Comparing the financial crisis mechanisms of Fisher, Minsky and Woodford

1. Introduction

 Given the current economic climate of financial instability, it is important to draw inspiration from many texts over the century in order to understand and learn (if not rectify) from the situation. Irving Fisher’s work on the Great Depression in the USA in 1929-1933 will allow us to see a basic overview of the areas in the economy which are most fragile. This work was extended by Hyman Minsky and close parallels can be drawn in their work. However, asking whether money supply even has a role within the economy, let alone the crisis, is a vital one; one which Michael Woodford addresses in a contentious piece of work. Therefore, this essay will look at the similarities between Irving Fisher’s financial crisis mechanism in ‘The Debt-Deflation Theory of Great Depressions’ and Hyman Minsky’s ‘Financial Instability Hypothesis’. It will then discuss the differences of these models to that of Woodford’s (/Wicksell’s) pure-credit economy in ‘Interest and Prices’.

 

2. Irving Fisher’s Debt Deflation

 Irving Fisher’s work entitled ‘The Debt-Deflation Theory of Great Depressions’ was published in the first edition of Econometrica – four years after he famously stated that “stock prices have reached what looks like a permanently high plateau”[1] on he eve of the 1929 crash. Given that he was famous for being a mathematical economist, this article in Econometrica had no ground-breaking mathematics in it whatsoever (infact it had no evidence at all). Instead, it was a paper constructed purely around a theory. At the start of the article he explains his “cycle theory”[2] whereby an “economic system contains innumerable variables – quantities of “goods”…the prices of these goods, and their values”[3] and that “only in imagination can all of these variables…be kept in equilibrium”[4]. As economic theory highlights both equilibrium and disequilibrium, Fisher tells us that “[t]he former is economic statics; the latter, economic dynamics. So called cycle theory is merely one part of the study of economic disequilibrium”[5].

 Given this framework, and the absurdity of the assumption of perfect equilibrium, Fisher highlights three important variables which are often in disequilibrium: 1. capital items, such as homes, factories etc; 2. income items, such as real income, shares traded and; 3. price items, such as prices of securities, commodities, interest[6] but concedes that disequilibrium in these markets would not bring about large economic change unlike over-indebtedness and deflation. Fisher thought that the over-investment and over-speculation (as specified in the above three points) would always have an effect on the economy but they would have far less of an impact on the economy as a whole if “it was not conducted with borrowed money”[7]. From here he postulates that without debt and deflation, “other disturbances are powerless to bring on crises comparable in severity to those of 1837, 1873 or 1929-33”[8].

 Fisher subsequently produced his economic mechanism whereby over-indebtedness and deflation could result in an economic crisis[9]:

 Start: Assumption of initial over-indebtedness due to speculation of future profits and/or due to low interest rates would increase the incentive to borrow and then speculate 

1. Debt liquidation
2. Contraction of deposit currency as bank loans are paid off which will decrease the velocity of money. This will lead to distress selling as over-indebtedness has set in.
3. Distress selling leads to deflation (the money supply is decreased due to paying off loans). The paradoxical situation arises where the more people try to pay off their debts, the more the debt grows (because the real value of money has increased)
4. An increase in bankruptcies due to a decrease in the net worth of businesses
5. Decrease in profits
6. Decrease in output, trade and employment
7. Pessimism runs through the economy
8. So hoarding increases and so the velocity of money decreases further.
9. Complicated changes in nominal (money) and real (commodity) interest rates

 Given the assumption that it is the expansion and availability of credit fuelled by the temptation of large future profits and low interest rates, Fisher highlights two possible policy implications[10]: 1. the “natural” way out of depression and; 2. reflating the price level. The “natural” way occurs when bankruptcy is fully found throughout the economy thus creating a slower rate of indebtedness. When at this low, a recovery boom period would occur, improving the wellbeing of the economy. However, this “natural” way out of a depression is “via needless and cruel bankruptcy, unemployment and starvation”[11]. The other method of reflating the price level is key to his argument. Controlling the price level, as the Federal Reserve started (but did not continue) under Roosevelt in 1932, via ‘open market purchases’ led to higher prices and businesses making profit[12]. He also mentions that deficit spending could help reflate these prices[13]. The attention to monetary policy is key – an expansion in the money supply will lead to an increase in the velocity of money and so would halt many of the subsequent maladies found in the above model.

