buddenblog

Remember the falling dollar?

The Bush Administration has been depending on the falling dollar to boost American exports and dampen imports in an effort to moderate our huge national debt.  Remember, when the dollar falls, exports grow because our goods become cheaper overseas, and imports decline because imported goods become more expensive.  We sell more of our stuff and buy less of theirs.  The huge debt has been a cause of great concern among quite a number of non-politician economists because our government is paying daily expenses through indebtedness -- kind of like paying your rent and your utility bills on credit cards which you can't pay off every month.  The conservative stance has been to argue that it isn't really a problem because our dollar is so strong and we are so important that we can keep going like this for quite awhile.  The stance from The Other Sides has been that large indebtedness is okay periodically if it is used to stimulate the economy in down times, to build infrastructure which also would stimulate the economy, or to pay for time limited expenses like war (hopefully time-limited).  They have argued that if other countries start to lose confidence in the dollar and start to replace their dollar reserves with Euros, say, it would weaken the dollar to the point that we could start to have really serious problems with an unsound currency.  That is, for example, we would need more and more and more dollars to pay off other countries who now hold considerable quantitities of our debt.  China and Japan come to mind.  Under normal circumstances, or maybe we should say relatively stable circumstances, countries don't "call in" other supposedly economically sound countries' debt like repo men, but if they lost confidence in us, or for that matter they wanted to see us decline, they could.  An example on a small scale basis:  If you borrowd fifteen thousand dollars from someone in Europe six months ago, today you would owe her close to twenty thousand dollars.

Here is a link to today's New York Times which indicates that some players on the international scene are beginning to do just what economists on The Other Sides fear.  It also discusses the Administration's continuing failure to undertake problems that really matter and o make worse what was bad before.

Here is a link to an op-ed piece in the Times putting a  pin very close to the Alan Greenspan bubble -- the bubble in which live  Administration optimists.  http://www.nytimes.com/2005/03/10/opinion/10grant.html

A first look at capitalism: the role of people in macroeconomics

Economists' view of the world

Remember, economists view the world, at least the economic world, as a mechanical system.  This view can be diagrammed in black and white.  Many economists believe that while they may not completely understand the system, it exists in a pure and predictable form.  That is, they 're not going to create it: they are going to continue to discover  how it works.  Their assumptions are based on the belief that there are principles upon which the world and the universe operate which are pretty much unchanging.  This belief  comes from the development of what are called "hard sciences" like physics and chemistry where scientists make observations and test them and then conclude that they have found phenomena that are  predictable, like gravity or the rotation of the earth on its axis.  Since we humans are also phenomena of the universe, the assumption is that we, too, follow predictable rules even if our spouses don't think we do.  Efforts to find timeless rules for human behavior using what the scientific method have led to the development of the "soft sciences" like economics, political science, sociology and social psychology.  I would agree with people who also think the study of humans acquired a scientific veneer because beginning in the nineteenth century, people tended to overuse and overvalue scientific approaches to learning at the expense of more subjective ones.  Thus, to gain respectability, people interested in human development found it necessary to frame their investigations in the language of science.

This is not really bad when scientific tools of observation and measurement are not the only tools valued, but it is when they are the only ones.  Today, in our country at least, this is what has happened so that we see art and literature  devalued into fringey subjects, not things kids should learn about or from in school, and we see the emphasis put on only what is "practical." In fact, art and literature and theater and education now are framed in economic terms and seem to have to hold their own as simply economic products.  When a city decides it really needs its symphony orchestra as San Antonio, Texas has, its argument for funding it is that it will "attract business."  The new head of the symphony was hired because he would incorporate "good business practices" with the hope that the symphony by itself would turn a profit, necessary to continue justifying its support. 

Another negative consequenceof our devotion to the soft sciences not just of economics but of sociology and others  is that we allow ourselves to be driven by what is not even  good soft science: poorly tested hypotheses become driving forces in our culture: for instance, how our culture uses the concept of self-esteem.

While there is great value in a "social science" or "soft science" approach to some human problems, it is an approach which, if universalized, deprives us of awareness of much that is inherent in our nature.

