By J.D. ALT
Classically, we imagine money being aggregated by an entrepreneur who uses it to build a factory, purchase raw materials, hire labor, and begin manufacturing widgets which are then sold in the marketplace. This same result could be had by the process of an ogre appropriating a factory by intimidation, acquiring raw materials by force, and using slave labor to produce the widgets. The difference is that, in the first case, the process produces customers (the laborers) who can purchase the widgets with their wages, whereas—in the second case—the ogre’s widgets have no paying customers. One model produces an economy, the other model doesn’t.
If we look at the modern global corporation, we see something of the ogre. Yes, they pay to build their factories—but prefer to coerce local communities into footing much of the cost through preferential land and tax deals (as well as, in many cases, the appropriation of local water supplies) in exchange for the “local jobs” the factory promises to create. They also do not outright “steal” their raw materials, but do manage to argue that the minerals existing in the ground of public lands are somehow theirs by right in exchange for a nominal rent. True, as well, they do not employ slave labor, but instead employ strategies that have, in the end, the same result: they minimize the use of local labor (all those jobs they promised to create) by using robotic technologies—and by outsourcing much of the “make-work” of the widget components to a country with cheap (some may even characterize it as “semi-slave”) labor. It is for this reason, of course, the same global corporation is so desperate for global trade agreements which will allow it to favorably access the markets to which it has outsourced its human labor—because that’s where the theoretical paying customers (the wage earners) are that its business model is creating.
In a similar vein, economists puzzle over the lack of inflationary pressure—indeed, the tendency towards deflation—in the modern western economies, even though the financial industries seem to be “creating money” at a historical pace. It might be that there’s something of the Ogre in that financial industry as well: the money it creates is not used to build factories, acquire raw materials, hire labor, and build widgets—it is used, instead, to make bets in the casino of the financial markets themselves. Poker chips are bought and played, but the chips never get redeemed, and they never leave the casino—except when they are used to buy political power and favor to perpetuate the game. (A few chips do get redeemed as spending money for the high-rolling players—and this does, in fact, put inflationary pressure on the prices for mega-yachts and London penthouses, but who really worries about that?) What matters is that the “money” generated by the casino never shows up is in the pockets of wage-earning customers on Main Street. Their pockets, if anything, contain fewer dollars than they did a generation ago—while the store fronts they gaze into contain more and more widgets assembled by robots with make-work parts fabricated by workers in other countries.
There is, in other words, a profound disconnect in the way things are functioning. The American economy has dropped a crucial cog out of its gear-box and, as a consequence, the gears on top are spinning wildly but futilely, while the disconnected gears on the bottom are grinding slowly and ineffectually. What we need to do, somehow, at all costs, is to put that missing cog back in the gear-box. Or—perhaps that is not exactly correct—we need to connect the drive-train directly to the lower gears themselves, and insert a cog let them drive the upper gears as, I believe, the machine was supposed to operate in the first place.
Professor Antal Fekete predicted that QE would not stimulate the economy. Take a look at his essays posted online years ago.
The alternative?
He writes about Adam Smith’s Real Bills Doctrine. It results in a money supply that fluctuates with the needs of production and takes the creation of money and credit out of the hands of central planners. Consumer and Producer create a real bill. The banks discount it giving the producers working capital. The bill, and the credit created are extinguished by payment in bullion within 90 days.
It’s almost as though banks have never thought of factoring.
Pretty much everything about real bills doctrine stuff is based upon an incorrect understanding of how banks work – primarily how ‘repayment’ works on the liability side. It is, in reality, nothing more than a reclassification of what type of liability you have with the bank.
Yes. We are all aware here of the theoretical world believed in by lovers of Austrian Economics and gold bugs. In the real world, people find gold coins to be a clunky inconvenient system of exchange, which is why it was discontinued.
Rather than tossing out a ludicrous red herring, you might want to give some thought to what “gold bugs” and many supporters of Austrian economics actually want: constraints on the production of “money” by central banks and fractional reserve lending, which gold has provided to a much better degree than any alternative for centuries.
No one suggesting that it is a perfect solution, either.
Thank you J.D. Your essay is helpful. I don’t have a snappy response yet, but there is something building in my mind from all of the recent discussion, here, and as a result of the United States’s presidential race. I am not a trained economist. My graduate education is in systems theory. I am beginning to believe, from my reading and listening, that there is little requirement to take from the wealthy to increase the wealth of the poor. There is also little requirement to shut down the casino of the financial markets to get money, and net worth into the “lower gears.” We need to invent the mechanism – the drive trains, and missing cogs – that your essay illuminates; and, create a new culture.
The main reason to shut down the financial casino is that it wastes real resources that could be better deployed elsewhere, and it gives political power to people that shouldn’t have it.
You don’t want your smartest minds tied up playing casino games. You want them searching for cures for cancer, etc.
Good point Neil. You’ve stated the dilemma succinctly. I said, “create a new culture.” Maybe I should have said, “create a new economic culture.” But I’m trying to think outside the box, so I’ll change it to, “create new cultures.”
One way to implement change is to make an obstacle irrelevant. You don’t have to destroy it. Just go around it. I’m sensing the way forward for the global community requires art; as in imagination and creativity, to create new cultures, and produce new economies, as J.D. Alt explains in his blog above.