 While Fisher is very modest in his style of writing and clearly states that this paper is the first step towards more research in this area, there are, however, still problems with his theory. First of all he starts with the assumption of over-indebtedness and gives us a clue as to how this may begin (low interest rates, speculation of future profits) but he does not go into great detail. There are different types of indebtedness for different demographics and to simply put them altogether and label it ‘over-indebtedness’ is not necessarily pragmatic. Also, underpinning his theory is the idea of decreasing price levels but the link between deflation and depression is much debated. For example, in a study trying to find an empirical link, Atkeson and Kehoe[14] find that there is no (or in some cases extremely weak) correlation between deflation and depression. If we define a ‘depression’ as a negative increase in GDP then looking at the USA and the UK over a 45 year period, we find that it is inflation (due to exogenous shocks e.g. oil shock) which leads to negative GDP growth:

 Figure 1: UK and USA Inflation and GDP Growth Rates[15]

 It is interesting to note that the recent “”deflationary boom” in China”[16] has led economists to reconsider whether deflation is actually bad for the economy:

 Figure 2: China – Inflation and GDP Growth 1961-2007[17]

 3. Hyman Minsky’s Financial Instability Hypothesis

 Minsky drew inspiration from Keynes, Fisher and Kalecki in his analysis of financial instability. There are clear parallels to the work of Fisher – speculation, investment and debt. Minsky’s work is highly influential as it uses Fisher’s unregulated credit expansion which can cause the collapse of the financial system and offers another route out of the ultimatum of “Keynesian fiscal stabilisation or monetarist faith in the natural equilibrium of market economies”[18]. He also revolutionized macroeconomics by taking a “balance sheet approach to the relationship between the financial markets and business”[19]. For Minsky, both fiscal and monetary policy are ineffective, “not only because of the “trade off” between inflation and unemployment…but more significantly because of a strong tendency for an expansion to become an inflationary expansion which, in turn, leads to an incipient financial crisis”[20]. He also feels that the economic theory was not sufficient to predict or explain financial crises and instability as it “offers an explanation of serious business cycles…[and]…stagflation that goes beyond the money supply, the fiscal posture of the government or trade union misbehaviour”[21].

 However, to appreciate this model, we must understand the Kalecki roots which forms its foundation. The essay will then look at the model showing the similarity with Keynes and Fisher.

 Starting with Π = I and assume that workers spend all they earn on consumption and profit receivers do not consume then;

 And that the causation runs from I → Π

 Then:

 Π* = (1/1-C)(I+DF-BPDF-SW)

 Where Π is profit, I is investment, C is consumption, DF is government deficit, BPDF is the balance of payments deficit and SW is the saving by workers.

 This shows that profits are determined by social, political, psychological and economic variables via their affect on I, C, DF, BPDF and SW as opposed to just technology (which is assumed the case in the neo-classical framework).

 This view of profits as a cash flow “naturally leads to an analysis of the different roles played by profits in a capitalist economy”[22]. For Minsky, profits are the key to a capitalist economy; they determine present and future investment as well as validating past investment decisions. Fluctuating investment could lead to a financial crisis whereby at sufficiently low levels investment, output, employment and thus profits, certain financial commitments cannot be paid through the usual sources. But why would investment fluctuate?

 Minsky offered three different types of financing which would all yield different returns. Toporowski offers a concise description of these financing structures[23]:

 “commitments to make future payments covered by a certain income stream are ‘hedge’ financing; commitments to make future payments which may or may not be covered by future income are ‘speculative’ financing structures; while commitments to make future payments which can only be covered by issuing new liabilities, such as borrowing, are ‘Ponzi’ financing structures.”