So what does all this have to do with economics?  Economics is a "soft science."  Like other soft scientists, some economists think they are working in a "hard science."  They push and pull at the systems they perceive but do not really question whether the system as they see it actually exists.  The pushing and pulling makes things happen within the system they have defined, but that system excludes many of the forces shaping people, cultures, the physical environment  of the world and also blinds them to the consequences of pushing and pulling within their system.  More seriously, we've generalized their system and turned it into dogma.  Thus, in U.S. we have running our government people who might be called economic ideologues.

So.  Let's look at how human beings are defined in economics.

Most basically, economists think that humans act rationally. This doesn't mean that we would all agree that each others' decisions are sensible or smart, but rather that within the context of each person's mind, she is making a rational choice.   And our lives are, in this context, always a series of choices.  We choose whether to get out of bed each day, for instance.  When we make our choices, we do so bydeciding which decision is better according to our values and  prioritizing.  So when the alarm goes off, we might decide we can snooze for another ten minutes.  If we do that, maybe we've asked ourselves (almost without thinking about it) whether we value some more dozing more than we value getting up and getting ready for work right away.  We would consider things like whether we would be late or not, whether the pleasure of the sleep outweights the pleasure of a cup of coffee right away, and so on.

Generally, economists and many other people assume that this rational decision making for choosing alternatives is  always establishing priorities for the use of time and money or even just money:  a human being as homo economicus  That is, that every person's decisions, whether made consciously in these terms or not, could be quantified in terms of money. 

Today economists are not so simple-minded as to say that every decision people make is exclusively in one's own self-interest.  There is room for altruistic decisions and for group decisions.  But they would say that it is still an individual's rational decision to accept a group's decision.

In the United States, official economic thought is dominated by free market economists, perhaps ironically considered liberals.  These economists and the politicians they influence and the businesses that benefit from free market ideology consider that humans are  homines economici and that freedom is the freedom to make rational economic choices: therefore, the government should not in any way interfere with the freedom of the market so as not to interfere with a person's freedom to make market choices, the true meaning of freedom.  This is an extreme view in the larger world.

Remember, underlying this homo economicus the idea of people's choices always being rational, even if they might not all have economic implications.  Thus, today even in the United States there are efforts to enlarge the definition of  the rational choices people make.   There is still not too much attention paid to the idea that some choices may be completely irrational and that completely irrational choices may have a larger effect than on the individuals making them.

Some articles I referred to for the information on homo economicus:

McCaffery, Edward J and Siemrod, Joel (2004): "Toward an Agenda for Behavioral Public Finance" in University of Southern California Law School:  University of Southern California Law and Economics Working Paper Series

Mertinez Coll, Juan Carlos (2001): "Las deciones individuales"  en La Economía de Mercado, virtudes e inconvientes

Zafirovski, Milan (2003): "Human Rational Behavior and Economic Rationality"  in Electronic Journal of Sociology (2003)

--- (December 2, 199): "The human factor: rational economic man" in The Economist (US)

If you read Spanish, a wonderful site for explanations of economics of all sorts is at the University of Malaga en Spain:  http://eumed.net/cursecon/.

 

What is capitalism? A first look with explanations of scarcity and supply and demand

Capitalism is not a fixed system with well-defined, unchanging  rules of operation.  Rather, it covers a lot of different  economic practices over history in a lot of different places.  Capitalism as a term describing a system, if you will,  came into use  in the eighteenth century with the Enlightenment.  Today we use it to  describe not just economic forms, but to name  a particularly European-U.S. kind of thinking about human economic activity.  Capitalism as an economic system plays a pivotal role in Enlightenment and post-Enlightenment western societies, especially in the United States.

As a mere descriptive word, generally connoting mercantilism capitalism applies to societies that existed  long before and outside of Europe and the United States.   In that context, it connotes trade for some kind of profit, or to the traders' advantage, and it existed, before the Enlightenment, at one time or another,  in many parts of  the world.    In West Africa,  in what were still the Middle Ages in Europe, there was a large trade network which enriched the Empire of Ghana and the Empire of Mali.    Ultimately, this trade reached Europe and Arab countries. The great Silk Road, the trading route of Asia along which Buddhism traveled, carried a mercantilist, or capitalist, trade.   More familiar is the fact that the Mediterranean area was a focal point for trade long before the Enlightenment, for, among others, Phoenicians, Greeks, Romans and Arabs.  These market systems were not just means for families to survive, but essential to the acquisition of wealth and the survival of entire societies. Among these societies were empires in India, Asia, the Middle East  and the Americas which far surpassed western European societies in learning, technology, agriculture, architecture, art, and in over all grandeur in addition to  commerce.

