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Beyond the “Nation-State” to a “Free-Market-Collective???”

June 18, 2012

Never a good day when Stolid Joe Stiglitz thinks we’ve been brainwashed.

The fact that the 1 percent has so successfully shaped public perception testifies to the malleability of beliefs. When others engage in it, we call it “brainwashing” and “propaganda.” We look askance at these attempts to shape public views, because they are often seen as unbalanced and manipulative, without realizing that there is something akin going on in democracies, too. What is different today is that we have far greater understanding of how to shape perceptions and beliefs — thanks to the advances in research in the social sciences.

I incorrectly identified Noah Smith as a “center-right” economist, while he claims to be “center-left” or even full-on liberal. Maybe I caught him on some supply-side days and drew the wrong conclusions. His thesis adviser does appear to be claiming to be a “Supply-Side Liberal,” though so far I have found less agreement with him personally than I do with Noah, generally. What is important is that Noah Smith takes a reasonably “scientific” approach to economics, which is why I liked him even when I thought he was further from my particular views than he is(?). The importance of this cannot be overstated. If you are not going from the empirical data to the model, validating the model, making predictions and confirming your analysis in a peer-reviewed way (not just to an uncritical chorus of hallelujahs) then you are not doing science.

…Because as nice as it is to have a team, I have a stronger and deeper allegiance, which is to science. And by “science” I basically mean rational skeptical empiricism. My dad raised me on these ideas; they’re very important to me, and I believe they are the best. So if I think an idea makes sense, I’m going to say why. If I don’t buy a theory, I’m going to say I don’t buy it. I believe that only by being intellectually honest can we find the best answers and the best policies.

Now here you may cross your arms and say “Economics isn’t a science! Hrmph!” But if so, you’re missing the point, which is that it can be a science and (according to Noah Smith’s value system) it should be a science, and when it’s not a science that’s bad.

Anyway, just wanted to correct the record. Also, to give you an example… When the crisis first hit, I had no idea what a liquidity trap was. I naively assumed that in all cases, at all times, if you increased the supply of money beyond the expanded need for more (say, simply, population growth) then there would be an automatic supply & demand type of inflation / currency devaluation. I was not a regular reader of Paul Krugman until I started looking into some of the underlying dynamics of the crash. I had no dog in this fight – no intellectual edifice to defend; no academic career built on a particular set of economic models; I just wanted to know what was going on. Now, there are still some deep questions surrounding the structure of “money as such” and “credit issuance” and how that has changed significantly over the past several decades, but the fact remains that if any of the people had been right about their simplistic fiscal / monetary theories, we would have seen very different results. See this litmus test:

The policy response to financial crisis has, in effect, given us a great natural experiment in macroeconomics — an experiment that can and should be viewed as a test of two views of the economy. One view — which includes both freshwater macro and much of what Austrians say — is in effect classical macro as Keynes described it, in which the economy is always constrained by supply. The other is a more or less Keynesian view in which a depressed economy is constrained by demand, not supply.

These two views had strong implications on three fronts. One was interest rates: would large budget deficits drive rates up, as a classical view implied, or would they do no such thing under depression conditions? A second was the effects of austerity (which has been much larger than the weak efforts at stimulus, and therefore provides the real test); would austerity policies release resources to the private sector, as per the classical view, or lead to economic contraction? Finally, a third implication involved inflation: would large increases in the monetary base produce soaring inflation, again as classicists of all kinds claimed, or do no such thing under depression conditions?

All that being said, I did run across a truly disturbing article while drinking my morning coffee – Finance and the Mafia State. The premise seemed to be – and there is quite a bit of evidence that this has been going on – that we are moving from a Nation-State based organization to a one world “market-based-politics.” I often take the long view on things. Sure, we have not always had nations. In fact, nations arose out of specific needs – we humans organized as society got more integrated, trade increased and city-states became too disorganized and restrictive – or so the story goes. Most historical accounts get a little more nuanced about power factions and power grabs, etc, etc… But the idea remains the same – a bigger umbrella for more interconnected people. Now, I can see certain organizations gaining in power on a more equitable global power distribution over time – we are a much more connected world yet again – though certainly the US and a few other powers are not too keen on giving up any power just yet… But a “One World Market Economy???” That scares the be-jeesus out of me. To my mind – and the evidence seems clear – that means a world dominated entirely by bankers.To the extent that democracy and self-governance exist and are possible, surely they are possible through government organizations, not market “organizations.” Yikes.

As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.

You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.

The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money.

It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos. It is especially pernicious when governments start to dabble in the meta money, as Greece did when the government covered up its debt by using derivatives. That is wholly unforgiveable. It is bad enough that governments have allowed traders to make up their own rules with money, in effect playing Russian roulette with money itself. But when they, too, start using the same tricks, then the road back to sanity becomes long indeed.

Ho hum.


From → Economics, WTF?

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