 In a period of tranquility where the economy is close to full employment, Minsky suggests that the insurance of holding money would fall. This would increase the price of capital assets and so a shift to higher risk (but potentially higher reward) speculative or even Ponzi financing. This would increase the finance needed “by the increased investment demand that follows a rise in the price of capital assets”[24]. As an economy moves towards the riskier speculative and Ponzi financing structure, the economy becomes more sensitive to interest rate changes. As a result, Minsky’s transmission mechanism is as follows: 

1. An increase in investment demand will lead to an increase in profits which, in turn, will increase the price of capital assets.
2. This increase in profits and price of capital assets will lead to an increase overall, of investment → BOOM
3. The central bank will intervene in order to control inflation
4. Due to inelastic demand and supply for investment leads to a rapid increase in short-run interest rates.
5. This increase in interest rate will increase the price of supply of investment.
6. The increase in short-run interest rate will also lead to an increase in the long-run interest rate which will decrease the present value of profits.
7. A decrease in investment (from 5) will decrease profits
8. Decrease in profits leads to a fall in the price of capital assets which leads to a further decrease in investment.
9. With a fall in profits comes an inability to fulfill financial commitments → INDEBTEDNESS
10. This indebtedness will lead to portfolios having an increasing speculative and Ponzi financing structure flavour.
11. FINANCIAL CRISIS

 With this view of the transmission mechanism towards a financial crisis, Minsky’s main policy recommendations are to have a large government and a big bank. This large government can offset a decrease in investment with an increase in government deficit and the large swings in profits can be dampened and the big bank can act as a lender of last resort. These policy implications are, what Minsky argues to be, the reason as to why the USA has not fallen into the debt-deflation trap. Therefore, this explains why figure 1 has not strictly followed the Fisher framework. Also a cut in interest rates would improve the firm’s financial position and eases the cash flow problem which could create an increase in investment.

 The similarities with Fisher (and indeed Keynes) can be seen in this model. First of all there is a clear distinction between current trade and future obligations à la Fisher’s dual price system. Another area is that the Financial Instability Hypothesis is an alternative to the neo-classical view that “the technical marginal productivity of capital generates profits”[25] which can draw parallels with Fisher’s work on this topic. On can also see how a decrease in profits will lead to a decrease in output/employment (Fisher) or investment (Minsky) and then how debt can drive risky behaviour and lead to a financial crisis.

 Minsky’s analysis can be used with reference to the East Asian crisis (which many authors have discussed[26]) where “as profits grew, expectations of further profits expanded, which led to further flows of funds, in a speculative, endogenous development of expectations, confirming Minsky’s perspective. As debt was extended and speculative investment expanded, financial fragility in the Asian countries increased”[27].

 However, there are limitations to Minsky’s theory. It does not take into account the self-financing investment – why does investment have to come from credit? Also, the basis of this model comes from Kalecki’s profit model; this is based on national income identities which are not necessarily realistic. Another issue is the principal agent problem which could lead to crises as opposed to this model. As Barnes points out, “while the FIH is underpinned by a microeconomic model of the financial management of a business, it does not recognize the differences between the company’s interests and those of its owners, the conflicts caused, the likelihood of informational asymmetry and its implications for accounting information”[28].

 Woodford-Wicksell Theory of ‘Pure-Credit’

 Woodford takes a very different theory of the economy where he models it without explicitly having the volume of money. It has a distinct Wicksellian flavour in so much as a pure-credit and a cashless economy could be considered the same thing[29]. His theory is “to develop a framework for monetary policy analysis that is firmly based on dynamic, optimising, general equilibrium analysis in a stochastic context while departing from real-business cycle assumptions by replacing the latter’s presumption of full price flexibility with an optimising form of nominal price stickiness”[30]. In Woodford’s analysis, “money does not matter since it is not integrated within the monetary framework that should be used by policymakers”[31]. As his model assumes no transaction frictions, the cashless economy can be considered as people have no demand for money as there is no risk for money to hedge. As will be highlighted when the model is formally shown, Woodford’s theory is based on microeconomic foundations. One advantage of such a model is to try to make it “immune to the Lucas critique”[32].

 The agents within his economy are: 1. a representative household (which is a price take and seeks to optimise his intertemporal utility function); 2. firms (price makers in a monopolistic setting, has Calvo pricing (supply and demand are both functions of price which is a general equilibrium feature), assumes to maximise profits and produces a single good with only labour); 3. central bank (fixes the level of the nominal interest rate on its liabilities in response of both the inflation rate and the output gap[33]) and; 4. the government (decides fiscal policy and can issue government bonds). Other assumptions include two frictionless markets and the financial market is perfectly complete.