To me this argument that something is broken looks quite naive, because the economy is working very well for the people who matter, the rentiers, either elite or mass rentiers, who dominate the political process.
That the “real” hourly wages of working-class male prime age workers, the «wage-earning customers on Main Street», have been declining for 40 years is something that is intentional, not a mishap because the «economy has dropped a crucial cog out of its gear-box».
The major shift of the past 40 years is that the majority of the what was the unionized working class now see themselves as a petty rentiers, and they want and vote for bigger profits and capital gains for themselves and the upper classes, and for lower wages and benefits for everybody else poorer and darker skinned than themselves.
And they have been getting booming property prices and stock prices for themselves and shrinking wages and benefits and job security for everybody else. The economy is not broken; it is working as intended.
A “traditional” Republican commentator (D Frum) has pithily summarized the way the economy is meant to work as:
«Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares. This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.»
I think that’s pretty funny. But I’m crying, not laughing.
“…and high spending for the currently old” – ?
Aren’t the Repubs the ones who keep trying to reduce or eliminate Social Security and Medicare benefits?
My version: “…and high spending for the rich who know how to play the game.” Mainly military spending and the VAST investment in bankster bailout funds.
Money is the grease in the wheels of the producer-consumer economic machine, the real economy. It should be distributed among those who are working within that model and taxed away from those who are not.
The biggest obstacle to change is how well propaganda is working and how little is being done to combat it in ways that are able to spread the truth as far and as wide as the economic lies are being spread. A few people here and there tell the truth, but only a tiny segment of the population reads/hears/views the truthful messages.
The 1% think they are in a fully functioning car, although they are not either. E.g. global climate change can make their grandchildren suffer a lot too, and can cause them to go extinct with the rest of the human race.
The 99% know they are not in a fully functioning car. But many believe that the car’s defects are all the fault of the liberal media, the (supposedly) liberal government’s reguolations, the Mexican immigrants or the Muslims.
By cog I presume you include the degree of robots being introduced into the production process. This becomes worthwhile when the production costs are less that when human labor is involved. So two effects happen together. Production costs are reduced but more and more people are thrown out of work. And my question is: which of these two effects dominates the future? If the robots masters have their way, we will reach a situation where nobody can afford their products. Unless people receive salaries, nothing can be bought without deliberate and increasing debt and even with the current misuse of money it can’t go on for ever.
We need a regulatory law which stops robots from displacing people from doing useful work, but does allow the robots to produce at less cost. This implies that the useful work will become more managerial and less manual. Students of non-management courses please take note!
We are both cursed and blessed with robots. They like any tool that came before them, greatly magnify our productive capacity. Within the capitalist system this has always meant less labor involvement in the hands on aspect of production of any given mass produced widget.
The old factory centered model of production-consumption is dying a slow death, and with it goes the traditional sense of the economy. What do we do when we are finally able to admit to ourselves that the past is gone?
We’re starting to see more affordable access to robotics technology, 3D printers, inexpensive CNC machines etc.
This can be very liberating to individuals. Having taken an interest in these technologies, and having acquired some of this technology and the skills to use it, I am surprised at how quickly I became much less dependent on factory produced goods and hence other peoples manual labor. All I need are some raw materials (most of which are almost infinitely recyclable) a little energy and lots of creativity. We are headed toward the replicators of Star Trek and a time will come when we will even make our own custom task specific robots.
It’s difficult to envision how things will unfold, but it does seem clear that the need for both factories and factory model capitalists of any kind will gradually diminish if individuals are encouraged to acquire and learn to use all of this new technology to it’s fullest potential.
Less manual work, yes. More managerial work? In the short term, perhaps; long term no, management is a product of the old factory model.
What will be the nature of the economy that evolves as a result of the arrival of the affordable universal tool? It’s an important question it seems few are trying to tackle. How do we adapt the economic system to the situation were the producer-consumer own the means of production?
I have enjoyed the comments of each of you but I think the greatest value of what JD wrote has been missed. We need a great expansion of the number of people who understand the problem. We, who understand the problem, communicate well among ourselves. It is difficult to find language that conveys reality to those who are not linguistically prepared to tune into “our circle”. JD’s explanation is remarkable because it uses language that goes beyond our “usual”. I sent it to a dear friend, a retired engineer who is conservative, knows what he thinks and is sure the World would work much better if everyone thought as he does. His response surprised me somewhat (I’m not entirely sure what I expected) but here is an exact quote of his response.
“I think that this explanation makes a lot of sense. So much
sense, in fact, that I am in favor of tracking down everyone who
participated in the banking meltdown, and incarcerating them, for life.
And the worst of the lot, should be put to death, in order to set an
example to the rest. This crap has got to stop, and it has got to stop
now! Thanks for the very sensible information, and also for alerting us
to never again allow a Clinton out in public. Apparently, they belong
in the dungeon, and never again allowed to see the light of day.”
We, who understand the problem (or at least think we do), can enjoy our time around our own campfire. Until we learn to talk with those who are not in the “circle” not much is going to change.
Professor Alt, I admire what you have done, I hope you can manage much more.
POMPO
POMPO, that is a very encouraging comment that I can assure you is much appreciated. Also, please thank your friend for reading the piece with an open mind.