Ali’s blog

Mostly quant stuff with occasional digressions

The dubious need for fiscal stimuli

Posted by alifinmath on January 11, 2008

Here is Lawrence Summers with his expert opinion on what to do about the impending train crash (aka recession). He feels a fiscal stimulus is needed to mitigate the impact of such a recession. Let me bang my head against the wall a few times … there, that feels better. Now where was I? Ah yes, the need for a fiscal stimulus. The orthodoxy of that great unthinking herd of mainstream economists, who promptly comply with the desires of their ruling-class paymasters. If we’ve learnt anything from the time of Reagan onwards, it’s that these fiscal stimuli don’t work. They tend to be targeted to the affluent, and the “trickle down” is imperceptible. The rich, in fact, take the money and run. And in fact, the real motive of such stimuli (which differs from the ostensible one of combating insufficient macro demand) is to make the rich richer.

We would — again in fact — have fewer economic gyrations if the poor weren’t so poor and the rich weren’t so bloody rich. The problem behind capitalism is that workers aren’t paid enough to buy what they collectively produce — as workers, they’re treated as a “factor of production,” but they’re also needed as consumers to keep the show on the road. So to prop up demand, they’re given access to credit — which they can’t pay back. The system relies on an ever-increasing bubble of credit to stay afloat. In essence, that’s what the subprime fiasco is all about — it’s rooted not so much in faulty loan practices as much as the inherent contradictions of capitalism itself. The average American must be the most indebted creature in the world. The USA is a massive debtor’s prison — precisely because it is the most capitalistic nation. As Marx argued, insufficient demand (and concomitant productive overcapacity) is a main factor in the wild gyrations of a capitalist economy.

But reducing inequity in society is the one thing we can’t talk about today. You a commie? Do you vote red, pal, or red, white, and blue? And so not only are we trapped in these cycles of boom and bust, but most of us don’t even understand the real causes behind them because of the indoctrination of ruling-class economic orthodoxy. As Marx said, the ideas of the ruling class are the ruling ideas.


6 Responses to “The dubious need for fiscal stimuli”

  1. Chris Prouty said

    Contrary to your numerous posts on the topic, capitalism is not a system that is destined for failure. Personal and government debt are not hallmarks of capitalism. In fact, for hundreds of years the United States operated in a reasonably debt-free environment. Neither the country nor the citizens carried any major debt. It was viewed as shameful to be indebted. I don’t have a source for this, but I have read that Eisenhower once apologized to the American people for running a deficit!

    Access to credit is not unlike an arms race. Take mortgages, for example. Once one person has access to a mortgage, he or she is willing to pay vastly more for a property than he or she would (or could) if they were forced to pay cash. Presumably this individual will outbid competitors for a property of choice, effectively forcing everyone else to take out mortgages just to stay in the game, let alone purchase a desired property. This is a double-edged sword. On the one hand everyone is now in debt. On the other hand, vast sums of money have been injected into the economy, which in turn goes into entrepreneurial ventures, R&D, etc and leads to a higher standard of living for everyone. The problem is that this “injection” can really only take place once. We are in the midst of the fallout from an attempt at a second injection: the rise of sub-prime lending. I think it is obvious that the market has reached a saturation point in its ability to carry debt.

    By the way, I challenge you to give me an example of a single economy based on Marxist principles that is not a total or semi-catastrophe. Marx was a bitter man who dreamt up his ideology to combat a society that he felt did not give him his due. Contrary to popular opinion, he did not advocate a society of fairness. The tacit assumption of his philosophy is that those who are able should be held in bondage to those who are not. Classless indeed.

  2. alifinmath said

    Marx was brilliant as an analyst of capitalist dynamics — so brilliant that large chunks of his analysis remain relevant after a century and a half. But he had virtually nothing to say about the contours of a post-capitalist society. In essence, there are no “Marxist principles” for the new society, except a few vague sentences on the withering away of the state. The Soviets quickly turned to a system of bureaucratic collectivisation — described insightfully in Trotsky’s “The Revolution Betrayed.” And the less said about the Chinese communists the better. I’m not aware that there has ever been a truly socialist state. And it’s an open question to me whether there can be one. That doesn’t mean, of course, that we should dismiss Marx’s analysis of capitalism as a system without having carefully examined his arguments.