 There are three sections to his analysis has an IS-AS-MP[34] framework:

 IS: links the expected output gap and the short run nominal interest rate to aggregate demand.

 AS: links the rate of inflation to the gap between aggregate demand and the long run aggregate supply. This uses rational expectations which augments the old Phillips Curve.

 MP: The monetary policy here is based on Taylor’s Rule where nominal interest rate is equal to the sum of the natural rate of interest (time varying real rate which would be obtained if the prices were fully flexible) and the inflation target. As a result, the actual inflation rate depends on the actual output gap and the expected value of the inflation rate in the next period. This would make sense because a positive output gap would lead to higher inflation because production costs would increase e.g. labour costs.

 In this framework, money supply does not affect the economy, but interest rates do. This pure-credit economy arises because there is no money supply and so credit is automatically created to allow payments and transactions. In Fisher and Minsky it was the money supply which links with profit/debt and crises but as there is no money supply in Woodford’s economy, there would be no crisis. As there is no uncertainty in this model, there is no risk and so there is no need to hold money and the economy would reach equilibrium via the only transmission mechanism, interest rates. Both Fisher and Minsky saw the economy being in a permanent state of disequilibrium but it has mechanisms whereby it can stabilise itself. However, under the general equilibrium theory of Woodford, the economy can achieve equilibrium very readily.

 This is by no means a theory which has not been criticised. Eagle tells us of four areas of contention with this model: “(1) Woodford’s assumption that his solution is bounded is inappropriate. (2) Any finite version of Woodford’s model is incomplete. (3) Woodford’s central bank does not control nominal interest rates. (4) Woodford argument that interest rates determine prices and that prices affect the interest rate is circular and hence invalid”[35]. However, it can be argued that this is not a one-size-fits-all theory. It has been stressed that the ““precise content of an optimal policy rule” will depend upon details of the adopted model of the transmission mechanism and thus are likely to be different for different economies”[36].

Conclusion

 In reading Fisher and Minsky, one can draw distinct parallels. There is a clear distinction between current trade and future obligations as seen in Fisher’s dual price system. Both theories are alternatives to the neo-classical view that “the technical marginal productivity of capital generates profits”[37]. Also the expansion of credit availability will lead to over-speculation due to financial commitments needing to be paid and thus highlights the fragility of the system. Both would offer intervention; Fisher would get the central bank to increase money supply while Minsky would prefer to let the large government intervene through fiscal policy spending in productive technologies. The contrast with Woodford, therefore, could not be any greater. For Woodford, the supply of money does not affect the economy and so there would never be a crisis (except from an exogenous stochastic shock). As a result, the mechanism whereby general equilibrium is reached is via the interest rate which the central bank can regulate. For me, Minsky’s analysis seems to have a lot of weight and his recommendation of having a big government and central bank (the latter as a last resort) will always be able to rectify a financial crisis. However, this is not necessarily the best option given the political arena economics operates in – using tax revenue to bail out banks is not popular. However I feel this is the only way to work – how does one tell a money lending institution to not lend to an individual/enterprise etc purely because it feels it is too risky?

[1] Toporowski, J. – ‘Theories of Financial Disturbance’ – Edward Elgar Publishing 2005 p75

[2] Fisher, I. – ‘The Debt-Deflation Theory of Great Depressions’ – Econometrica Vol. 1 No. 4 1933 p337

[3] ibid

[4] ibid

[5] ibid

[6] ibid p340

[7] Ibid p341

[8] ibid

[9] ibid p341-342

[10] ibid p346

[11] ibid p346

[12] ibid p347

[13] Toporowski, J. – ‘Theories of Financial Disturbance’ – Edward Elgar Publishing 2005 p77

[14] Atkeson, A. and Kehoe, P. – ‘Deflation and Depression: Is There an Empirical Link?’ Federal Reserve Bank of Minneapolis Research Department Staff Report 331

[15] Data from the ESDS website – World Bank World Development Index statistics

[16] Salerno, J. – ‘Deflation and Depression: Where’s the Link?’ – Ludwig von Mises Institution website

