By Philip Pilkington, a journalist and writer based in Dublin, Ireland
Watch out, I have a large, very large fur, with which I could cover you up entirely, and I have a mind to catch you in it as in a net.
– Leopold von Sacher-Masoch
Many aspects of contemporary economic theory certainly seem to have their origins in the mythic and the moral rather than in the realm of the rational. But while this seems to be an accurate description of the system as a whole, it does not seem quite able to account for certain aspects of this system which appear to be rather obsessive in the minds of its adherents.
These obsessions, or ‘fetishes’, can be explained in like terms, that is: compared to certain primitive rituals and superstitions. To do so we will first have to form a better understanding of the fetish itself; an Enlightenment concept that has a long and interesting history.
The specific fetishes we will explore will be the most important today: the government, inflation and gold. All these phenomena are interconnected in neoclassical economic theory (yes, even gold, or at least the ghost thereof), however, they tend to lead their own individual existence outside of the Grand Neoclassical System itself. In and of themselves they are, for economists and economic commentators, fetishes that can be worshipped in dark rooms away from the great hall. They are like fragments of the main theory that adherents smuggle out of the temple and obsess over in their own private shrines.
This may seem like an obscure practice but it is a very important one, especially in times when the Great System has been so thoroughly shaken. Today more so perhaps than ever, commentators seem willing to worship their favourite fetish – be it the intrusive presence of Big Government or the lack of gold in the bank vaults – rather than take stock of what has actually occurred.
Before we begin it should be noted that while it is usually commentators, the educated public and economic functionaries that engage in fetish worship, economists occasionally do so themselves and even when they do not it is always the economists themselves that choose what will become a fetish by underlying some aspect of the Great System or other.
Before we begin we must turn to the notion of the fetish itself in order to understand its meaning more clearly.
A Brief History of the Fetish
What is a fetish? Today people will probably equate a fetish with a form of sexual behaviour. They might also, if they have attended lectures on the social sciences, be familiar with Karl Marx’s ideas about ‘commodity fetishism’. Both of these ideas were products of the 19th century and they share a mutual, deeper source.
The term comes from the 18th century French writer Charles de Brosses. De Brosses picked it up from the Portugese who coined it to describe certain magical practices the observed in Western Africa among the natives. They noted that these natives often attributed magical properties to certain objects – such as feather necklaces or beads – and so began to refer to these objects as ‘fetishes’, derived from the Latin word facticius, which means ‘artificial’ or ‘man-made’.
It was from de Brosse that Marx too derived his idea of ‘commodity fetishism’. Marx saw certain contemporary practices as similar to primitive fetishes and considered them to be carry-overs from earlier forms of thought. So, for example, he thought that people’s worship of money – more specifically, what he called the ‘money form’ – was a modern manifestation of fetishism.
Then there were the 19th century ideas about sexual fetishism. These were introduced by the French psychologist and hypnotist Alfred Binet who also derived his ideas from de Brosse. Binet’s theories, which made an extraordinary and very modern contribution to the theory of human sexuality, are remarkable and largely forgotten today – much, I think, to the loss of those of us living in the 21st century.
Binet didn’t consider the fetish to be a monstrously perverse manifestation of freak sexuality – a view certainly held by most of his contemporaries. Instead he thought that fetishism lay at the heart of all sexuality. Binet claimed that we are all, to a greater or lesser degree, fetishists and that the weirder of these fetishes are of difference from ‘normal’ sexuality in degree rather than in kind.
All of these theories on fetishism should be viewed as interconnected and, in order for us to have an appreciable idea of what fetishism is, they should be allowed to coexist. They all highlight different shapes taken by what is correctly denoted as a singular phenomenon: fetishism.
Fetishism, to summarise rather crudely, is a way of viewing the world where certain specific ideas or objects become locked – usually unconsciously – into the mind, and become key reference points for everything from sexual attraction to religious rituals to means of payment.
The attachment to these ideas and objects then is almost wholly passionate. This accounts for why they are so often grounded in irrationalism. They are like the building blocks of the larger systems with which we organise our lives, but due to the reverence shown to these particular aspects of the larger intellectual systems they can often be broken off and leant an autonomy all of their own.
How then, do these fetishes apply to popular conceptions of free-market economics?
Economics as a Dissemination of Fetishes
From the very start economics students are raised prone to fetishism of the most extreme variety. Certain ideas in economics are stressed and their social consequences hinted at to be of immense importance. Inflation, as we will see, is taught to be particularly important in its implications and is, in the minds of many, detached from the theory being taught and given a sort of force in its own right. So too is government intervention. The Grand Neoclassical System caters to these fetishes as it is, to a large extent, built upon them and the moral systems from which they come.
What results is a sort of intellectual sound bite that can be thrown out almost at random in a discussion or an argument. If the interlocutor or opponent then tries to work around the fetish and construct a rational argument he or she is ignored, grossly misunderstood or accused of, in a sense, desecrating the fetish.
These fetishes seem to become even more important to the educated public as the pillars of mainstream economics crumble. Faced with the fact that the Grand Neoclassical System might be incoherent people retreat to their fetishes.
One comparison that many will be familiar with is the story about when the Hebrew people began to fear that Moses might not return from Mount Sinai and turned to the worship of a Golden Calf. This, as is commonly known, is referred to as ‘idol worship’ which means the worship of a false god. Given that the ‘true God’ is doubted because of difficult circumstances the ‘false god’ is erected.
This is, in a sense, similar to the argument here. However, fetishism should be seen as even more primitive than idolatry. While the community continues to organise around the Golden Calf, fetishism tends disperse the community into perverse sects. So, one sect might take the leg of the calf, while another might take its head as the object of worship – the Calf is no longer a god, false or otherwise, but is broken down into a series of objects that different people imbue with different magical properties. This is the true nature of fetishism. While many might point to neoclassicism as the worship of a false god, it was a god – that is, a central turning point around which the community could organise. Fetishism is something altogether different.
The problem with fetish worship then should be obvious. While neoclassicism may have serious shortcomings it gives people faith in their leaders and gives their leaders some sort of model to work off. The fetishes, however, are simply aspects of the theory – limbs of the calf – and make no sense whatsoever when they are worshipped alone. Incoherence and mass-confusion ensues. (This should not excuse neoclassicism, of course. If it were a coherent theory it would not be susceptible to such chaotic breakdowns.)
What really determines the nature of the particular fetish adopted seems to be wholly subjective, a personal attachment – always passionate and irrational – that is given to one or another of the fetishes. So, one commentator might be shrieking about the size of government while another might be trembling at the thought of inflation. The problems facing policymakers probably have nothing to do with either of these aspects of economic theory but since they are no longer tied to the greater system they gain an autonomy in their own right – as a sort of personal obsession; or fetish.
What we end up with is a tribe of economic commentators and functionaries divided; each picking up their favourite fetish – be it a fertility statue or inflation – and going off to their separate shrines to worship their particular fetish. And so the tribe becomes divided; completely unable to govern itself.
Fetish I: Government
Of all the economic fetishes in circulation today the fear of government seems the most important, the most passionate and, not surprisingly, often the most patently ridiculous. It takes its quote-unquote ‘rational’ weight from the idea that if free-markets were allowed to operate without government constraint something good will happen. These ideas are forced into students brains in undergraduate economics classes. The reality of the government’s role in the economy is altogether different, but before we sketch this out let us turn to one particularly absurd manifestation of this fetish today.
You’ve seen it before. The websites and the dinner-table conversations where the participants claim that the current financial crisis was due to too much government intervention. The first time I came across this fetish I was flabbergasted. My mouth dropped, my eyes opened wide, “Does this person read the newspaper?” I thought. Well, it turns out that, yes, they probably do read the newspaper as it is generally educated people who make this outlandish claim.
The trick is that these people ‘know’ something that the newspaper doesn’t. What is this arcane piece of knowledge? Specifically, that government regulation and intervention has wrecked the economy and that it was this corruption that led to all the ‘badness’ that came out in the crisis.
Press them on it and they cannot really explain further – or, if they can it is usually a haphazard freak-fest of deranged brain-wrongery so completely bizarre that it makes you question the validity of Man’s existence itself. It’s like arguing with a Truther or any hardcore conspiracy nut. They possess an obscure ability to bend the discussion to their will by throwing out strange, irrelevant and often made-up references that, even if you could keep up with, would prove impenetrable.
This is fetishism. It gains credence from the vague idea derived – and perhaps one of the few retained – from an undergraduate course in economics or business, that the free-market leads to ‘goodness’ and the government causes ‘badness’. The idea is split off from the theory of the markets itself and becomes an autonomous force: a fetish. This fetish, like a parasite, takes over the brain of the host and transfixes them in a repetitious ritual song wherein they spew out random ‘facts’ that revolve around the idea.
The economic reality of government is, of course, far more complex. The government plays an extremely important role in the economy, two aspects of which I will now highlight. Perhaps before I do this I should try to debunk straight out the idea that government intervention and regulation caused the financial crisis, but I’m not going to do this because anyone that believes this… well… they’d believe anything and I’d suggest that instead of trying to convince them otherwise you should come up with a scam to fleece them of everything they own.
Okay, so two of the most important roles that the government plays in the economy are geared to ensure that said economy does not slip into a Great Depression-style slump every time there is a relatively large financial crisis. There are many other important roles that the government plays in the economy, but I choose to highlight these particular ones as they show up an important aspect of the glaring moronism of the anti-government fetishists.
(Disclaimer: What follows does not count for Eurozone governments. The periphery of these are essentially self-destructive client states geared to take on unsustainable debt loads that are shunned by the bigger players in Europe who abuse the system to sell goods to these countries and then allow them to fall apart when things get bad).
Anyway, the first function the government serves in these instances is to step in and take on more debt to make up the gap in private sector spending that result from these crises. To put that more simply: when the private sector stops spending, the government does. This allows unemployment and output to remain at relatively tolerant levels; that is, until the anti-government and other fetishists step in and wreck this. Hyman Minsky called this, rather pertinently considering our present discussion, the ‘Big Government’ aspect of the government’s response to crises. In his book ‘Stabilizing an Unstable Economy’ he uses the example of the 1974-75 US financial crisis-cum-recession [p. 41]:
In 1975, because of Big Government and the large increase in government debt, the default risk of business and bank portfolios decreased. As business liquidated inventories, they decreased their indebtedness to banks and acquired government debt. Banks and other financial institutions acquired liquidity by buying government debt rather than by decreasing their assets and liabilities. The public, both households and business, not only acquired safe assets in the form of bank deposits and savings deposits, but were able to decrease their indebtedness relative to income. The existence of a large and increasing government debt thus acted as a significant stabilizer of portfolios during the threatening period of 1975. [You can see the large ’75 deficits here]
The other important action the government takes during these crises is to act as the ‘lender of last resort’. While this may be a somewhat irritating practice as it props up dodgy private institutions, there is no doubt that without government serving this function in some shape or form, the results would be a depression of the 1930s variety. So while people may rightly claim that governments should try to restrain institutions from availing of government bailouts, this is an integral function amidst today’s particular economic circumstances. To point this out is not to commend it.
Minsky once again summarised this nicely with reference to the 1974-75 US financial crisis-cum-recession [p. 43]:
Whereas Big Government stabilizes output, employment and profits by its deficits, then lender of last resort stabilizes asset values and financial markets; for example, the Federal Reserve buys, stands ready to buy, or accepts as collateral financial assets that are otherwise not marketable; it thereby substitutes, or stands ready to substitute, its own riskless liabilities for assets at risk in various portfolios. Whereas Big Government operates on aggregate demand, sectoral surpluses, and increments of government liabilities in portfolios, the lender of last resort works on the value of inherited structure of assets and the refinancing available for various portfolios.