Early capitalism, or mercantilism, however, was not universal, nor did all societies evolve in the direction of capitalism.

But we are here interested in the U.S. of A., so I will try not to go too far afield.   Be warned, however,  we need a historical perspective to refine our understanding and our arguments for confronting today's issues, so it will be incorporated.

Capitalism, as conceived by whom we might call the  earliest "official" philosopher/describer of capitalism, Adam Smith, was a system which, in a sense, provided a stage on which actors played their predetermined roles  and acted in certain more or less predetermined ways.  It, thus, was  a system theorized to work no matter what individual humans did,  a system  which existed independent of human direction: mechanical, predictive and descriptive.  When economists get together today in the U.S. to try to keep us out of too deep a recession or to control inflation, they try to determine how to tinker with the system just enough to keep it from going into a painful recession or  inflation.  Many believe that the system would right itself in time without any intervention because of its nature: we only make minor adjustments because of the immediate problems for us humans. 

Today in the U.S. many of us, especially non-economists,  seem to believe that this system is sacrosanct, that its laws are almost divine, that it is inextricably entwined in "democracy" which we cannot have unless we have capitalism, or in the now-interchangeable term, the free market system.  This is a big problem and not characteristic of  the beliefs of its great architects and critics.

There are some basic "laws" or "governing principles"   of capitalism.  I have compressed a few centuries of thought into much of this. There are multilple themes and variations.

The first and simplest concept is that of supply and demand.  One can consider that there is both a supply of goods and a demand for those goods.  For instance, there is, at the supermarket, a supply of milk and a demand for it:  the supply is the product, the demand is what customers want.  When there is  more milk than people want, the prices for the milk go down.  At its simplest, the principle is that when there is less than people want, the prices go up. 

To the idea of supply and demand we can add  the concept of scarcity.  That is, the notion of not enough.  People go to try to find something when they don't have enough of it.  The trip to the store in the middle of the night for diapers is an example of this.  Today marketsin the United States and much of the "developed" world  depend on people not only needing things, but  wanting them.  Since in our world  a large number  of us have more than enough of what we need to live on and more than enough of most things, capitalists try to create scarcity by creating demand, getting us to feel we need stuff we don't have like the latest fashion, a better  toothbrush, or an SUV.

So scarcity fits right in with the notion of supply and demand.   

Producers will try to sell their goods  at the highest price they can get.   This depends on there being some scarcity.  Parents and doting grandparents rushing frantically to Toys-R-Us at Christmas time to get the latest Elmo is an example of at least perceived scarcity.  The same thing happened with Beannie Babies and Cabbage Patch Dolls.  It happens more subtly when food producers rush lo-carb spaghettie to the supermarket.

Consumers, on the other hand, like it when there is more than can be sold easily...when the prices come down.  This happens obviously when a fad loses momentum: the boxes of low-carb spaghetti pile up in carts with marked down merchandise at the front of the supermarket.

Competition provides a brake on runaway high prices.  If more than one company is making a product, all will have to try to figure out how to attract customers.  And of course all of them  want to make more money than that limited to covering their production costs because a value of capitalism is to make money, and certainly to make more than you spend. So producers  will have to either figure out a cheaper process for making their stuff, thus being able to make more money at the going rate in the market or how to  make their products more desireable than those of  their competitors.  This leads to innovations in production and/or product.  And ads that say things like, "Ford is the Best in Texas." 

As innovations generalize, that is, as a whole bunch of producers make things the new way or in the new style, prices will again fall and new innovations will become necessary to stimulate demand (bigger and bigger SUVs).  If a product is made to last forever (like in the "good old days") the market for that particular product will wither and not only will the producer lose his profits, but workers will lose their jobs.

