then no one can spend, no matter how cheap the cars, the washing machines, iPods, clothes, medicines, sausages, movie tickets, doctors' fees.

If these things cannot be purchased in the market, because would-be buyers have no income, they have no market price. Their market price is not defined.

Is not that those things are not useful. There is no a priori reason to doubt machines can make quality, useful stuff: stuff with "value in use" (as Adam Smith used to say); or with "use value", as Marxists say.

Is not that those things lack "utility", as I suppose Worstall would say.

Is that would-be purchasers lack the wherewithal to pay for them. Their market price is undefined, and so is their "value in exchange" or their "exchange value". Whatever utility they might have, it's irrelevant, without the income to pay for the goodies.

So, we find a paradox here: in their effort to reduce costs, capitalists (intent on profiting from their "entrepreneurship") end up unable to sell their much cheaper and more abundant produce, let alone to make a profit or even recoup their investment.

We must conclude that the proposition "is not the case that labour is the source of all value" is false. That is, whether readers like it or not, the proposition "labour is the source of all value" must be true.

To put things differently, it is the labour exerted to produce things, for which workers are paid, that allows workers to earn an income, income they use to buy those things they produced. This is what confers "value in exchange"/"exchange value" to the commodities.

And although Worstall stumbles quite badly with other things (among them, his highly idiosincratic definition of communism), I'll let them pass. With this is enough:

"For here’s a little known point that I like to make. We don’t actually care about jobs: don’t care if no one at all has one. We also don’t care about incomes: it’s not a problem if everyone has very low incomes. What we actually care about is that everyone has the opportunity to consume".

Berlin's Stories.

Der Spiegel Online is offering a series of articles on Berlin, to commemorate the city's 775th anniversary. For me, two of them are extremely telling, for different reasons. Here I will comment on one, leaving the other for the next post.

Reading Eva-Maria Schnurr's piece (22/11/2012), where she describes the evolution of Berlin from "little more than a swampy backwater", prior to 1870, "to one of Europe's most modern metropolises by 1914", I can't help but feeling awe before the power of capitalism. I can't, either, help feeling that was Schnurr's purpose.

Schnurr provides a vivid account of the transformation of what some call the "built environment", the material structures forming the city: buildings, streets, utilities, transport and communications. Perhaps that's understandable: those are concrete things, mentioned in documents and shown in pictures, even if historical documents and images tend to show only the choicest examples.

The Brandenburg Gate decorated after the
victory in the Franco-Prussian War (1871). [A]

These changes, Schnurr correctly takes as consequence of economic and political processes: the railroad-facilitated manufacturing and trade ("transforming Berlin in the 1840s into one of central Europe's most important rail hubs"), the change in Berlin's status, from capital of the Kingdom of Prussia, to capital of the German Empire ("the economic boom after 1871, sparked by the receipt of five billion francs in reparations from wartime enemy France"), the growth of the public bureaucracy.

Berlin Potsdamer Station, by
Friedrich Albert Schwartz (1876). [B]

The piece also succeeds in depicting the demographic transformation brought about by the change in the city's economic base: "By 1864, over half the city's inhabitants were not native Berliners". "Berlin's population in 1849 was only around 412,000, but by 1880 it had passed the 1 million mark. By 1914, 1.84 million people lived in the city, which had become Europe's most densely populated."

Another of Schnurr's achievements is to depict the emergence of a rather sheltered middle-class and the loss of political power by the landed aristocracy.

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The things Schnurr focuses on allow one to tell a story about capitalist development. In the surface, is a story of unmitigated progress. It's not a false story, but it's not the whole story and it's not history.

And Schnurr's story makes it difficult to understand the next article in the Der Spiegel series (which I'll comment in the next post).

However, not even Schnurr's narrative can completely hide the other side of the coin. Referring to the "downsides of progress", Schnurr says: "In 1905, while middle-class Tiergarten had an infant mortality rate of 5.2 percent, 42 percent of newborns died in proletarian Wedding".

While the middle-class figure sounds dubious (Tiergarten is traditionally an upmarket area), she does mention the price paid by some sections of the working class for all that development.

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The story Schnurr sets out to tell can be illustrated with pictures. If you search the net, you'll find plenty of positive images depicting this period, like those two opening this post.

It takes much more effort to find the other side of the coin:

The Freistadt Barackia slum, Tempelhofer Vorstadt, cleared
by the police in September 1872. Drawing by L. Loeffler. [C]

It's as if societies (and individuals, like Schnurr) consciously or not attempted to re-write their own past and re-create it on a sanitized, selective base, leaving aside those less-than flattering bits.

Image Credits:
[A] The Brandenburger Tor with decorations and downcasting Prussian troups after the Franco-Prussian War 1871. Wikipedia.
[B] Berlin Potsdamer Bahnhof, rear view (1876), by Friedrich Albert Schwartz. Wikipedia.
[C] Drawing by L. Loeffler: The slum called «Freistadt Barackia» (i.e. about: Shack-Land Free Town) on Planufer in the Tempelhofer Vorstadt, cleared by the royal police in September 1872. Wikipedia.