Sound familiar? Yeah, it should. It’s pretty much what happened post-2008.
As an aside, Minsky points out that should financial instability continue to be allowed to metastasize unchecked these counterbalances may not be enough [p. 75]:
The lender of last resort interventions and the massive government deficits that have prevented the sky from falling are strong medicine. Strong medicine often has side effects. [W]e know that the system can evolve so that medicine that was effective in one regime or one set of structures may not be effective in another.
This is an important aside indeed and bears careful consideration. However, it should be clear that the economic fetish of government phobia pure and simple is a misplaced and crankish idea that doesn’t deserve to be taken into consideration in real economic debate. It is just a pity that this fetish affects government policy as strongly as it does but more on that later.
Fetish II: Inflation
Lenin once said that the surest way to destroy capitalism is to debauch the currency and since he uttered these words they have occupied, consciously and unconsciously, the minds of many.
Inflation is seen by those who place extraordinary value on their property as a sort of class war waged upon their bank accounts. Many people don’t fully understand the process of rising prices, but they bridge this gap in their knowledge with an intuitive sense that someone or other is stealing from them.
But is someone actually stealing from them when prices rise? Sometimes – but rarely. The idea is more so than anything else an emotional reaction. If the shopkeeper is charging a higher price it is often assumed that there is some crook in the shadows pulling the strings. Inflation – or, more specifically, a rise in a price – induces paranoia.
These days, having been indoctrinated by mainstream economists and the media, people learn to equate price rises with trade-unions and government expenditure. They also tend to equate sustained inflation with hyperinflation – calling to mind images of wheelbarrows of money being pushed around by Robert Mugabe. Now this is a fetish if we should ever see one. It even looks like a fantasy – with the evil African dictator wheeling away large stashes of cash, presumably used to finance his harem, his family members in overpaid civil servant positions or his crude torture chamber. It’s really too good.
Let’s start with hyperinflation. (For a more complete discussion of this try here and here – and a simpler outline here). Hyperinflation is a rare, if not nonexistent phenomenon in our present age in the advanced industrial world, and there is good reason for this.
In order for hyperinflation to take hold consumers need to have access to basically unlimited amounts of cash or credit. If the government cuts taxes or hires a few extra workers this won’t be even close to enough on the demand side. Consumers need direct access to a constant stream of credit or cash, otherwise when the price rises take off, they’ll be pulled down again because people won’t have the hard cash to keep up. It also helps if there’s been a significant blow to confidence in the currency among the domestic population – as say happened in Mexico during the Peso crisis.
Hyperinflation proper is also assisted in its rise by a significant fall in productive capacity. I don’t mean a simple loss of output due to, say, unemployment or a few disparate strikes; I mean a full-scale wiping out of productive capacity. Say, the recent land grabs in Zimbabwe or the French occupying the Ruhr Valley in Germany in 1923 and the resulting production disruptions. This increased – and constantly and perhaps infinitely growing – supply of money chasing fewer and fewer goods might trigger a hyperinflation. But it’s still a ‘might’, especially in advanced industrial countries where social bonds are strong and governments legitimate (well, fairly legitimate…).
Advanced industrial countries with reasonably (I say, ‘reasonably’) stable banking systems do not generally face this sort of crisis. Indeed, they have not faced them since the Weimar Germany episode – and that was a relatively advanced country that was crushed in a major war and subject to harsh reparation payments and domestic revolutionary pressures – it was also some 90 years ago in a very different era. I’m of the opinion that, discounting nuclear war, an alien invasion or the seizure of power in the advanced nations by hardline Maoists, hyperinflation will never occur in the West.
Hyperinflation just isn’t a concern these days. But it is a fetish, and a rather powerful one at that. It is imbued with a power to tear society asunder, causing famine and strife. A witch’s wand of an idea waved by the semi-educated and the uncurious. It might be scary, if it was actually a threat – but it’s not.
What about garden variety inflation then?
Well, first of all we should ask the question: what is inflation? This isn’t a stupid question. Many people today equate inflation with price rises. This isn’t strictly true. If I sell you cans of beer and the cost of hops goes up and I pass this cost onto you as a onetime increase this is not inflation, it is merely the market passing on costs. Inflation is a sustained rise in the general price of goods. Most goods must be rising in price over time for inflation to be said to exist.
So where does inflation come from? Professor John T. Harvey in an excellent summary gives four main sources:
(1) Market power: This is monopoly plain and simple. I stole all the fishes – you want a fish – since no one else competes with me in the fish market I increase the price of fish – the general price of fish rises and along with it any other products that are made using fish (fish paste, fish oil, baggy-trousers with fish in the pockets etc.). It should also be noted that trade unions, in certain circumstances, have monopoly control over wages and they can cause these to rise. This in turn causes prices to rise, which may result in further wage rises and so on. This called a ‘wage-price spiral’ – more on this below.
(2) Supply shock: A wiping out of a stock of a product that is then passed on in the form of price increases to other products. Peak oil folk, for example, claim that when oil starts running out the prices of everything is going to increase – because, haven’t you heard? everything is made of oil. If this happens apparently we’re all going to have to live in the wild and hunt animals naked and the like. This is a classic supply shock inflation.
(3) Asset market boom: Am I really going to explain this to the Naked Capitalism readers? Come on… Mr. Speculator meet Mrs. Commodity. Cost of Mrs. Commodity rises. Mr. Speculator stuffs his greasy pockets. Other prices rise because these products require Mrs. Commodity to be produced.
(4) Demand pull: A favourite among neoclassicals and fetishists. The idea is that people have too much spending power and there are too few goods in the economy; money spent being greater than goods on offer means higher prices. It is generally assumed that this ‘too much spending’ comes from the government pumping money into useless projects that benefit no one: stairways to nowhere, poor people that should be dead by now, that sort of thing.
So, where’s the fetish at? Well, it tends to be a mix of two of the theories a laid out above – torn out of their context, of course. Which two? Wage-price spirals and government spending, of course. Or to speak without the euphemisms: unions and welfare queens. Haven’t you heard? These groups are costing us money. And not just through taxes either, they cause inflation too.
The reality is quite different. Wage-price spirals were a major threat in the heyday of union activity – roughly from the late-1940s up to the late-1970s, when unions actually had significant power. Even then, however, they were rarely at the root of inflation. The inflation of the 1970s, for example, was caused by rising oil prices. This was due to Arab monopolists bringing the pain to the West due to the latter’s support for the Israelis in the Yom Kippur war of 1973 (See the ‘Market Power’ variety of inflation as listed above). When various prices started rising in the economy unions used their market power to increase wages and maintain living standards. This in turn caused more price rises and so on. But at base was the rise in the price of oil.
Anyway, these days the idea that wage-price spirals might cause sustained inflation is silly. The unions took a major bashing in the Reagan-Thatcher era and haven’t recovered since – nor will they, if I were to make a prediction.
As for government spending, I won’t go into it too much, but aggregate demand is in the gutter since the 2008 collapse and subsequent recession. Notice that people aren’t buying much stuff these days and loads of people have lost their jobs? Well that leads to less spending, so most economies could really use an injection of government spending right about now. A good rule of thumb is that governments should be spending roughly in proportion to the amount of people and resources unemployed. This will almost certainly NOT cause inflation. Anything beyond this might.
But when these are generally invoked they are not rational arguments and we should not take them to be. Once again they are lore hinted at by the neoclassicals who stress these aspects in lectures and in the media. People pick up on this because they justify the prejudices they harbour against certain groups: poor people, workers, ‘useless’ old people and, hell, there’s no point in hiding it, you people are aware of the undertones of the welfare queen narratives… blacks and Hispanics.
These ideas then become fetishised and worshipped for their own sake. They are fetishes actively geared toward stopping society from improving itself in key regards. In many ways they are conservative fetishes, the veneration of which allows people to justify low wages, unemployment and poverty. Other causes of inflation are conveniently ignored or left off the radar (ever notice that commodity speculation gets less media attention than it should even though it is readily remediable?). This is a fetish that serves to conserve a certain way of living and a certain approach to policymaking; nothing more, nothing less.
Fetish III: Gold
Gold is perhaps the ultimate economic fetish even though it is the least explicitly invoked in popular discourse. Gold signifies for many a sort of stability. This is often an indefinable stability but, like all fetishes, this is usually based on ‘feeling’ rather than reasoned thought. This sense of stability is without doubt the central purpose that the gold fetish serves, for economists and non-economists alike.
The world is an uncertain place. Money values fluctuate and the cost of goods rises (and sometimes, though more rarely, falls). Some commodities, however, give off an aura of consistency; these include artworks and antiques, collectables and certain ‘hard’ commodities.
For many – usually the upper-middle class – these act as a sort of stabilising mechanism for the way they organise their world. So they might own a classic convertible that they drive on the weekends or they may surround themselves with antique furniture which they pass down through the generations. They literally live among things, things that they view as having a relatively fixed value. Certainty in an uncertain world.
Gold is one of the same species. However, it has two features that distinguish it from the other commodities. First of all, and rather less importantly, gold is generally thought of as more ‘democratic’ and less ‘elitist’ than an artwork or a classic piece of mahogany furniture. Why? That’s a very complex issue and this isn’t the place to explore it, but without a doubt it has a lot to do with our second feature. And that is the fact that gold was once, for a rather brief historical period, the fulcrum around which the world monetary system organised itself.
The idea that the bank notes in your pocket might be exchangeable for a fixed amount of gold bullion no matter what else happens in the world economy is a seductive one. And it is out of this attractive notion that the contemporary fetish of gold is born. When in place the gold standard gives the user of legal tender a sense of security. Indeed, it often allows them to escape the anxiety of an ever changing world – even if this escape is an illusion and a lie.
So when economic instability occurs and a gold standard is not in place people turn to gold hoards. They did so during the present crisis and they also did so during the monetary crisis that took place in the late-70s and early-80s. Not only do their savings turn to gold but so to do their minds. People hark back to the days of the gold standard, thinking that a return to this nostalgic time will solve our present economic woes. Austrian theorists are invoked and the central bank is attacked with mercy. Economic ‘theories’ spring up on the internet that more so resemble conspiracy theories than they do actual economic theories.
In reality nothing could be further from the truth than that the gold standard was a panacea. The system, while being theoretically pristine, was in fact highly unstable. Let’s run through a quick bit of history to illustrate this. (For a more in depth take, visit here).
While gold was used as a means of exchange throughout history it only became the official monetary standard for the world in 1844 when the Bank of England passed the Bank Charter Act, allowing full convertibility of Bank of England notes into gold specie at a fixed exchange rate. You could now bring your British pounds to a bank and get the equivalent value in gold bullion. Other nations followed suit.
This system really only lasted until the First World War. After that it began to breakdown into complete incoherence, but more on that in a moment.
The period in which the gold standard operated was, by many standards, rather unique. The British Empire had reached its nadir as the world economic superpower and wars and international conflict had been sparse and inconsequential. This is what really accounts for the working of the gold standard in this period; that is, the importance of Britain as the central world economic hub and the relative stability of international relations. This explains why the gold standard became widely adopted after the Brits established the 1844 Bank Charter Act. It was a simple case of ‘follow the leader’. But once the leader went into decline, so too did the world political system and with it the contemporary monetary standard.
With the onset of World War I most governments dropped the gold standard. The gold standard imposed limitations on how much they could spend and this was no good for a power engaged in a massive war. When the war came to a close the gold standard, together with the monetary systems of most countries, was in tatters.