    As for Marx being a “bitter man,” this is the first I’ve heard. Maybe he was, maybe he wasn’t. But I don’t see how that should affect our judgment of his analysis, which should surely be judged without reference to his disposition. We don’t judge general relativity by whether Einstein was happy, depressed, or bitter — why do it for Marx except as a pointless ad hominem attack?

    I do feel Marx deserves to be read. People quote him and ascribe various broad generalisations to him without having read his major works — “Capital” and “Grundrisse.” If they have read any Marx, it’s usually the lightweight “Communist Manifesto,” by Marx and Engels.

    “Capitalism” is often conflated with “free enterprise economy.” This tends to be propagated by people who have a vested interest in the status quo. Free eneterprise societies and economies have existed for millennia, and are arguably natural human phenomena. Capitalism, in contrast, is a highly artificial system, whose provenance only goes back two or three centuries, and whose driving force is the accumulation of capital (again explained well by Marx). In a free enterprise society, you knit me a sweater and trade it with me for some fish I catch — nothing more natural. In capitalism, you invest capital resources in land, machinery and “labor,” and you want a return on your capital. And for this you must exploit the work of others — which by sleight of hand, is termed a “factor of production.” This drive to accumulate generates its own tensions and contradictions. But I should stop this post here.

  3. Chris Prouty said

    The distinction between Einstein and Marx is that Einstein did not generate his theories as a thinly-veiled excuse for his own failure. Marx was poor, but obviously bright. As many capable people do, he felt entitled to a degree of success commensurate with his intellect. For whatever reason (he makes the reason he believes quite clear) society did not reward him as he thought he deserved. Being the clever fellow that he was, he went about designing a new paradigm that would satisfy his ego.

    This phenomenon is not uncommon. Take a favorite writer of mine, Ayn Rand. Rand grew up in communist Russia and saw some especially poignant examples of its disastrous shortcomings. Not surprisingly, her writing is fiercely anti-communist. Her philosophy, though revolutionary, is clearly a product of her upbringing and needs to be tempered with that knowledge.

    A philosopher’s back story is absolutely crucial in evaluating the resulting philosophy. It allows us to mitigate and forgive the more radical excursions with the knowledge that their views are the manifestation of some trauma. Marx and Rand (though I hate to knock her) are akin to petulant children wailing “I don’t wanna!” when told by their mothers that it is time to stop playing and do the chores.

  4. alifinmath said

    Chris, Rand was not a *thinker*. She wrote some pulp novels — “The Fountainhead,” and “Atlas Shrugged” — that resonated with the American public (though they were torn apart by critics). Rand’s “philosophy” — Objectivism — is risible. Marx, on the other hand, contributed a number of novel ideas and perspectives. His work — like that of every other European philosopher — borrows from (or is a reaction against) earlier thinkers such as Hegel and Feuerbach, and it can also be placed in the mainstream of European socialist thought. I’m willing to discuss those ideas but I’m not willing to discuss personalities as it drags down the level of discussion to the personal.

  5. Chris Prouty said

    I respectfully disagree with your thoughts on Rand. I knew I was opening myself up by simply mentioning her name. She is a perpetual punching bag for, well, anyone who can read. In fact, her writing went well beyond the pulp novels you speak of. If you have some time and $8, read “Capitalism: The Unknown Ideal”. It is a collection of essays by Rand and a few by a young Alan Greenspan. Nobody will accuse Rand of being a great writer, and she understood her weakness. She describes her philosophy through a series of anecdotes and reactions to news of the day. She acknowledges in her book that this is not an ideal way to communicate a philosophy, but I think it works for her. Though her writing lacks the flowery prose normally associated with philosophers, her content is strong and features the timelessness for which you admire Marx. Her writing and opinions are perhaps more popular today than they were in her time.

    By the way, don’t pass off the frightened pseudo-intellectual group-think of the “critics” as legitimate critique.

  6. alifinmath said

    I read the book by Rand and Greenspan about 30 years ago (at the time Greenspan was a nobody). But I remember nothing about its contents today. I also read “Atlas Shrugged” over 30 years ago. I think the critics took it apart as fiction — legitimately so. The characters — Hank Rearden, Dagny Taggart, Balph Eubank — are cardboard, and meant only to transmit Rand’s half-baked ideas. She’s no Balzac.

    If we have to discuss philosophers, we’d be better off with Smith and Ricardo, in my humble opinion.

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