[17] Data from the ESDS website – World Bank World Development Index statistics

[18] Toporowski, J. – ‘Theories of Financial Disturbance’ – Edward Elgar Publishing 2005 p149

[19] ibid p143

[20] Minsky, H.P. – ‘The Financial Instability Hypothsis: A Restatement’ – Thames Papers in Political Economy p1

[21] ibid p2

[22] ibid p13

[23] Toporowski, J. – ‘Theories of Financial Disturbance’ – Edward Elgar Publishing 2005 p144

[24] Minsky, H.P. – ‘The Financial Instability Hypothsis: A Restatement’ – Thames Papers in Political Economy p16

[25] ibid p12

[26] See Wolfson, M. – ‘Minsky’s Theory of Financial Crises in a Global Context’ – JOURNAL OF ECONOMIC ISSUES Vol. XXXVI No. 2 June 2002 and Kregal, J. A. – ‘Yes, “It” Did Happen Again- A Minsky Crisis Happened in Asia’

[27] Wolfson, M. – ‘Minsky’s Theory of Financial Crises in a Global Context’ – JOURNAL OF ECONOMIC ISSUES Vol. XXXVI No. 2 June 2002  p396

[28] Barnes, P. – ‘Minsky’s financial instability hypothesis, information asymmetry and accounting information: the UK financial crises of 1866 and 1987’ – SAGE Publications Vol 12(1): 29–53 p29

[29] This debate over the differences between Wicksell and Woodford is too long for this essay but is nonetheless very interesting.

[30] McCallum, B. – ‘Michael Woodford’s Interest and Prices: A Review Article’ – Carnegie Mellon University and National Bureau of Economic Analysis 2005 p2

[31] Barbaroux, N. – ‘Wicksell and Woodford: a Cashless Economy or Moneyless Economy?’ 2007 p9

[32] McCallum, B. – ‘Michael Woodford’s Interest and Prices: A Review Article’ – Carnegie Mellon University and National Bureau of Economic Analysis 2005  p2

[33] Barbaroux, N. – ‘Wicksell and Woodford: a Cashless Economy or Moneyless Economy?’ 2007  p11

[34] ibid p13

[35] Eagle, D. – ‘Multiple Critiques of Woodford’s Model of a Cashless Economy’ – Eastern Washington University 2005 abstract

[36] McCallum, B. – ‘Michael Woodford’s Interest and Prices: A Review Article’ – Carnegie Mellon University and National Bureau of Economic Analysis 2005 p25

[37] Minsky, H.P. – ‘The Financial Instability Hypothsis: A Restatement’ – Thames Papers in Political Economy p12

[Via http://commenttoday.wordpress.com]

When spite is also expensive

Responding the news that the gay marriage ban costs Australia $700 million (a year, I guess), a twitter user asks:

Oh this is a tough one… Does the government hate gays more than they love money??

The answer, of course, is “yes”. Yes, the government “hates” gays more than they love money.

Or, more precisely – they love bigot votes more than they fear losing greedy votes, which they secure in other ways.

It’s a pity, really, because there are actually more non-bigot votes out there, if anyone other than the Greens would care to represent them.

[Via http://anonymouslefty.wordpress.com]

Henry David Thoreau--Walden Pond and On Civil Disobedience--Videos

Thoreau & Walden Pond 

Iconoclastic Individualism – Henry David Thoreau (part 1)

Iconoclastic Individualism – Henry David Thoreau (part 2)

Iconoclastic Individualism – Henry David Thoreau (part 3)

Thoreau on Civil disobedience

Background Articles and Videos Related Posts On Pronk Palisades Philip Bobbitt–Terror and Consent–Videos Patrick J. Buchanan–Churchill, Hitler, and The Unnecessary War–Videos Jonah Goldberg–Liberal Fascism–Videos George Lakoff–Videos Andrew C. McCarthy–Willful Blindness–Videos Peter Robinson–Conversations With Authors–Videos Amity Shlaes–The Forgotten Man–Videos Thomas Sowell and Conflict of Visions–Videos Thomas Sowell On The Housing Boom and Bust–Videos Marc Thiessen’s Courting Disaster–A Clear and Present Danger To The American People–President Barack Obama!