Some gold fetishists claim, of course, that this is where ‘it all went wrong’; but that is pallid nonsense. The world was evolving and changing and the fixed gold standard of 1844 was quickly becoming outdated. This was obvious even at the turn of the 19th century when the likes of William Jennings Bryan was making his famous ‘Cross of Gold’ speech – which can be heard here. The economic historian Karl Polanyi wrote in his famous book ‘The Great Transformation’ – which is an amazing history of the broader forces that led to the collapse of the gold standard proper – that [p. 21]:
The breakdown of the international gold standard was the invisible link between the disintegration of world economy that started at the turn of the century and the transformation of a whole civilisation in the thirties.
The gold standard had become a restriction on the progress of civilisation that was speeding up at the time and had to be done away with, as a snake sheds its old skin. Yes, there were cranks who disliked this new era – the Austrian Schoolers were some – but they were relics of a different era, nostalgic for the economic, social and political systems of their childhoods; much the same way that you hear the ‘Golden Age’ in the US discussed among older people today, often with a twinkle in the eye and a convenient forgetting of the social chaos that was bubbling under the surface.
After WWII a new system was set up. It was the gold standard once again, but in a different guise and under the auspices of very different economic policies. The central hub this time around was the US, but in a far more direct manner than Britain had been in the High Victorian era. The British, as has been said, initiated a gold standard and then were ‘followed’ by the rest of the world into doing the same. The 1946 Bretton Woods system was altogether different. Now it was the US dollar that was convertible into a fixed amount of gold, while the other currencies were to be convertible into the US dollar. It was a sort of gold standard, but at one step removed.
This quasi-gold standard – despised by the nostalgists – was in place to serve the same purpose as the original gold standard: that is, to stop the government quote-unquote ‘spending beyond its means’. It is, of course, somewhat ironic that this was the era of government spending proper, but that’s another day’s discussion.
Once again the new gold standard didn’t last long and succumbed to the pressures of history (as so often glistening economic theoretical constructs do). Nixon scrapped the gold standard in 1971 because various countries were devaluing in order to counteract high rates of unemployment, while the US was spending a small fortune in East Asia to fight the Commies.
You can see Nixon’s speech here; it’s a fascinating piece of history – an ostensible conservative giving up on his principles in the face of new realities. You can almost see his dismay and disorientation.
This date is now fetishised by the gold bugs; this, once again, is where it ‘all went wrong’. This is nonsense, of course. What had actually happened was once again the current of history had swept away an outdated monetary system that had ceased to function properly. The gold fetishists will claim that the instability that followed is proof that Nixon made the wrong move, a typical claim by the economic fetishist who wishes to bend history to fit his or her narrow conception of the world. Again this is complete nonsense; the instability caused the move away from gold, not vice versa.
Those who wish to return to the gold standard today are massively ignorant of the forces driving history. They are usually fetishists that want history itself to conform to their way of conceiving how society should be organised. They cannot and will not see that history is a dynamic flow of events and anything that gets in its way will be cast, to turn a famous phrase, into the dustbin. The idea that a new Bretton Woods system could be put in place is farcical in the extreme – the US is far from its post-war power and would not have the political clout to enact such a system. If it tried to do so alone is would be destroyed competitively by countries not adhering to the old ways. The idea that we could return to an 1844 Bank Charter system is likewise and perhaps even more so ridiculous. Can you imagine countries shipping gold bullion to one another in return for trade? Japan ships a freight of Nissans to Ireland; Ireland sends a freight of gold bullion back. Come on, the world has got a bit too complex for that.
So, do the mainstream economists play a part in disseminating the gold fetish? Yes, but not as directly as they spread those other perverse ideas that we have discussed. There is no point in going into technical details here (if you want them I’d suggest this), but the neoclassical system still assumes that we are on the Bretton Woods standard.
The neoclassicals assume this in the way they teach undergraduates how modern central banks fund government spending. This is what we see daily in the media about governments ‘running out of money’ and the like. This nonsense leads the educated public to treat the government in the same way it might treat a household and this sort of thinking feeds into the idea that there must be some ‘thing’ that is anchoring government spending. While educated people don’t tend to equate this ‘thing’ with gold, when they think about the system in any depth they become panicky that this imaginary ‘thing’ does not exist at all and that the truth is that we operate in a state-backed fiat currency regime where currencies have no intrinsic value. This, more often than not, leads to yet more gold fetishism.
Contemporary Fetishism
These three fetishes – and they are not the only ones – run rife in public discourse. Most people do not spend their time studying how the economic system actually works. Most don’t even have time to fully come to grips with the easy mythologies adhered to by the neoclassicals. So they fill these intellectual gaps with fetishes.
These fetishes – and, as has been pointed out above, the academic economists hold a great deal of the responsibility for this – have an extremely important bearing on the way we run our societies. Nothing can end a discussion on public policy faster than invoking big government, inflation or that the government is running out of money.
In this these fetishes are greatly constraining our ability to properly govern our societies. This is especially so after the current financial crisis when people, distrusting the economists whose theories essentially led to the meltdown, return instead to their favourite fetish. Even people who should know better opt out for the simple solution. It’s very easy to call for a new gold standard or smaller government when, at some level, people must know that such a thing will never and can never be implemented. It’s not so easy to face reality as it is and formulate policy proposals that tread on too many myths to be popular.
We began with a quote from Leopold von Sacher-Masoch, the fetishist novelist of the 19th century after whom the sexual fetish of ‘masochism’ was named. It seems only fitting that we should end with a lyric from a song entitled after and based upon his most famous work. In The Velvet Underground’s avant-garde masterpiece ‘Venus in Furs’, Lou Reed sings a lyric that could so easily be applied to our economic fetishist:
Tongue of thongs, the belt that does await you
Strike, dear mistress, and cure his heart
For this is what the economic fetishes do for us today. They cure, not our societies, but our hearts. They are, more so than anything else a lure, a lulling to sleep – they are…
A thousand dreams that would awake me
Different colors made of tears
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In Zen, the goal is to avoid word fetish.
That’s what Bodhidharma taught – special transmission outside scriptures, no reliance upon words or letters.
“It is a defect in language that words suggest permanent realities and people do not see through this deception. But mere words cannot create reality. Thus people speak of a final goal and believe it is real, but it is a form of words and the goal as such is without substance. The one who realizes the emptiness of objects and concepts does not depend on words. Perfect wisdom is beyond definition, and pathlessness is the way to it.
The wise one treads this path for the direct realization of impermanence and for the direct realization of understanding. This, then, is perfect wisdom. Such a one should tread this path knowing that attachment and attractions are neither good nor harmful, even enlightenment is neither good nor harmful, because perfect wisdom is not meant to promote good or harm for that person. However, even though there is no intention of good or harm, it does confer endless blessing.”
– Prajnaparamita
Boom boom boom boom
-johnny lee hooker
:)
“Mere words cannot create reality…” Tell that to S&P and Moody’s!
Bullshit creates reality all the time!
I hate saying anything bad about this because I liked the first part so much but here are a few pointed questions.
If economic progress should drive prices down over time why do we generally have inflation?(please don’t give me some crap about hedonics)
If there is no gold standard to restrict the amount of credit or currency issued in the global reserve currency, does this lack of artificial scarcity cause malinvestment?
At some point does the marginal benefit of the size of government decrease vis-a-vis its ability to mitigate downturns? Or as the government gets bigger is its ability to impact GDP decreasing or increasing when a crisis hits.
To what extent do you agree or disagree about the marginal productivity of debt as it currently stands in the U.S.? an answer would be $1 more in private debt= x(GDP growth), and same for public debt. Is this even possible in your view?
I just loved the introduction but the world you are describing is a textbook one which I’ve never observed outside the classroom.
A large part of the reason why there is inflation is because central banks target inflation rates. On the other hand, you can only drive down prices so much before further decreases become unsustainable (unless you move to China or something, but that causes other problems). Back in the ’70s and ’80s inflation was mostly created to artificially reduce the value of the amount of money ordinary workers got while not compensating them for that inflation, and after that the inflation has been kept as low as possible, for the opposite reason.
Yes and no. The financial crises we’ve been seeing are in part due to the fact that there are ever more savings floating around that cannot be profitably reinvested, and in part because banks are allowed to increase their leverage far beyond safe levels, and creating lots of money that is generally only spent on goods/services and home building/improvement. Now, this latter mechanism is quite interesting, because I can not quite figure out why the money lent this ways is — in aggregate — spent in unproductive ways.
I would an answer these questions slightly differently.
On inflation.
Most of the spending power in the economy is credit rather than money per se – something like 97% credit to 3% money. So what we actually have is a money system tacked onto a vastly bigger cridit system. No prizes for guessing which is the dog and which the tail. Now factor in that the banks can issue new debt at zero cost and that they don’t have to have reserves first (or gold) and you have guaranteed inflation but not necessarily in what the central banks (who don’t understand this) are watching which is CPI inflation. So the inflation turns up in asset prices – shares and houses and then morphs into a Ponzi.
On Gold.
Gold is just another commodity with has its own price which can vary just as copper or oil do. Historically, it has great importance as a store of value in troubled times because it is valuable, easy to hide and does not corrode. Historically also it has been used as a medium of exchange but this is only barter.
Some months ago Yves has a great link to some research that showed that a substantial part of the deflation in the Great Depression was down to the French buying gold in huge quantities. They did this by settting their exchange rate artificially low so that French workers were effectively subsidising gold purchases by their central bank through foregone wages. Now just imagine the history of the last two decades if the US had been on a gold standard. Hint: China is much bigger than France.
Money, properly understood, is intrinsically valueless tokens that are agreed by society to be good settlement for all debts, public and private and NOT a commodity. For more on this see Steve Keen’s blog.
You’re mostly emphasizing different aspects, though I feel your failure to distinguish between different types of credit is unhelpful.
But this is missing the point. Money doesn’t need to be a commodity, it just needs to be universally accepted. It can be linked to a commodity, though this brings with it problems of its own — see the example of the inflation occurring thanks to the Spanish importing huge quantities of silver and gold from South/Latin America. The intrinsic valuelessness, understood against that background, can actually be an advantage. As such, in some ways the decoupling of gold from money is in some ways helpful (the differences in cost of living between countries with coins that are all shackled to gold makes the pegging almost impossible to maintain).
“If economic progress should drive prices down over time why do we generally have inflation?”
I never said anything about that. Without generalised price increases, you’d have generalised price decreases — and with it high levels of unemployment, low wages, mediocre profits and intermittent depressions (as they had in the 19th century).
But the above didn’t deal with this. True though. For expanding prosperity general price increases are probably the norm. We just don’t want them to get out of hand.
“If there is no gold standard to restrict the amount of credit or currency issued in the global reserve currency, does this lack of artificial scarcity cause malinvestment?”
Doubtful. I can think of quite a few ‘malinvestments’ that took place during the era of the gold standard.
‘Railway mania’ in Britain is an excellent example as it overlapped almost to the month with the adoption of a gold standard. There were plenty of other speculative bubbles during the gold standard era.
The best source for these? ‘Das Kapital’ by Herr Karl Marx. Seriously. It’s a great source for examples of ‘malinvestment’ in this era.
“At some point does the marginal benefit of the size of government decrease vis-a-vis its ability to mitigate downturns?”
I seriously doubt it. Anyway, I don’t advocate that the government should increase it’s relative share of GDP. I don’t think it needs to. It just needs to maintain its current level — and perhaps allocate itself a bit better as a stabalising mechanism rather than a bureaucracy. Job Guarantee comes to mind.
“To what extent do you agree or disagree about the marginal productivity of debt as it currently stands in the U.S.? an answer would be $1 more in private debt= x(GDP growth), and same for public debt. Is this even possible in your view?”
I don’t understand the question. Sorry. I understand the terms. Just not the question.
