Sunday, January 19, 2014

The Metamorphose of the Crisis

Six years after the start of the Great Recession, the world is not any better. The outlook is gloomy despite  signs of recovery that some economists claim as a demonstration of success of austerity policies. During these years, capitalism  has undergone an intense  restructuring with dramatic cuts in wages and social services.  But large firms have restored their profits and banks are cleaning up their balance sheets. 

The Economist  (Dec.7) devotes a special issue to Blackrock, the largest investment fund in the world.which is the first shareholder in half of 30 biggest multinational corporations. It represents it as a black rock hanging over a background of blue sky, which reminds a painting of Magritte. Its power relies on managing other firms' money and controlling their investments in bonds, commodities or other assets. 

There are other examples of 'financiers' who are now returning on the scene, such as Icahn, a raider who became famous for his take over on the US airline company in 1985 but who challenges Apple for being responsible of  having too much liquidity without distributing profits to shareholders. A big sense of the general interest? Those investment funds can own anything. There is one called Marathon Asset Management which has taken control of an entire city, Scotia, at 250 km from San Francisco. This may pave the way for other cities like Detroit, where even museums will be sold in an auction. 

The question is whether their dominance is a problem? The return of the 'masters of the universe' is seen by big magazines as a sign of dynamism of capitalism. .Remember what Adam Smith used to say his classic 1776 treatise on capitalism, the Wealth of Nations : " All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind. Crisis, what crisis? Not for the super-capitalists.

The contradiction  is that capitalism cannot continue with the same model of growth and rules which prevailed before the crisis. This means the pursuit of the 'financialization' of the economy, with the concentration of economic power in the hands of few large corporations and investment funds. Furthermore, it would represent a continuing widening of social inequalities, with gains of growth still flowing to the richest part of the population. A recent research study of the Washington University suggests that top 5%  has too much saving while the bottom 95% is forced to reduce their savings to offset the worsening of their living standards.

Did we learn something from the crisis ? In a recent speech at the IMF, Larry Summers, the former President adviser, has warned against the risk of prolonged stagnation and deflation. These are the words he pronounced on Nov.8: "my lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential"

We are perhaps at the end of a capitalist era, but we do not know how the world in which we are living will look like in the next ten years. From his prison, the Italian philosopher Antonio Gramsci, wrote : "The old world is dying away, and the new world struggles to come forth: now is the time of monsters"


  1. Perhaps you should reread the Wealth Of Nations. You seemed to have missed a few things..

    "What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."


    "The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations."


    "Where wages are not regulated by law, all that we can pretend to determine is what are the most usual; and experience seems to show that law can never regulate them properly, though it has often pretended to do so."

    Shall I continue?

    Right now we don't know what the demand is for public goods. How closely do you think the current supply of public goods matches the unknown demand?

    Maybe you think you can go to the grocery store and expect that the employees there will be able to divine what you will put in your grocery cart? Maybe a waiter at a restaurant will be able to divine what you will order? Maybe you were able to divine that I was going to reply to this post of yours?

    The cause of this crises and the multitude to follow is that government planners do not come even close to accurately divining the demand for any goods. They can't divine the optimal supply of milk yet you believe that they divine the optimal supply of war, infrastructure and regulation.

    I might be wrong though. I'd definitely be interested in reading anything which leads you to believe that government planners can accurately determine the demand for public goods.

  2. The problem is financial capitalism and over concentration of wealth not the market economy. I quote Adam Smith (Book III, Chap. 24)
    "But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons"

    1. Your quote reveals that either you didn't read the entire thing or you didn't understand it. Here's the punchline...

      "A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people who had not the least intention to serve the public."

      The goal of a bakery owner isn't to serve the's to get rich. But getting rich requires serving the public. Markets work because serving the public is the means to a very desirable end. So it's a win win system. The public gets served because the bakery owner wants to get rich.

      If wealth is not evenly distributed...then it's because some people are better than others at serving the public. Do you think some bloggers are better than others at serving the public? Do you think it's fair that Noah Smith has far more followers than either of us? Do you think it's fair that Paul Krugman has far more space in the New York times than either of us?

      Of course, in some cases, the distribution of wealth reflects the fact that some wealthy business owners limit competition by lobbying for the creation of government regulations that raise the barriers to entry. In order to solve this problem we have to clarify the demand for public goods.