[Via http://raymondpronk.wordpress.com]

What Is "Old" Is "New" (Or "Sioux")

The BBC, providing free advertising “reporting” on a “report” which “investigated” whether it is even possible to battle “climate change,” composed by a group calling itself The New Economics Foundation (a name which, presumably, is not meant to evoke recollections of Lenin’s “New Economic Policy”):

…None of the existing models or policies could “square the circle” of economic growth with climate safety…

…In the report, Growth Isn’t Possible, the authors looked at the main models for climate change and energy use in the global economy…

And the “report” came to the conclusion that economic growth is — as if its title didn’t give it away? — out of the question if we are simultaneously serious about arresting “climate change.”  Still, all is not hopeless.  There is perhaps one way forward:

…The report concluded an economy that respected environmental thresholds, which include biodiversity and the finite availability of natural resources, would be better placed to deliver human well-being in the long run…

The BBC did not share with us any historical example from the NEF “report” of a “better placed” economy which had.  Despite that unfortunate oversight, this blog immediately thought of one possibility.  And in the absence of any others, it could well serve as something of a model — although, it is of course also arguable as to whether it really did indeed “deliver” widespread economic “well-being in the long run”:

But assuming for the sake of argument that the Sioux managed it, and despite what that NEF “report” calls for, precisely how 7 billion people will subsist almost entirely off hunting — especially when hunting is increasingly judged beyond the moral pale — is difficult readily to envisage.

And especially when, as USA Today tells us:

Among 21 social and economic issues, global warming ranks last as a top priority to Americans, who view it as increasingly less urgent, according to a survey released Monday by the Pew Research Center for People & the Press…

For if we can but only rarely in life assert “the politics is settled,” the above certainly looks as if “the politics” preclude any effort anytime soon to implement a global return to hunting and gathering.

[Via http://atlanticcrossings.wordpress.com]

A good news story

 Thought that I would add some good news to this blog for a change today – because we all like to hear that.

 A Guardian article has highlighted how 39% of CEOs will be looking to increase their workforce in 2010, according to a PwC survey. Just a word of caution though in this happy tale – 25% planned yet more job cuts – but on the plus side this is down from nearly 50% last year. However, there is still expected to be no early end to high unemployment – CEOs adding jobs are often expanding their workforces by 5% or less.

Still, things are looking a lot better than 12 months ago. Overall, 81% of CEOs worldwide are confident about revenue prospects for the next 12 months, up from 64% a year ago.

Companies that have weathered the downturn in reasonable shape are now looking for opportunities to move ahead of rivals, as evidenced by Kraft Foods Inc’s acquisition of British chocolate maker Cadbury Plc.

 So what does this mean for companies in terms of their IT development? Well basically there is a big window of opportunity over the next 12 to 18 months, and there are big bargains to be had by getting in early. Now is the time to look at new and emerging technologies – things like the Cloud and Silverlight – and ensure that you are ahead of the curve as things start to pick up. Seems like in 2010 there is all to play for

[Via http://businessbytes.wordpress.com]

What is fractional-reserve banking?

Banks create money by practising fractional-reserve banking in which banks keep only a fraction of their deposits in required reserve (normally 10% of the deposits) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Example, for every amount of deposit, the bank will loan out 90% of the deposit as excess reserve and keeping the remaining 10% as required reserve. This process is called multiple deposit creation or chequebook money. Each of the process of money multiplier ended when all excess reserve have been absorbed into required reserve.

Fractional reserve banking benefits the economy by providing regulators with powerful tools for manipulating the money supply and interest rates, which many see as essential to a healthy economy. It also can help the government to finance its debt.

[Via http://oystercove.wordpress.com]

Ron Paul: Legalize Competing Currencies

By Ron Paul,

Much has been made recently about the supposed economic recovery.  A few blips in a few statistics and many believe our troubles are all over.  Of course, they have to redefine recovery as “jobless” to account for the lack of improvement on Main Street.  But the banks have money, Wall Street is chugging along, and the administration would like to get on with other agendae.

They have even set up a commission to investigate the crisis as if it were all in the past.