On speculation and malinvestment in the gold standard era here’s an interesting piece (written in 1856 — the gold standard having been adopted 12 years earlier in Britain):
http://bit.ly/jCb5Py
Speculation:
====================
“The British are prone to congratulate themselves upon the removal of the focus of speculation from their free and sober island to the muddled and despot-ridden Continent; but then they forget the intense anxiety with which they watch the monthly statement of the Bank of France as influencing the heap of bullion in the sanctum of the Bank of England; they forget that it is English capital, to a great extent, which supplies the great arteries of the European Credits Mobiliers with the heavenly moisture…”
===================
Malinvestment proper:
===================
“One of the most extraordinary and characteristic transactions of the Royal British Bank was its connection with some Welsh Iron Works. At a time when the paid-up capital of the Company amounted to but £50,000, the advances made to these Iron Works alone reached the sum of £70,000 to £80,000. When the Company first got possession of this iron establishment it was an unworkable concern. Having become workable after an investment of something like £50,000, we find the property in the hands of a Mr. Clarke, who, after having worked it “for some time,” threw it back upon the bank, while “expressing his conviction that he was throwing up a large fortune,” leaving the bank, however, to bear an additional debt of £20,000 upon the “property.” Thus, this concern kept going out of the hands of the bank whenever profits seemed likely to come in, and kept coming back to the bank when fresh advances were required to go out. This practical joke the Directors were endeavoring to continue even at the last moment of their confession, still holding up the profitable capacities of the works, which they say might yield £16,000 per annum, forgetting that they have cost the shareholders £17,742 during every year of the Company’s existence. The affairs of the Company are now to be wound up in the Court of Chancery.’”
The entire system of credit banking is government established. To say that government had nothing to do with the financial crisis is nonsense. The structure of modern banking is to hide insolvency and fraud. In fact, banking as it is practiced is likely against the US Constitution in that it grants a few the power to engage in a money monopoly. None of this mess would have taken place on the scale it took place without the deposit guarantees and other guarantees in place. The system itself is a government system, only the profits are privatized.
A true system would have been liquidated, but it wouldn’t have gone on as long as it did, thus the moral hazards would have shown up decades ago. Instead government and the Fed covertly hid and bailed out banks like Citi over and over again. The S&L mess was a government fronted mess as well. Recall the Speaker of the House, Jim Wright went down in that fiasco.
Laws were set up to discourage people from pulling their money from banks. The banks were liable for the money so why couldn’t they have it in the first place? But, due to the set up, poor practices became industry wide. Why obey the rules when no one cares?
I will buy into the other arguments. True inflation requires true demand. The Austrian theory on hyperinflation rides on the psychology of the desire to hold a particular money. When the desire diminishes, there can be a race out of the money, thus an idiot like Bernanke could cause hyperinflation. But, the true value of money is on its face, tender in payment of debt. These are the same words used in the Constitution itself, “A tender in payment of debt”. Few understand the widespread liabilities payable in dollars. Even if the dollar was abandoned, it would still have a demand to acquire it to pay these debts. All the time central bank notes were redeemable in gold, the bulk of the money in the country wasn’t gold, but bank deposits. The Federal Reserve and the perception that the Fed could cure the problems behind a bubble is what caused the Great Depression. It is what caused the current crisis. The only debtors being given relief today are the bankers themselves.
Plagiarizing Krugman.
http://krugman.blogs.nytimes.com/2010/06/09/the-seductiveness-of-demands-for-pain/
That is, what’s being plagiarized is the basic ploy of misdirection away from the simple comprehension of organized crime and toward fuzzy armchair psychoanalysis.
As Krugman puts in in that post, the sentence which sums up his entire agenda:
“I don’t think you can resort to class warfare arguments.”
At any rate, he’ll try to divert people from doing so for as long as possible.
Regarding that first fetish, the real fetish is continued faith in representative government, which we know was an elitist scam from the outset (Federalist #10 and 51), and which at any rate definitively failed in all its economic and political promises. We know that reformist economic elitism doesn’t work, and by now we should regard all elitism as offensive to human dignity.
To use the MMT idea to astroturf on behalf of continued faith in big government is an abuse of it. Its proper use is proximately to refute deficit terrorism and goldbuggery (i.e., a negative use), and in a broader, affirmative sense to explain how “money”, in order to have any legitimacy, must always be circulating. It therefore follows that the “store of value” notion, including all asset hoarding, all “property” in land, resources, idle treasure hoards, is illegitimate. That’s the real educational use of MMT.
But it has no worthwhile implications for activism beyond that, since the goal has to be to do away with elitist centralized government completely. That includes elite-centralized currencies, whether they’re privately administered by banksters or “publicly” by government technocrats. It’s anti-democratic corporatism either way.
“To use the MMT idea to astroturf on behalf of continued faith in big government is an abuse of it.”
I didn’t use MMT. I cited Minsky.
You’ve used MMT before. I don’t necessarily limit my comment to the post at hand. It depends on the argument.
I’ll bet.
When does economics itself – the ideology of scarcity – become THE fetish of the comfortably dumb?
Big government, inflation [really hyperinflation], and Gold – the holy trinity of the austerian church – is merely sleight of hand to attack/ridicule the golden calf of AUSTERITY. So let us worship at this tower of babble…
Trouble is the other side of this fetishism – Keynesianism and/or MMT – has their own priesthood whetted to economic growth as the only solution to lifting all boats.
Never comes the day when both the Austerian and Keynesian churches are seen as two sides of the same reactionary coin predicated on scarcity: more economic growth because there isn’t enough to go around. If scarcity was no longer the result of nature but of men, then contemporary economics has fetishized scarcity to justify the gross inequality stemming from such artificially-induced scarcity.
Economics itself is a fetish…
Mickey Marzick in Akron, Ohio says: “When does economics itself – the ideology of scarcity..”
It wasn’t always that way. Once upon a time economics was the ideology of abundance. But somewhere along the way economics got turned on its head.
The old industrial capitalists needed demand. Increased demand and increased production went hand in hand, along with profits. But then someone noticed that increased profits could be gained by simply decreasing production, especially if demand was rigid. When production was cut, profit margins soared. But overall, greater profit margins on smaller production meant greater overall profits. The age of monopoly, or finance, capitalism was born.
Government is frequently used to enforce lower production. Seldom is this done overtly, but usually is done in the name of serving some higher goal. (This may be part of the reason why many are skeptical about the environmental movement, which more than once has become a tool of monopoly capitalists.)
So I think industrial capitalism, just like Keynesianism and/or MMT, was “whetted to economic growth as the only solution to lifting all boats.” But that all changed as industrial capitalism morphed into monopoly/finance capitalism. And of course monopoly/finance capitalists are never so bold to declare themselves as such, but always masquerade as industrial capitalists. Thus we get all the doublethink and doubletalk, because they are not what they pretend to be.
Keynesianism and MMT become tools of the monopoly capitalists when the monopoly capitalists gain control of the government. As Amitai Etzioni observes in The Moral Dimension, Toward A New Economics:
.
The classical economic dogma held that economic and political power should be kept separate. It’s not unlike the belief in separation of chuch and state, calling for a separation of economic power and political power. The neoclassical economic dogma, however, is based on the idea that those who have economic power should also have political power, and those who lack economic power should be deprived of political power.
Mickey Marzick in Akron, Ohio,
Perhaps the best case study of monopoly capitalism, where government was used to curtail production, thus driving up prices and profits, was that of the integrated oil companies in the 1930s.
As to this history, I highly recommend Nicholas George Malavis’ Bless the Pure & Humble (a play on words derived from Pure Oil Company and Humble Oil and Refining Company, two of the biggest oil companies in the 1930s). It deals with the struggle by the largest oil companies of the day to get governments, both state and federal, to limit oil production so as to drive up oil prices. The period covered is between 1919 to 1936. This passage from the book will give you some idea of what happened to oil supply and price during that period:
As Malavis goes on to explain in great detail, the big oil companies of the day, led by Humble (now Exxon) and Pure (later Cities Service and now Occidental), began a legal and political battle to have the government step in and place legal limits on oil production (called “allowables”, each well being assigned a daily “allowable” production which could not be legally exceeded) so as to bring production back into line with demand and thus drive up prices. This was a long struggle lasting many years that included sending in the Texas Rangers to shut in the wells of recalcitrant producers, but by 1936 the major oil companies finally prevailed in achieving a web of state and federal controls to reign in oil supply, and the price of oil rose to over a dollar a barrel.
This was all done in the name of “tak[ing] care of…future generations…and to prevent the actual waste through reckless and prolific production of this great natural resource.” Whatever one thinks about this high-sounding goal, it nevertheless flies in the face of the free-market fundamentalism proselytized even to this day by major oil company executives.
There has not existed a truly free market in oil since. When U.S. production peaked in the 1970s, the Saudi Arabian government stepped into the lurch and took over the U.S. government’s role as market policeman. I don’t see any reason to believe why this situation will change until demand outstrips Saudi Arabia’s ability to produce.
To help my thinking, I divided capitalism into four parts. Each part is driven by ROI. The first is the competitive phase where you attempt to position yourself in the market with an innovative product. The second is the growth phase where you maximize ROI using scalability and marketing with the goal of securing a piece of the market. The third phase is a grab bag of actions unrelated to traditional production and sales. You might invest in a Congressman, a lobbyist, consolidate or diversify. Management changes to suit the current strategies. Management that is unconnected to the core business is fatal eventually. Hence you have the Steel Trust run by those that know nothing about the business because the business is simply about making money, not providing a product. The fourth phase is decline, where Private Equity takes over or a hedge fund begins the process of asset stripping. The business may be liquidated by a takeover or merger. Often a few win and many lose. That is capitalism, the business cycle. If you are a public company there is no stopping point. It is a process of growth until decline.
Nicely stated.
I assume each phase requires a different fetish, as economic behavior is largely a function of psychology (which Pilkington points out so wonderfully here).
“The period in which the gold standard operated was, by many standards, rather unique. The British Empire had reached its nadir as the world economic superpower and wars and international conflict had been sparse and inconsequential.”
Either I am completely missing Pilkington’s point (this is possible) or the sentence quoted above makes no sense. Does he really mean to use the word “nadir” to describe the position of the British Empire prior to the first world war?
I can’t escape the uneasy feeling that he has confused “nadir” and “zenith”. If he is in fact capable of such a gross misstatement I find my confidence in much of the balance of his argument very much shaken.
You’re quite right. Sorry. I don’t have an editor. Or access to an edit button. Blogging… a dangerous game… Typos are a constant threat and we have no defence against them.
Pilkington gives us quite an arresting performance of shoddy thinking. Confusion seems to be the ultimate goal, with the outcome a rather muddled and roundabout defense of neoclassical economics.
“While neoclassicism may have serious shortcomings it gives people faith in their leaders and gives their leaders some sort of model to work off,” he tells us. “The fetishes, however, are simply aspects of the theory – limbs of the calf – and make no sense whatsoever when they are worshipped alone. Incoherence and mass-confusion ensues.”
Pilkington is telling us that the total is greater than the sum of the parts. Even though the neoclassical beliefs on gold, inflation and government make no sense whatsoever as standalone theories, they combine into a coherent and serviceable whole. So Pilkington is asserting that you can take three little piles of fecal matter, combine them into one big pile of fecal matter, and they come out smelling of lavender.
But there’s an even bigger problem with Pilkington’s analysis. For while inflation and gold may indeed be fetishes, ancillary to the core neoclassical faith, this can hardly be said of government. The anti-government creed is part of the Holy Trinity of both the classical and neoclassical doctrines. Individual self-interest, limited government and free markets are like the Father, the Son and the Holy Ghost of the neoclassical faith. So to say that worshiping at the altar of limited government is not the same as worshiping at the altar of neoclassical economics is tantamount to saying that worshiping Jesus is not worshiping God.