The essentials of a capitalist system are traditionally considered to be land, labor and capital.  Labor itself is a commodity, too, something which the producers absolutely depend on.  A  scarce labor market  in the pre-industrial days meant workers could demand more wages, an overloaded labor market meant they had to take what the producers offered.   Similarly, the land on which producers would build their production facilities  is subject to the laws of supply and demand.  Landlords and the rent they charge come in for some special treatment by capitalist theorizers.  Capital itself, money, is a market commodity as we all are aware if we have money in money market accounts.  It becomes very important as businesses try to expand or change significantly.  They have to, basically, buy money -- pay interest -- to make the necessary investments in their means of production.  Or maybe we should say,  they need to rent money.

Most theorists of capitalism did not assume it would go on forever.   Adam Smith thought it would go on at least long enough to "raise all boats," for instance, but not necessarily longer than that.   He also thought that as people became wealthier, they would have more children, more demand would be created for the basics and the increasing numbers of children would provide the needed new workers. 

The capitalist system makes assumptions about human nature that weren't really made before or outside of the European  Renaissance and Enlightenment.  While humans weren't  any kinder as a bunch before it, it wasn't until the Renaissance and most especially the Enlightenment that they came to identify themselves as individuals first and members of a society second.  That is, it was, and in many places still is, more the norm to think of the demands of their groups  first, themselves second.  I'm not celebrating the virtues of community here.  Today in negative terms, you see this loyalty to community first  in kamikaze pilots and of course suicide bombers.  A community loyalty can lead to unquestioning acceptance of all kinds of persecution, physical hardship and the like, and similarly, kings and chiefs and priests  justify their positions and their actions as justified by community norms. 

Capitalists do think of people as interested in themselves first.  Many  think  that people are by nature  imbued with the profit motive, that is, that all of us, if left to our own devices and with time on our hands will turn to trying to make more wealth for ourselves.

Another belief is that people will always act in their self-interest.  Individualism as we think of it has its roots in this belief:  people not always will, but should act in their self-interest and shouldn't expect other people to do it for them.

A third, but not universal, capitalist belief is that people will act rationally in their own interest.

In a capitalist society, being productive and consuming are the highest virtues.   Leisure was shunned early on by self-respecting people in the capitalist system.   This industrious economic unit, the working man, was given characteristic advice by Benjamin Franklin:   "Remember that time is money.  He that can earn ten shillings a day by his labor, and goes abroad or sits idle one half of that day, though he spends but sixpence during his diversion or idleness ought not reckon that the only expense; he has really  spent, rather, thrown away, five shillings [more that he would have earned had he worked the whole day]."

Though expecting tremendously individualistic behavior from people, capitalism's theorists see people as impersonal units whose behavior can be described and predicted.

In sum, we see in much  capitalist thought origins of the notion of individualism and the notion that people are compelled most of all by their own self-interst.  We see, too, the capitalist value of working hard and long well past the time needed to meet our necessities.   This is often  framed in the context of self-interest:  making more money for oneself and seeming virtuous in the eyes of potential creditors needed to, for instance, grow a business.  We can also see that it is  easy to move from the idea that the seller will try to make the most money he can and the buyer to buy something for the least possible to the belief that we are all trying to cheat each other, especially car salesman.  Pronouncements about human nature  like these latter ones which are not inherent in capitalism end up shaping behavior, of course.  But I would argue that this  behavior is not  inevitable because other sorts of belief shape behavior just as effectively.  And there are always stubborn folks  among us who will not be unthinkingly shaped by the general expectations of those around us.

Today a lot of Americans seem to believe that capitalism is some kind of God-given system for total  human development and is in its last best stage:  that there is nothing better or different that would work, there is no variation that can come along.  They consider globalization to be capitalism's greatest flowering.  A lot of those same people  see socialism as the only and evil alternative :  as the enemy of capitalism, kind of like the Fallen Angel constantly nipping at the heals of God.   This is a false dichotomy premised on dangerous dogma. As some all-too-often quoted anonymous person said, "change is the only constant."  I suspect we will find ourselves in somewhat unfamiliar territory in the future. Nonetheless, capitalism and the rise of the west are inextricably entwine d and certainly capitalism has been a force for much that is wonderful as well as much that is not.