The truth is that Americans are still losing jobs, the Fed is still inflating, and more regulations are in the works that will prevent jobs and productivity from coming back.  We are on this trajectory for the long haul.  The claim has been made many times that this administration has only had a year to clean up the mess of the last administration.  I wish they would at least get started!  Instead of reversing course, they are maintaining Bush’s policies full speed ahead.  They are even keeping the Bush-appointee in charge of the Federal Reserve!  They are not even making token efforts at change in economic policy.  And for all the talk of transparency, we hear that some powerful senators will do all they can to block a simple audit of the powerful and secretive Federal Reserve.

We have been on a disastrous course for a long time.  The money supply has doubled in the last year, our debt is unsustainable, the value of the dollar is going to continue its drop, and those Americans who understand where we are headed feel helpless and held hostage by foolish policy makers in Washington.  When the bills finally come due and the dollar stops working we are in for some real social, economic and political chaos.  That is, unless we take some major steps now to allow for a peaceful transition in the future.  These steps are laid out in my legislation to legalize competing currencies.

First of all, no one should be compelled by law to operate in Federal Reserve notes if they prefer an alternative.  We should repeal legal tender laws and allow Americans to conduct transactions in constitutional money.  Only gold and silver can constitutionally be legal tender, not paper money.  Instead, it is illegal to conduct business using gold and silver instead of Federal Reserve notes.  Simply legalizing the Constitution should be a no-brainer to anyone who took an oath of office.  Consequently, private mints should be allowed to mint gold and silver coins.  They would be subject to fraud and counterfeit laws, of course, and people would be free to use their coins or stay with Federal Reserve notes, as they see fit.  Finally, we should abolish taxes on gold and silver, which puts precious metals at a competitive disadvantage to paper money.

The Federal Reserve is a government-sanctioned banking cartel that has held far too much power for far too long and is in the end stages of running the dollar into the ground, and our economy along with it.  The very least Congress can do, if they are not willing to abolish the Fed, and perhaps not even conduct a serious audit of it, is to allow citizens the freedom to defend themselves from being completely wiped out by their monopoly power.

Legalize Competing Currencies originally appeared in Ron Paul’s Texas Straight Talk on 25/01/2010.

[Via http://freethemarketman.wordpress.com]

Banking, shadow banking, money

Whatever you think about the Bank of England’s behaviour over the crisis, the quality of its publications and speeches has been exemplary.  The Financial Stability Report and Inflation Report are essential reading, while the speeches tend to highlight important and often complex issues better than I have read elsewhere.

For those of you who like to see the Financial Crisis in Manichean terms*, such publications are bad news: they show you so much about the systemic fragilities that the soaring language of good, evil, injustice and so forth can seem somewhat silly afterwards.   For example, ‘The Role of Macro Prudential Policy’ has a wonderfully succinct taxonomy of the ways that rational economic activity can sum up to systemic fragility; how we can all be doing our jobs correctly as we see things, and yet the whole caboodle** can be tottering on the edge of disaster.   Finding a single bunch of CEOs who between them crashed the car is futile.

Paul Tucker, who is particularly responsible for Financial Stability, has made some ‘remarks’ on shadow banking, an essential component of this crisis.  As a relative novice to banking, I have been puzzling over how it works, and found his speech useful – because it highlighted the very blurred lines between something acting like a bank and something that IS a bank.

Consider a primitive economy.   Larry the Lord has £10 worth of Land.    Peter the Peasant has £10 worth of Corn.  Barry the Banker has £10 of gold.   Now imagine Larry wants to dig a well, and needs £5 of corn. Now, if a land-corn market does not exist, he has a problem. If neither Larry nor Peter trust each other enough, and absent some sort of financial system, no well is dug, economic activity is lower.  Shame – because Larry is a useful entrepreneur, and rich enough, but just not liquid enough.

Stage 1: banking solves the problem

But Barry is a banker.  He offers to lend £5 of gold to Larry on security of half his land.  Larry then buys off Peter his £5 of corn.  Peter deposits the £5 back with Barry

-          Larry’s balance sheet is then: £10 land; £5 corn, £5 owed to Barry.

-          Peter’s is:  £5 corn; £5 of ‘M’, which signifies a deposit with Barry.