In The Evolution of Civilizations Carroll Quigley observes that when a civilization enters what he calls the Age of Conflict, “some of the defenders of vested interests divert a certain part of their surplus to create…instruments of irrationality.” The best I can tell, Pilkington fancies himself an instrument of irrationality.
“So Pilkington is asserting that you can take three little piles of fecal matter, combine them into one big pile of fecal matter, and they come out smelling of lavender.”
No, I’m saying that the neoclassical system is, for the most part, internally consistent. There’s no value judgment here. Certain voodoo cults have relatively internally consistent theories, so do the scientologists. You just always think in terms of value judgments because, well, that’s how you think.
“So to say that worshiping at the altar of limited government is not the same as worshiping at the altar of neoclassical economics is tantamount to saying that worshiping Jesus is not worshiping God.”
Calm down. You obviously misunderstood the piece. That’s okay, I forgive you.
Sorry, Philip, but DownSouth apparently understands what you said better than you do.
“While many might point to neoclassicism as the worship of a false god, it was a god – that is, a central turning point around which the community could organise. Fetishism is something altogether different.”
Do you see what you did there? You explicitly said that neoclassical economics is NOT fetishm. Indeed, fetishism is something altogether different.
And yet you proceed to snipe at three individual fetishes and believe that by doing so you’ve taken down neoclassical ecnomics as fetishism. How can you possibly believe that you’ve accomplished anything close to that kind of result when you say from the outset that neoclassical ecnomics, albeit flawed, is not fetishism?
The funny thing is that you actually seem to be aiming for the heterodox neoliberal Austrian School (of which I’m no fan), not mainstream neoclassical economics, which is dominated by the Chicago School who does not suffer from the inflation and gold fetishes. The minority Krugmans and Bakers of the world are pseudo-Keynesians of the true neoclassical mold, which do not suffer from any of the three fetishes.
On the one hand, it is great that you are so adept at creating straw men. On the other hand, it is a bit tragic that you can’t seem to knock them down.
I think you missed the point too. What I called ‘fetishes’ are rather like spin-offs of the main theories. ‘Memes’ if you will.
In this I wasn’t actually having a go at either neoclassicism or the Austrian School — although there were shots fired (especially my saying that neoclassicals bear some of the responsibility for these fetish-memes), but that was not the main thrust.
What I was trying to discredit is the cack soundbites that float around political discourse. In the heyday of Keynesianism and institutionalism there existed what I call ‘fetishes’ too. They were different, but they existed — although I think Keynesianism was less prone than the other schools. Today, they’re of a different variety and, I think, more prevalent.
I should also point out that while neoclassicals are quite prone to ‘fetishism’ and the Austrian School even more so, there is another school that is certainly the most prone to producing fetishists: the Marxists (so, it’s not surprising that the Marxist system, when realised, degenerated into almost complete propaganda).
Thankfully we have a good representative of the Marxist-fetishist theorist on Naked Capitalism: DownSouth. Marxist terms — torn of their context — constantly show up in his/her discourse; ‘monopoly capitalism’ this and ‘overproduction’ that. I wonder how many people have noticed…
And the Pilkington Blitzkrieg continues. (Liquidate Toby, the attempter, DownSouth, Tao Jonesing,etc) As I’ve said before, by the time it’s over the only ones left standing at NC will be the Wall Street cheerleaders.
“And the Pilkington Blitzkrieg continues.”
What choice do I have. They misconstrue what I say. I mean Attempter said I ‘used MMT’ when I cited Minsky.
Just because I want to ensure that my views are not misconstrued I am then a ‘Wall Street apologist’? That’s pathetic. Grow up.
Philip Pilkington: “Just because I want to ensure that my views are not misconstrued I am then a ‘Wall Street apologist’? That’s pathetic. Grow up.”
You’ve misconstrued what I said. I never accused you of being a Wall Street apologist. What I said is that you’re driving away everyone on this site who is *not* a Wall Street apologist. Big difference. (And this is merely the passing observation of a long time reader here, it’s not a “value judgement”.)
http://www.sitemeter.com/?a=stats&s=s20nakedcapitalism&r=36
Been commenting on here since about March.
Been writing since late April.
And so? I never said that overall site traffic was down since you started commenting. I said something completely different. Exxon’s profits are up 53% this year, but that has nothing to do with what I said either.
That’s true. I am being remarkably unfair.
We can simply assume that since the numbers have stayed stable/grown that the non-corrupt have left the site and they’ve been replaced by Wall Street apologists.
Mwuhahahahaha… it’s working. My plan to destroy the Naked Capitalism site is all coming together.
*Waxes mustache*
If you’d just let me finish. What I wanted to say was to thank you for all your work. I think it’s a damn good thing you’re running off the Wall Street critics and I hope you succeed in getting rid of every one of them. Whether part of an intentional strategy or not, it makes no difference. As long as it works. This will be a far better site once all the leading “bankster” critics have been eliminated.
Wow, this has to be one of the stranger comment threads I’ve read in well over a year at NC.
It puts me in mind of the ‘Reader/Text Interaction’, a scientifically verifiable process that occurs when anyone reads a text. We interpret a text in light of our own backgrounds and experiences (and yes, people got tenure for providing the data to substantiate it).
In my own case, I went… well ‘bananas’ (in a good way) over this post because I found it such a breath of fresh air and extremely insightful. I had assumed when I started reading the comments that everyone (or at least, ‘the regulars’) would be as enthused as myself.
But nooooo… not so much.
However, I then recalled my own interests in anthropology, plus experiences traveling. One in specific comes to mind: a young girl was alarmed when I cut my fingernails once on a grassy patch in Queensland. She was Aboriginal, and convinced that if my nails were left to nature’s good graces to decompose, that what would actually occur would be that a Night Demon would come find my fingernails on the ground, spirit them off, and then have the power to do wicked things to me (I presume using some form of voodoo-like ritual). The child was so agitated, that I proceeded to calm her by following her requests.
A short time after that, a friend who’d been teaching up near Darwin told me about an (Aboriginal) man who’d burst into his classroom because a local man (we’d say some kind of shaman) had ‘shaken The Bone’ at him. My friend was quite struck by the sheer terror this produced in the victim, who had appeared quite healthy in the morning, but was so stricken by having been ‘called out’ as it were — having ‘The Bone’ (I presume the femur of a large kangaroo, but I’m only guessing) shaken at him along with a stream of curses and invective. Three days later, this man expired.
In other words, the kinds of anthropological knowledge that Pilkington brings to this post are to my own experience utterly ‘real’. As real as anything else in the world.
We are all dividing into little Economic Tribal Belief Systems as the world churns in unexpected ways, as each day unhinges our previous assumptions about how things should work.
We had the Neoclassicists, but as when an earthquake dislodges the doors from their frames, their theories are showing as no longer coherent — and certainly insufficient to explain today’s economic activities.
In a sense, Pilkington seems to be ‘shaking The (Kangaroo Femur) Bone’ at these priests of High Finance, these Austerity Princes, the people whose advice and misjudgment got us into this mess.
I don’t pretend to be any sort of genius, nor even ‘smart’, but I sometimes wonder if these Wall Street charmers didn’t find themselves overly educated, formally. And undereducated, lifewise.
The thing about hearing someone you know and trust tell you incredible stories about things they’ve seen with their own eyes makes you think, “Hmmmm… maybe the world doesn’t work quite the way the Great Authorities claim that it does…”
A bit more of that in economics would do the world some good these days.
Anthropology, after all, studies humans.
And economics is *human* behavior.
I think anthropology offers far more insight into a lot of group economic behavior than endless graphs, bar charts, and dry reports.
With all due respect to other commenters, even those who seek to make Pilkington’s work more air-tight, I thought it was a stunner of a post and I think economics needs to draw a lot more on anthropology and psych.
absolutely.
strange how our “enlightened” culture thinks we’re advanced from the bone shakers. But we have our own bones and our own way of shaking them. And our own fatalistic certainty in the power of our fetishes.
This line of thinking is rich indeed (no pun intended). I don’t have my research and fact check staff handy, ha ha, but I believe Binet was an influencer of Freud, who of course tried to make a few contributions to group pyschology.
Not sure if anyone saw the Magonians on the video from London but here they are:
http://www.youtube.com/watch?v=0AouX-nWvv4
Our entire categories of ontology are ripe for an evolution — economics is one of the lowest hanging of the fruit — I think fetish begins to scratch the surface there but it’s a deep dig. Math in economics is another fetish. Maybe even the Cartesian coordinate system itself. LOL.
“…Binet was an influencer of Freud…”
Twas indeed. Binet was very important psychologist and, together with Fechner, it’s a damn pity he’s forgotten today.
I included a link in the original article to a really good piece on Binet and his theories but it got lost in the BlogMachine. Here’s a link if you’re interested — the rest of the articles on this site are very interesting too, I just can’t figure out who wrote them. It says they when they were written (the 50s), but beyond that I don’t know:
http://www.oldandsold.com/articles09/sexual-emotion-49.shtml
Tao,
It is Pilkington’s treatment of government that gives me greatest pause.
It is not tenable to place the institution of government into the realm of the sacrosanct. Every human institution must stand under constant review. The question must be asked, what forms of it are viable under what specific conditions? Pilkington’s pro-government vs. anti-government framing gets it all wrong. It draws the battle lines in the wrong place, for it is quite possible for a person to be both pro-government and anti-government. Or in other words, one can be for good-government while at the same time being against bad-government. Pilkington’s framing doesn’t allow for that distinction.
The same goes for government spending. It is not tenable to place government spending into the realm of the sacrosanct. Spending government money, for instance, to bailout insolvent banks is bad. Spending government money to buy near worthless securities at face value is bad. On the other hand, spending government money to provide unemployment benefits is good. But I cannot, and will not, buy into the idea that all government spending is good.
Pilkington charges that I “think in terms of value judgments,” to which I plead guilty. He seems to be oblivious to the fact that his drive to purge moral considerations from economics puts him on the same page with the neoclassical economists. As Amitai Etzioni wrote in The Moral Dimension, Toward a New Economics:
But the neoclassicial paradigm is highly reductionist. Etzioni’s research concludes something entirely different:
Neoclassicists argue that moral considerations are unimportant, that “the only assumption essential to a descriptive and predictive science of human behavior is egotism,” as Dennis C. Muller, president of the Public Choice Society, put it. And I for one see very little difference between that statement and this one from Pilkington:
▬ Philip Pilkington: Economics as Metaphysics and Morals
“No, I’m saying that the neoclassical system is, for the most part, internally consistent.”
What about Sraffa’s reswitching argument, whereby he establishes the inability of the neoclassical system to measure capital’s marginal productivity?
Once one loses marginal productivity theory, the question of distribution and allocation are open for debate as to whether they’re coerced by power as opposed to realizing equitable returns.
Yes, and Keen’s arguments about demand functions also point to a paradox and an inconsistency. I only hold that the neoclassical system is relatively consistent. I agree that it is not wholly so. This is one of the reasons that I disagree with it.
Philip Pilkington said: “…I’m saying that the neoclassical system is, for the most part, internally consistent.”
The neoclassical system is about as “internally consistent” at this:
The Godfather –The Baptism Scene
The neoclassicists are hypocrites. Sure they worship at the altar of limited government and free markets, saying all the right things at the right time. But astute observers are not duped by this.
DownSouth,
The neoclaissical system IS in large measure extremely consistent. It just bears perilous little resemblance to the world we live in and has been used to justify all sorts of land grabs by corporations and financiers.