You gotta know what you're talking about when you talk about economics

I’m sure it’s not hard to figure out that I’m a liberal.  I like to think that hard core right- and left-wingers are black and/or white and that liberals come not only in many shades of gray but in purples and oranges and blues and that we can shift our shades as we learn more.  I hope  that we are liberals because we “question assumptions” as they used to say in the sixties, even our own.   Sometimes liberals are scorned as relativists: as  relativists to such a degree  that we have no cores.  As a liberal, I’m not into absolute relativism: I don’t think that all belief systems are equal and that you can believe anything you want and live anyway you want as long as it doesn’t bother me. A long time ago, Walter Cronkite defined, if I remember correctly, a liberal as someone who had some firmly held principles and examined critically the proposals for solving  problems: that dogma did not guide a liberal to solutions, and in fact following dogma didn't do anything but lead down a dark hole.

Among the principles I hold as a liberal are that the earth needs to be treated with respect, that we should husband its resources, not plunder them; that humans are part of nature, not separate from it and that as such, we are ultimately utterly dependent on its health for our own; that there is no reason some people should be rolling in wealth while far more people don’t have enough to eat and are riddled with sickness and poverty; that we should be looking for ways to enhance the side of our nature that recognizes that we need to care for the rest of our pack and its home and that we need to tame the side that wants to go it alone while recognizing its need for protection, its uniqueness and its value as a fount of creativity and love.  For those who are fierce individualists and are proud of it, I would simply ask how they would do if they literally were alone: if they had to make it by themselves in the desert of  West Texas, for instance. Or even alone on some beautiful, rich uncultivated land in Oregon without all the stuff dreamed up and made by other people: without ploughs and hoes, even, or a well. Or how they will do when they are old and infirm?  Or how, for that matter,  would they have made it as infants?   Finally but no less important I believe that  people should never be enslaved, should never have to live with their necks under the boot of a master, that we have to know in our gut that workers  are at least as important as owners who could get nowhere without them.  Recently I was reminded that Paul Tillich said that no human being should be treated as a "thing."  I would agree with this, too, and I would add that maybe we should say the same thing about any living creature who can feel pain.

So these views inform my outlook on what drives the good ole U.S. of A. Currently, economics is at the center of a lot of what does. I mean economics as a philosophy, if you will, and economics as a system, and unfortunately economics as an ideology, all  of which run like blood through our national discussions about everything from taking care of our elderly and sick to why we were urged to go out and spend, spend, spend after 9/11, to why so many are against taxes and see government as the enemy, to why some people think we have to slice off mountain tops and sully the arctic to survive, and to why some believe that people in Africa or China have to work under terrible conditions and die young from pollution-caused diseases because globalization as we define it is not only inevitable but good for them.

But I realized that while I had some hazy ideas about capitalism, the national budget, why the national debt might be bad on the one hand, but wait a minute, not so bad, and while my “instincts” (George Bush trusts his gut, remember) said that in the name of free markets which are somehow essential to our survival, we were destroying the planet, I couldn’t put things into focus.  So I started to read. And I want to share some of what I have learned so that if you are where I was, you  can perhaps learn some of what I have learned and be able to talk from knowledge as well as instinct about how we got ourselves into this mess. 

My first steps were to look into some practical, immediate issues that I didn’t understand: for instance, the national debt and the GDP/GNP which I’ve already talked about on this blog. But they were only pieces without roots to a bigger understanding.  So I learned more about revenue and the Federal Reserve System and business cycles and so forth. And I went back into history to find out how we came to believe so strongly in individualism, in whatever the free market is, and in capitalism as if it were a religion. Remember, I think we all need to study history not simply so we don’t repeat the past but to knock down our dogmas because dogmas often did not start out that way: ideas and systems and  wrong beliefs  harden into dogma over time.  We humans have not come close to finding any sort of perfect system for running our lives, and in fact our very natures may preclude that we ever can, but we can use our heads and our hearts and our guts  to try  to  fashion  a compassionate world.  Of course , as Buddhists would say, we need to be  mindful:  we need to watch  how  we  decide what we decide.