You seem to get so upset by what Pilkington says that your attacks on him are often wide of the mark. You seem to see him as an apologist when he isn’t. And you also seem to hate MMT, when I think it has quite a lot to offer (it is at minimum vastly superior to the nonsense that Bernanke seems to believe in, which when you strip it to its core, is based on the “loanable funds” theory that was debunked by Keynes and disproven empirically in the Great Depression).
I don’t mean to sound critical but your exchanges with Pilkington are not of the same caliber as your normal comments.
“Pilkington gives us quite an arresting performance of shoddy thinking….the outcome a rather muddled and roundabout defense of neoclassical economics.”
Thoreau’s abbreviated version, “Some circumstantial evidence is very strong, as when you find a trout in your milk”
Given what is happening in this comment thread, I think the post did not state sufficiently clearly that Pilkington does not agree with neoclassical economics BUT it does have this superficial luster (sort of like a beautiful car on a lot that turns out to have no engine). The fetishists do the equivalent of take the steering wheel from this defective car and act as if their possession of the steering wheel means that they have effective modern transportation.
Pilikington: Thee doth project too much.
So let me see if I got this straight….In Pilkinton’s World
1. Government in the Dominatrix.
2. Inflation, whom the Dominatrix refers to as “My Little Bitch”, is the Blow-Up Doll.
3. And Gold….Gold is for piercing, in which case the whole puffed-up facade deflates to flatness.
And what a messy scene that is…
_________________
I think Pilkington would have been better off referring to “deviance” and “anomie” as opposed to “fetishism”.
Had he done so, he could have simply referred us to the work of Robert K. Merton (and Emil Durkheim).
The following is a small sample of R.K. Merton’s work from wiki and other sources. And no, it’s not directly related to this Pilkinton post on fetishism…but it’s broader in scope and moves beyond the fetishes of economists (and those journalists who are obsessed with them) into the concepts of anomie and deviance within the society. The brief description of anomie is dead-on in describing the Zeitgeist of the Moment. And it may resonate with those on both the Left and the Right who are disgusted by the State of this Moment.
Merton’s Theory of Deviance and Anomie
Merton’s theory on deviance stems from his 1938 analysis of the relationship between culture, structure and anomie. Anomie–a state of normlessness– occurs when there is “an acute disjunction between the cultural norms and goals/desires of individual members.”
In a state of anomie, Society is unable to exert its regulatory/disciplining influences. Human desires are left unchecked and unbounded…the individual “aspires to everything and is satisfied with nothing”.
In his theory, Merton links anomie with deviance and argues that the discontinuity between culture and structure have the dysfunctional consequence of leading to deviance within society.[12]
Merton not only argues that all Americans, regardless of their position in society, are exposed to the dominant materialistic values, but that cultural beliefs sustain the myth that anyone can succeed in the pursuit of economic goals. Merton sees the American dream as an emphasis on the goal of monetary success but without the corresponding emphasis on the legitimate avenues to march toward this goal. In other words, Merton believes that all subscribe to the American Dream, but the ways in which people go about obtaining the Dream are not the same because not everyone has the same opportunities and advantages as the next person. This leads to a considerable amount of (the Parsonian term of) deviance.
And, finally:
[W]hen a system of cultural values extols, virtually above all else, certain common success-goals for the population at large while the social structure rigorously restricts or completely closes access to approved modes of reaching these goals for a considerable part of the same population,…deviant behavior ensues on a large scale.
Two thumbs up!
Pilkington’s post can be summed up as a case of “dust breeding”.
“The system is perhaps best decoded through its excesses, but it is the same system everywhere. Cruelty is the same everywhere. Going back to Duchamp, we can sum it all up as a case of “dust breeding.” – Jean Baudrillard
http://www.metmuseum.org/toah/works-of-art/69.521
I think Pilkington is right to seek the animating myths behind supposedly rational, secular beliefs. At one point, I wondered if The Market could be, to some, a fetish. But after I looked up some of the history of cargo cults, I began to suspect that market worship is a form of gnosticism.
You have reached the apex of nadirism.
I’m not from the states. But he strikes me as an unrealistic candidate. His work regarding the car crash stuff was good though. :)
“when the Hebrew people began to fear that Moses might not return from Mount Sinai and turned to the worship of a Golden Calf. This, as is commonly known, is referred to as ‘idol worship’ which means the worship of a false god. Given that the ‘true God’ is doubted because of difficult circumstances the ‘false god’ is erected.”
A classic example of how “history is written by the victors.” The idea of true and false gods has an interesting history. Naturally those in power think their gods are ‘true’ while others are ‘false.’ The Hebrews were not always monotheists. Like almost all ancient peoples they were polytheists and ancestor worshippers. There is much academic argument about this, but after wading through a bunch of it I came to see monotheism ultimately served the elites and that’s a mjor factor in why it won out over polytheism (OK, thats uber-simplistic but this is merely a comment). Monotheism gave the elites more power (as a single god was removed from the world and it’s inhabitants, much like the elites desired to be) and the little people less power (gods and goddesses had limited powers and were actively involved in the regular world and accessible to everyone).
What did the golden calf represent to the ancient Hebrews? Their ancient fertility and abundance goddess and gods, and their “old ways.” But this new idea of a single all powerful god was very seductive and there were many prophets who pushed that (ancient version of propaganda) in service of their elites. The Hebrews followed Moses (if this is a true story and not just a religious propaganda narrative) because he made them certain promises, and when things got tough and it looked like Moses had been ‘leading them on’ they quite naturally looked back to their prior religious beliefs and attempted to reconnect with their old gods who (in accordance with their prior beliefs) promised an abundant earthly life. While there is a certain type of asceticism associated with the desert, your average person is more interested in abundance and comfort as goals.
I have to say I have always disliked the word fetishism. It’s another example of the white man’s imperialist mindset when it comes to religion. It is a popular belief that monotheism ‘evolved’ out of polytheism and is superior to it. I understand the origin of that belief but I no longer subscribe to it. Please note, I don’t think any spiritual or religious belief system is superior or more correct, they are all collective and individual choices that have collective and individual consequences.
From Wikipedia “Essentially, fetishism is the attribution of inherent value or powers to an object.” Because the Christian monotheist mindset is so removed from the real world, this was the explanation the academics of the time came up with. Another explanation is that so-called idols and fetishes are earthly representations (symbols) of spiritual powers and through ritual such objects are ‘imbued’ into the earthly world with the powers they represent (which are invisible, and part of the “otherworld”).
Either way I can appreciate that Philip is associating fetishism with economic theories. Getting a college degree in economics certainly involves a ritual/initiatory process which imbues economic theories with spiritual/moral otherworldly power via group belief and enforcement of such.
Looking forward to when economists come back down to the real world and imbue the idea of “employment” as a fetish, along with the idea of “gross national happiness.”
Valissa said: “Because the Christian monotheist mindset is so removed from the real world…”
As much as the Neoclassical economist mindset?
yes, and ascetism is rather like austerity… and the meek shall inherit the earth.
… oops, meant to ‘snark’ alert on my sheeple comment
And Matthew 5:12, “Rejoice and be glad, because great is your reward in heaven”
In the meantime the priest/hierarchy will alleviate you of your personal wealth. The magic show has been fleecing their unwitting marks/followers for centuries….the ultimate congame
Gold or Fiat Perfect Wisdom Gnosticism God False God It all comes down to one thing. Judgment Day Accountability. And some serious Time. Without Accountability none of it will work. :)
I think you’re right that monotheism is always a power-grab by elites. Your example of Moses is good, and the ancient Egyptian shift to worshiping Ra as well as the move to Roman-Catholicism under Constantine all back up the premise. Even The Reformation backs up the theory as a contra-positive — fragmenting religions led to fragmented power.
I don’t think Pilkington was wrong to use the term “fetish” though. It conjures the correct connotation that “superstition” — as an example of something that monotheism is equally guilty of — doesn’t quite map 100% to. Superstition does not have the sense of worship that fetish does.
“Dogma” comes close, but implies a layer of nonsense on top of absolute truth when we know there is no kernel of truth in neoliberalism.
Monotheists have their fetishes. I would say that Orthodox Jews, Trinadine Catholics, snake handlers, foot-washing Baptists, etc. all exhibit fetishistic behavior.
I await angry letters from snake handlers.
“..Fetishism, to summarise rather crudely, is a way of viewing the world where certain specific ideas or objects become locked – usually unconsciously – into the mind, and become key reference points for everything from sexual attraction to religious rituals to means of payment…
This seems to me only to make sense when contrasted against some supposedly holistic vision, in comparison with which the fetishistic view is cramped and restricted. I would say that this theory is just describing the normal human way of taking in the universe, always in tiny, objectified pieces, always heuristic rather than total.
“the normal human way of taking in the universe, always in tiny, objectified pieces”
This is only ‘normal’ in the past few hundred years due to the ‘modern’ educational process and cultural beliefs.
“I would say that this theory is just describing the normal human way of taking in the universe, always in tiny, objectified pieces, always heuristic rather than total.”
In schizophrenia, maybe, but otherwise no. People generally view the world — even perceptually — as a ‘gestalt’. Psychiatrists have been aware of this for years. Broken, fragmented ways of taking on the universe are indicative of severe psychosis. The French philosopher Maurice Merleau-Ponty is very good on this. So is Karl Jaspers (but I prefer MMP).
“This seems to me only to make sense when contrasted against some supposedly holistic vision, in comparison with which the fetishistic view is cramped and restricted.”
I can easily demonstrate this with reference to the above article.
Take inflation. In economic theory inflation cannot be thought of alone. It must be considered in terms of other variables (employment, government spending, average incomes etc etc). Thought of alone it is a meaningless concept. That’s I called a ‘fetish’.
This is similarly the case in every conceptual system. Even language itself. Language is also made up of interrelated binaries that don’t make sense without one another. Even numerical systems are organised in this way.
So-called schizophrenia? We haven’t (still) conclusively decided what it is. Let’s not use it to denigrate, dissuade or toss about like the other semantic games that are routinely played.
I’m absolutely not denigrating or playing games. What I was alluding to above — i.e. psychical attention dispersed onto various disparate objects independent of each other — is widely recognised as a key mechanism in schizophrenia and other severe psychoses:
http://schizophreniabulletin.oxfordjournals.org/content/33/1/142.full
“Binswanger also proposed a stage model but suggested that a loosening of the perceptual schema (or the internal structure of the object, see appendix) was responsible for the separation of perceptual fragments from their experiential context.”
And again:
“Matussek proposed that changes in visual perception in schizophrenia are closely related to the loosening of individual perceptual components from their natural context. Whereas the normal visual field is characterized by coherence, in which objects are perceived in meaningful relationships to one another, this coherence appears to be reduced in schizophrenia. Matussek provided a real-world example to contrast perceptual organization in schizophrenia from the normal perception of a visual scene. He described a railway station in which a group of people, a train arriving, and a kiosk are present. Although these objects are salient elements of the visual scene, there is nevertheless an inherent organization between them. This results from their “embeddedness” in the overall scene of the railway station. The directly perceived phenomenal organization is evident when an incongruous element is imagined (e.g. a writing desk on the rails), which immediately causes surprise. In this view, the loosening or splitting of visual context would lead to the perception of individual elements of a scene but without necessarily grasping their natural relationships (and therefore the scene’s overall meaning).”
So, sorry, just to recontextualise that.
The above commentator suggested that this ‘heuristic object’ approach is probably the psychological norm. It is far from. There is no way people think, understand or perceive the world in such a way. This only occurs in severe psychopathology.
(It can also occur if certain psychoactives are ingested — PCP, LSD, DMT, Mescaline and, most especially, Ketamine, which simulates these symptoms almost perfectly).
Pilkington, I think, is simply explaining that fetishizing small ideas into a system is self-defeating activity. He’s not much talking about the system as such.
Baudrillard, in your quote, reiterates Duchamp’s canard: “There is no solution because there is no problem”. But in fact, that there is cruelty everywhere does not mean all cruelty is the same. Similarly, the system is not the same everywhere.
But there is “system” everywhere and all kinds of small stupidities have been elevated to systemic ideology–like Duchamp did with Dadaism and dust-breeding.
http://www.metmuseum.org/toah/works-of-art/69.521
“Pilkington, I think, is simply explaining that fetishizing small ideas into a system is self-defeating activity. He’s not much talking about the system as such.”
Thank you.
I’m not sure which I enjoy most, your posts or your threads. Thanks for the effort!
Baudrillard might quote Duchamp once in a while but that doesn’t mean he agrees with the statement “there is no solution because there is no problem”, nor does using one or two of Duchamp’s ideas make him Duchampian.
His thought is radically different from Duchamp’s, as indicated by the following quote:
Baudrillard: “We will live in this world, which for us has all the disquieting strangeness of the desert and of the simulacrum, with all the veracity of living phantoms, of wandering and simulating animals that capital, that the death of capital has made of us – because the desert of cities is equal to the desert of sand – the jungle of signs is equal to that of the forest – the vertigo of simulacra is equal to that of nature – only the vertiginous seduction of a dying system remains…
My position is based on reversibility, which seems to me to be the true symbolic form. It is more an indetermination or a total instability of principles, and it is evil because it contradicts all possibility of rebuilding the world.”
Sorry for the late response, I’ve been gone.
I did not write that Baudrillard believed as Duchamp but simply that in your specific quote, he made a specific agreement, which you also analogized by that lovely word, “dust-breeding”.
Baudrillard is much more broad-ranging than Duchamp ever cared to be. However, he, too, suffers the same severe entrenchment from which general academia seems not to be able to extricate itself.
you become a market fetishist(or what ever) when the market has been abused and denied for so long. Thank you government and bankers.(and most economists except for Milton Friedman)
Despite the fact Phillip doesn’t know his nadir from a hole in the ground I admire his command of the English language. His understanding of real world economics…..not so much. I will continue to worship at my fetish monuments of precious metals and overseas investments, and smaller less intrusive government. It is that fixation on justice that makes me regret the asset bubbles and wealth transfer which has occurred under the massive engorgement of Uncle Sam and his stimulus band of bankers.
That “financial repression” being discussed in academic/administration gatherings better be implemented soon, before the last buck of those “re-directed” FED and US Gov stimulus dollars arrives in the banks of Costa Rica and Brazil…Pura Vida
Philip:
Barry Eichengreen stated in Golden Fetters: The Gold Standard and The Great Depression 1919-1939 that “Once they shed their Golden fetters, policymakers had several new policy options available. They could expand the money supply. They could provide liquidity to the banking system at the first sign of distress. They could increase the level of government expenditure. They could take these actions unilaterally without any need for assistance from foreign countries to neutralize the impact on the exchange rate.”
Then came the insights of Minsky and somewhat later MMT.
Is it conceivable that there now exist a new set of policy Fetters every bit a powerful as those of Gold?
Even you do not seem too proud of the lender of last resort moves in 2008 when you state:
“While this may be a somewhat irritating practice as it props up dodgy private institutions, there is no doubt that without government serving this function in some shape or form the results would be a depression of the 1930s variety. To point this out is not to commend it.”
Minsky may have been more correct than even you realize when he stated “We know that the system can evolve so that the medicine that was effective in one regime or one set of structures may not be effective in another.”
Especially if effective ends up being explicit support for a corrupt political/economic status quo.
It seems that one of your most cherished assumptions is built aroung the inevitably positive role of Big Government and Big Bank–how about an essay critiquing that assumption?
I might do something. But I think it’s all been said before.
Minsky is 110% right that the ‘medicine’, on which the patient is already hooked, will eventually kill it. But that’s why he entitled his book ‘Stabalizing an Unstable Economy’. His policy proposals have been expanded on by the MMTers. Basically, the Job Guarantee program coupled with continuous structural government deficits to allow private sector saving.
Add to this adequate financial regulation — which Yves is 100x more qualified to comment on than me — and you’ve got a sketch of a solution.
I don’t think its all an impossible sell either. The public want regulation — so that’s just a case of getting past the lobby groups. I think the JG program is a goer whether you’re right or left-wing. The hard sell is going to be the structural deficits (and using tax policy for inflation control). This is where the fetishists come in to ruin everything…
Fetish inflation is what happens when the wrong folks take the idea of a well functioning market economy seriously. In such a market, all goods are sold or bartered in such a way that at the end of the market day the market has cleared.
However, our so-called market economy is based on the premise that it’s good to buy cheap and sell dear, so that at the end of the market day some sellers will have made a profit and others a loss; or, if there is no money or real assets to pay the losses, the losers will incur debts to provide the winners with financial assets.
Of course, not everyone within a given market can possibly buy cheap and sell dear. Not everyone can buy wholesale and sell retail; there must be counterparties. Who could that be?
As a farmer friend once noted: Farmers buy retail, sell wholesale, and pay the freight both ways.
The same might be said for most salaried and wage workers.
What would happen if these folks managed to get the terms of trade changed? Market power, supply shock, and /or demand pull inflation.
Worse yet, perhaps they would then be able to pay off their debts. Each debt that’s paid off destroys someone else’s financial asset. Investors don’t want cash; they want income bearing financial assets.
Worst of all, what would happen if debtors defaulted or his debts were forgiven? Whoever holds the corresponding financial asset would see his wealth destroyed.
But, as the saying goes, if debts can’t be paid, they won’t be. The whole world economy is there now. Losses will be incurred. How long can we kick the can down the road? The question is, what form will the losses take, and who will incur them? We’re all in games of musical chairs and hot potato.
Regarding gold: Money is now “backed” by government bonds. If a our economy is to have the necessary money for it to operate, then the government is obligated to print bonds so that there won’t be too much money, i.e., inflation. We must all, with the taxes levied to pay interest on these bonds, pay a sort of tribute to those bond buyers, those who had managed to successfully buy cheap and sell dear. In days gone by, gold was a good asset for these winners; interest bearing bonds putting the citizens in more debt are much better.
That’s not quite how it works — although Bernanke won’t tell you this.
The bonds are issued to control interest-rates. Nothing more, nothing less.
When the government creates money it generally creates the equivalent in bonds. This means that if the money is sloshing around the banking system dragging down the interest rates the bonds can be ‘traded’ for the reserves. So, it may appear that money is ‘backed’ by bonds, but in fact the bonds are really just being used to ‘soak up’ the issued money.
This explains QE. When the Fed bought up loads of bonds the result wasn’t inflation — as the mainstream theory might have predicted. But, instead, the interest rate simply bottomed out as the banks sat on a load of cash.
Here it is explained better:
http://bilbo.economicoutlook.net/blog/?p=332
Whoops. Dodgy link. This is the one you’re looking for:
http://bilbo.economicoutlook.net/blog/?p=352
Sorry.
Thanks for the link, which I have just finished reading.
Theoretically/financially, it does seem possible for the government to spend domestically what it wants, whether or not it later sops up this money via taxes and/or by selling its debt. The Modern Monetary Theory Folks seem to be correct here. Whether it is politically possible is another question.
However, I question whether U.S. “money” that pays no interest and is not “backed” by being convertible into government debt would be acceptable for foreign trade or investment. It is in this sense that U.S. government debt seems to me to be a “backing” for the currency.
When the world was on the gold standard, gold had some value as ornament, but its primary value was that it “backed” the national currencies and thus could be used for international payments and to settle international imbalances. After Bretton Woods the U.S. dollar was generally accepted as if were good as gold. Over the last 40 years, however, would dollars have been so accepted if they were not convertible into interest paying federal debt? Evidently they were when they were needed to buy materials from us to redevelop their war torn economies. But now, when we sell less on the international markets than we buy, why would anyone want our dollars, unless they were convertible into interest paying assets?
Domestically, our investors need to find investments that will provide them with incomes. What would happen if the government did not supply them with billions of dollars of treasury securities? Isn’t the government by issuing debt transferring purchasing power and economic well-being from the tax payers to the bond holders? Put another way, sooner or later don’t government services have to be cut so that interest payments can be made?
Would the MMT folks agree that theoretically/financially the government could just pay off its debt in bank deposits as the t-bills, notes, and bonds became due? Whether that would be politically possible is another question.
Thanks again for the blog reference. I will be reading more on this. Also, have you any suggestions for blogs that explain repos and their relationship to the federal debt and to international finance?
“However, I question whether U.S. “money” that pays no interest and is not “backed” by being convertible into government debt would be acceptable for foreign trade or investment.”
My understanding is that the MMT folk advocate setting an interest rate on reserves to get rid of the whole bond issuance rubbish (this would also set an interest rate floor). I think this is already operative in the US to some extent. It’s called the ‘support rate’. It’s 0.25% and its why the interest rate never fell past that after QE. The MMTers advocate raising this when interest rates need to be raised.
Anyway, countries will hold dollars regardless. If I need dollars to buy, I dunno, rubber chickens from the US and these rubber chickens are good value, I’ll hold the dollars to accommodate my trade.
“Put another way, sooner or later don’t government services have to be cut so that interest payments can be made?”
No. Interest payments can be made by creating more money. It just requires a few keystrokes in the central bank. Ever notice that government debt grows year upon year? Yeah, it kind of has to. The less it grows, the more public debt grows. That’s what that other piece I did was about. Here:
http://www.nakedcapitalism.com/2011/06/philip-pilkington-debt-public-or-private-the-necessity-of-debt-for-economic-growth.html
“Also, have you any suggestions for blogs that explain repos and their relationship to the federal debt and to international finance?”
Bill Mitchell definitely did some stuff on that a while ago. He’s the best on this stuff. He never ceases to amaze me — it’s like there’s a central bank in his head or something.
MMTers, to my knowledge, view repos as a sort of ‘backstop’ when the government stops issuing enough debt to maintain interest rate targets — that happens when crazies get into power and start trying to run surpluses (i.e. not issue enough debt to maintain target interest rates). Here’s a blog that deals with this in a roundabout way:
http://bilbo.economicoutlook.net/blog/?p=14919
Some people may have noticed the absolute contempt in which I hold Austrian School ‘theorists’ too. That blog also provides a good example of why. They’re dinosaurs that understand nothing and assume everything. This causes them to just make stuff up and poison investors minds all over the world.
Hope all that helps — rant included.
“The less it grows, the more public debt grows.”
That should read “…the more PRIVATE debt grows…”
Sorry. I should also note that in the event that we continue using the bond issuance system (which is fine — it worked in Japan and they’ve got 200% debt-to-GDP), some MMTers advocate referring to it as the ‘private sector saving level’ rather than ‘public sector debt level’.
Who said these guys aren’t good at PR?
Well played and might I add, if investment…cough…churning exploratory fiat seeking yield (escape stagnate wage trap for most) is just an exercise in exchange skimming (bond holder revenue), who cares what monetary caprices nation states operate under.
Skippy…gold, commodities, basket, mmt, faith…all of these conditions change as environmental conditions dictate…humanity has been reduced…to the flow of insipid electrons…pretending to be value.
“MMTers, to my knowledge, view repos as a sort of ‘backstop’ when the government stops issuing enough debt to maintain interest rate targets…”
Sorry — it’s too early — I’m being too specific without specifying. I was talking here about repos of foreign exchange as that’s what’s dealt with by Bill Mitchell in the article I linked to (and to complicate things further for me this morning, foreign exchange ‘repos’ aren’t even called ‘repos’!).