So I am going to spend several posts weaving back and forth from the present into the past to try to make sense of how and why our system is what it is, all with the goal of making us better citizens by helping us inform ourselves. That may be one belief I hold as dogma: that for our country to function as a democracy, our citizens need to know what the hell is going on in it, and to understand and be able to criticize the arguments of politicians and economists and come up with some of our own.  We  can and  must know enough about economics in this country to  guide our often foolish leaders.

In conclusion, I want to say that I am certainly willing to question my own assumptions and listen to other arguments even if I get grumpy while doing it.

 

The Social Security Debate

The social security argument, introduced as a red flag (red herring) by the Administration,  is an example of an appeal to current beliefs that somehow privatization is always better.  Soon I will have some posts dealing with our underlying assumptions about economic well-being.  Right now, here is a link to Paul Krugman's column on the British experience with privatization.  He includes a link to an article by Norma Cohen  in The American Prospect, which link I also provide.

http://www.nytimes.com/2005/01/14/opinion/14krugman.html?oref=login

www.prospect.org

More on the importance of laypeople learning about economic issues and two extremely worthwhile online journals that can help

Economics as a field occupies a blurry place somewhere between art, science, and large-scale fortune-telling.  Its practitioners are smart and articulate and often at odds with each other.  Like Freudian psychoanalysts of the past, some of them seem to feel they are members of a priesthood that has been granted  almost mystical insight that the untrained cannot possibly have and that really does permit them to forecast the future.  Like anthropologists, they affect the very systems they are analyzing with their presence and their words, and their perception of reality is shaped, even distorted,  by their own particular set of templates. 

Nonetheless, we laypeople have to try to grasp  their ideas because their analyses do provide a way into making sense of our economic lives.  And economists  do end up shaping them: their arguments become policy, and policy on a world scale. 

Economists tend to deal with, well, economics: that is, they watch what happens to the money and try to offer advice that increases the money at an institutional level.  They don't very often watch what happens to the people holding or, more often, not holding the money, though they may report on per capita incomes and the like.  There was an interesting example of this in the news yesterday.  A headline in the NY Times reported that the tragic tsunami was not likely to seriously affect the economies of at least some of the nations hit because those economies did not depend on tourism or fishing.  Later on CNN, a reporter mentioned that over a million surviving fishermen were, as a consequence of the destruction to their boats, their homes, their docks and beaches, without a livelihood.

If non-economists can have at least some understanding of economics, we can contribute to  the discussion of economic policy from the human perspective: we can speak not simply of human suffering or environmental degradation, but can connect them to actual economic decisions, and maybe even come up with alternative approaches.   We can engage in the debate about why what appear to be good economic decisions may be, in the end, bad decisions from the broader perspective of human society and we can urge, from an enlightened perspective,  that economists break out of their narrow  framework for evaluating success and failure. 

As we humans all tend to do, economists get stuck in familiar and comfortable paradigms and see solutions in the confinment of those paradigms.  But we need to shift: we need to make  economics one tool for seeking well-being for  humanity, not the only tool.  We need to seek, perhaps, economic stability and sustainability,  not economic growth.  We need to break away from the notion that drives much policy: that the important part of human beings, the determining, defining element in their nature is the economic element and the concommitant desire always to have more: the belief in the "rational investor" as some kind of universal norm, for instance, or the misreading of group statistics as holding true for individuals.

There are two online journals published by Berkeley Electronic Press (U of  California) which will help you educate yourself about economics.  Written by stars in the field, the articles are longer and offer more insight and explanation than do the traditional columns in newspapers, but they are still within the grasp of us laypeople.  They are:

The Economists' Voice at www.bepress.com/ev, a "forum for ... ideas and analysis by leading economists on vital issues of our day."  Its contributers range from left to right and include Nobel Prize winners, outstanding academic economists, a leading GW Bush economist and my favorite, Paul Krugman.  Currently you can find discussion of the president's approach to economics, the falling dollar, and social security among other topics.

The Global Economy Journal at www.bepress.com/gej, whose main focus is economic aspects of globalization from a multidisciplinary point of view.  This is what I am getting at above: the multi-disciplinary approach.  I have not read enough of the articles to see if it is not only multi-disciplinary but also moving to issues of human and environmental impact.