However, the ‘object’ of the repo — be it foreign exchange or government securities and be it called a ‘repo’ or not — shouldn’t matter, the overall purpose is the same. So Mitchell’s article should still help.
The purpose itself? Well, it seems that, from an operational point-of-view, there’s really no difference to just flogging government securities outright. It’s just a matter of convenience:
“As with repos, the counterparties can agree the term of the swap to suit their particular needs.”
Sorry. I’m sure my confusion over terminology has caused you confusion. If there were any justice in the world Naked Capitalism would have an ‘edit’ button. Just ignore everything I’ve said and read Mitchell’s article. I’m sure you’ll be able to figure it out.
Finally — I promise, I need to get something to eat — John Hussman seems to view repo operations as a sort of fine-tuning of monetary policy (i.e. interest rates). I think he’s on the money here (ugh!). The key point being that repos are really just a method the Fed uses to fine-tune the interest rate to suit their targets (although, as what I quoted above indicates, they also seem to be used if investors find them convenient, so there’s probably many uses for repos).
Hussman is discussing the repo of mortgage-backed securities and in doing so highlights the purpose of this transaction in particular and the use of repos more generally to fine-tune the interest rate — note especially the second paragraph:
http://www.hussmanfunds.com/wmc/wmc070813.htm
“What actually happened is that the Federal Funds rate shot to about 6% on Friday morning, and the FOMC brought it down to its target rate by entering into 3-day repurchase agreements . The banks sold securities to the Fed on Friday, and are obligated to buy them back from the Fed on Monday at the sale price, plus interest. Such open market operations are designed to ease the immediate demand for liquidity, and to give the banks and dealers more time to find buyers in the open market for the securities they are trying to liquidate.
This was not a major policy shift. Again, it was an effort to keep the Federal Funds rate at the current target of 5.25%, in the face of demand for base money that was pushing the Fed Funds rate to 6%.”
The only thing I don’t understand is why you seem to be implicitly suggesting that classicists (or friedmanites, or keynsians or real business cycle monkeys) were ever able to connect these things. From what I’ve seen of (macro)economics textbooks, everything is always treated separately, and the chapters that supposedly integrate the different parts into a whole suck rather badly if the goal is to provide conceptual clarity.
That’s because mainstream economics textbooks suck @$$.
I know one Irish economist who was involved in writing the one that is used in Irish universities. My feeling is that he has a tenuous grasp of this stuff at best. You don’t need credentials — just gotta be part of the club, I guess.
From what I know Paul Samuelson’s book is quite good — I haven’t read it though — and that went through ten editions or so, before Friedman and his cronies started spreading their hokum. Not that I’m a fan of Samuelson. Philip Mirowski claims that Samuelson pretty much started to maths fetish in modern economics. I think he might have been right.
Anyway, what you’re saying is entirely correct. I don’t think its intentional. You’ve just got to understand that most economists are VERY mediocre academics. I don’t think many people appreciate just who makes up the economics professions. They’re all flunked engineering grads and the like. It’s really a bit of a circus.
This blog has repeatedly called for more (um, any) regulatory/legal action against the banksters and their associates. My view is that it is increasingly difficult to attribute this lack of government action to incompetence.
It seems to me that you are saying that the desire to protect one’s savings against loss of purchasing power via the purchase of gold is a fetish.
My view is that the policies and lack of action by the government in relation to banking and monetary issues are increasingly bare ass naked. Even if fully dressed, would you also consider it a fetish to prefer not to be groped by the TSA?
One benefit of gold is that limits the ability of central planners to control/steal value. Seems to me that theft is the name of the game nowadays.
Phillip,
What was getting is that in a macro sense is it possible that the U.S. Is decreasing current and certainly future productivity with every additional dollar of debt. On the backside on negatively sloped portion of the curve. If we were would we know? Would we just keep piling on more debt until it was painfully obvious that much of the debt outstanding could never be repaid. And I think my question of how big government should be wad misunderstood, Keynes lived in a world where government was a smaller portion of the economy, which leaves room for it to grow in the case of insufficient demand. This permanent big government model leaves very little powder dry for times like we are facing presently.
“What was getting is that in a macro sense is it possible that the U.S. Is decreasing current and certainly future productivity with every additional dollar of debt.”
Here’s the kicker — and trust me, if you start thinking in these terms you’ll avoid a lot of confusion and anxiety about US debt levels. Ready?
All dollars are debt! They always have been. Money cannot enter an economy without being one person’s liability (i.e. debt). This debt can be private — I can go to a bank and take a loan in which case $x will enter the economy. Or it can be public — the government can issue this money and a bond and hence bump up their so-called debt-levels.
New spending cannot enter the economy without SOMEONE taking it on as debt (have a look at the link I posted Ms. Jarvis). Think about it for a moment. It makes total sense.
“This permanent big government model leaves very little powder dry for times like we are facing presently.”
It’s all about balancing. The trick is to try to get government optimising its spending. We want this spending to be as stimulative as possible. So anything that pumps in the bucks at a base-level — welfare spending, government jobs program etc. — is to be seen as good and anything that pumps it in at the top-level — military spending etc. — should be seen as bad.
However, that’s only from a macroeconomic point-of-view. As we all know the military invented the internet — and just about everything else. So, government R & D is VERY important.
I’ve been saying in private for some time that the US could not easily destroy its military-industrial complex. And even if it did, it would be getting rid of a very valuable scientific infrastructure. So, what do we do? Well, here’s my plan…
Relaunch the space program!
Personally I think its a waste of time (yes, I’m a Star Trek fan, but still, I don’t think space exploration is really going anywhere). But it could absorb the current military-industrial complex institutionally — so all the Washington movers and shakers would continue to get paid — and it would maintain the research apparatus. I think it would also rejuvenate the national spirit. Iraq is ugly — Apollo less so. No?
Here’s an interesting chunk of history:
“Chairman of the Federal Reserve Board, Marriner Eccles testified before the House Banking and Currency Committee September 30, 1941. He was asked by Congressman Patman, “Mr. Eccles, how did you get the money to buy those two billions of government securities?” Eccles replied, “We created it.”
Patman asked, “out of what?” Eccles answered, “out of the right to issue credit-money.” Patman then asked, “And there is nothing behind it, is there, except our government’s credit?” Eccles responded, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.””
Eccles… the most honest central banker that has ever lived? Probably.
And to get over the initial shock:
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” — John Kenneth Galbraith
“All dollars are debt!” Well, sorta true. It normally takes a new bank loan (borrower’s debt balanced by bank’s debt) to create a new demand deposit, the form of money most commonly used. However, this bank “debt” bears no resemblance to what is normally thought of as debt. Once the original debtor pays you with the “money” from his demand deposit, you as the owner of your demand deposit account are the corresponding creditor to the debtor bank. However, if you try to collect on the debt by cashing out your checking account, all you’ll get is Federal Reserve notes, another form of “debt”. And if you try to collect on the Federal Reserve debts/notes, all you’ll get are other Federal Reserve notes, the Fed’s IOU, ad infinitum.
I think I’ll try paying my next credit card bill with my IOU. And if they tell me that’s unacceptable, I’ll tell them that what’s ok for the goose bank is ok for the gander me. I’ll pay off the IOU with another IOU. At least I might be willing to back my IOU with something real, like a day’s work. What’s the bank’s IOU backed with? And if no one can get anything from the debtor by demanding payment of the debt, what kind of debt is that?
Something just doesn’t make sense. What did Galbraith know that I don’t?
“All dollars are debt!” Well, sorta true. No, absolutely, utterly true. Money is debt. It isn’t created by debt, it is debt, a form of debt, a social relationship, not a thing.
However, this bank “debt” bears no resemblance to what is normally thought of as debt.
No, it is a perfectly ordinary form of debt. The bank owes you something. You might not need it now, so you just keep the pile of IOUs with the bank.
Once the original debtor pays you with the “money” from his demand deposit, you as the owner of your demand deposit account are the corresponding creditor to the debtor bank. However, if you try to collect on the debt by cashing out your checking account, all you’ll get is Federal Reserve notes, another form of “debt”. And if you try to collect on the Federal Reserve debts/notes, all you’ll get are other Federal Reserve notes, the Fed’s IOU, ad infinitum.
Yes. Things go round and round. But when do they stop? Answer is below.
I think I’ll try paying my next credit card bill with my IOU. And if they tell me that’s unacceptable, I’ll tell them that what’s ok for the goose bank is ok for the gander me. I’ll pay off the IOU with another IOU. At least I might be willing to back my IOU with something real, like a day’s work. What’s the bank’s IOU backed with? And if no one can get anything from the debtor by demanding payment of the debt, what kind of debt is that?
Something just doesn’t make sense. What did Galbraith know that I don’t?
What can you do with this bank deposit/IOU/bank note?
1)It is money. So you can buy real stuff with it. Yay! (Your) Problem solved. You banknote is redeemed. It is backed by the real-stuff-standard of the economy you live in.
2) You can pay off your credit card bill, your loan from the bank, the IOU from you to the bank, with this bank deposit, the IOU from the bank to you. Credits/debts going in opposite directions cancel each other out! This is the reflux/extinction of credit/debt.
3)Finally, and of ultimate importance, you’ve exchanged your bank IOUs for Fed IOUs – dollars – US gubmint money. The only way to destroy credit/debt/money is with credit/debt/money going the other way. These are called taxes. Uncle Sam writes you a letter saying U-Owe-Me!!! You cough up. Your Fed IOUs are redeemed. Uncle Sam gives you something most consider of great value – life outside prison. This tax reflux/extinction is what drives the whole shebang.
Calgacus, thanks for your answer. I think almost everything you say is true, but I still have a question. Of course, the value of money for most of us is that we buy goods with it. However, the point is that these goods are not created by the bank, but by businesses.
My crucial problem is with your statement “The bank owes you something.” Exactly what do they owe me?
In a recent blog, Michael Hudson noted that what was happening to Greece was analogous to a victorious army extracting tribute from a conquered people. But the weapon was finance rather than guns. It got me to wondering.
Is not the money-tax nexus a form of tribute? Are not interest payments imposed as the price banks charge for creating the debt used as money another form of tribute? What about rent? All these extractions may be desirable or even necessary, but a dialogue as to which extractions are necessary or desirable…and why they are…might be illuminating.
That spelling and grammar leaves quite a bit to be desired.
Shakespeare gives you the finger of…language is not an aggregate exercise.
Skippy…other wise we would still be grunting …eh.
The author is confusing a fetish with an obsession. A fetish is “A material object” (check Webster, it’s #1). The rest seems to me to be obfuscation (hey, who put this pink shoe in my lap?).
I actually gave a history of the concept — did you bother reading it?
Here’s dictionary.com:
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fetish
[fet-ish, fee-tish] Like this word?
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fet·ish
/ˈfɛtɪʃ, ˈfitɪʃ/ Show Spelled[fet-ish, fee-tish] Show IPA
noun
1.
an object regarded with awe as being the embodiment or habitation of a potent spirit or as having magical potency.
2.
any object, idea, etc., eliciting unquestioning reverence, respect, or devotion: to make a fetish of high grades.
3.
Psychology . any object or nongenital part of the body that causes a habitual erotic response or fixation.
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In psychology when we say ‘object’ we mean it in the philosophical sense of the term (i.e. ‘something that is not the subject’), not a material ‘thing’ (although it can be a material thing).
An interesting graph about price levels: part of what we measure as inflation is in fact the rise of real wages – which, as thise rise is in the long turn enabled by productivity increases, of course should not be measured as inflation:
http://www.luxetveritas.nl/blog/wp-content/uploads/2011/06/Labor-cost.jpg
(sources: Eurostat)