-          Barry’s is: £10 gold, £5 owed by Larry; £5 owed to Peter in the form of deposits.

Because this is a static example, everyone is as rich as before – they are each worth £10.  But because deposits with Barry are counted as money, there is now more liquidity – another £5.  If Peter wanted to buy something for £1, he could say to the seller “transfer £1 from my name to yours with Barry” – issue a cheque.  This has huge advantages over having to haul the gold over to the right person – particularly if they inhabit an economy with zillions of economic transactions to carry out, and not much gold.

Stage 2: shadow banking takes over?

OK.  Now take this position as a starting point. Imagine, too, that Barry is now as exposed to Larry as he feels comfortable with.  But  Larry wants another £5 loan against the rest of his land, having decided to make the well deeper.  In comes Danny the dealer.  He promises to get the money for him.  He issues a bond, which promises to repay £5 in a few years’ time.   Peter buys the bond, by which we mean, transfers his deposit at Barry’s bank over to Danny.  Danny then offers to lend this to Larry, who buys more corn off Peter, by transferring that deposit to Peter.

Now what do we have?

-          Larry: £10 of land, £5 owed to Danny, £5 owed to Barry, £10 of corn

-          Peter: £5 in terms of a bond, £5 deposit at Barry Bank

-          Barry:  £10 gold, £5 owed by Larry, £5 deposit owed to Peter

-          Danny: £5 bond owed to Peter, £5 loan owed by Larry.

The money in the system has NOT gone up.  In those strict terms, we are not more liquid. Money at Barry has not gone up, and gold has not been created.   But like in the first stage, the resources have been transferred to Larry to get started on some economically useful activity.

You can see that in many ways these two stages are similar.  They both seem to achieve the same things.  But the distribution of risks is different; in stage 2, Danny has the risk that Larry digs a stupid well.  Peter is still at risk if Larry screws up, but in Stage 1, he is owed by Barry, who has a fat buffer of gold; in my example, Danny has nothing, and might pass over a heap of losses to Peter if Larry screws up.

It is impossible, in the abstract, to say which of these ways of doing things is necessarily less risky.  It depends on how much capital each actor has.  If Danny set out on his business with £10 of gold, he might be safer, for example.  The phrase ‘Shadow’ awakens the suspicions of those determined to see things in terms of good and evil, or sneakiness and honesty.  Paul Tucker’s message seems to be that we need to consider all banking-like risk profiles – maturity and liquidity – and not just the formality of whether they are real banks.

On my part, such examples increase my scepticism about the obsession with increasing M4 or M4x or whatever else, that so motivates the pure monetarists.  You can increase lending in an economy without touching that particular measure.  It is possible over the next few years that economic activity will not track Broad Money so surely, as alternatives to banking come forth.  Given how money growth is still disappointing (ht Bond vigilantes), we had better hope so . . .

[Via http://freethinkingeconomist.com]

Helping Haiti : just do it !

Just a quick post to congratulate my children and their friends for raising $300 for Haiti today. It was simple and fun : baked goodies and lemonade on sale in Kennedy Park down at Coconut Grove, Miami.

The ingredients: eager kids, willing parents and sunshine…plus a table, a couple of chairs, and of course an amazing array of homemade baked cookies, brownies and cakes and water or lemonade.

The recipe : just set up somewhere central where passersby won’t miss you. The kids did all the selling…we parents just sat back and admired their selling skills, arithmetic, marketing know how and economic sense (“let’s sell four cakes on one plate, and then slip in an extra one for free”). To the suggestion that prices should be raised, there was a definite, “no, because nobody will buy if it’s too expensive”.  Sales trips further afield were made with banners and loud voices. They learnt a couple of words in Spanish to conquer the hispanic clients passing by. Bill board advertising was adjusted to suit the product offer (when we ran out of brownies). Shift work was neatly put into place when people wanted to take some time out to play.

To begin with, some of us parents had to restrain ourselves from invading their space and being too bossy…but gradually we all sat back and enjoyed some great adult time, only giving words of encouragement and help when needed.

The end result: lots of happy customers, 9 very happy (and a little worn out) kids, and $313 that we will send to Partner’s in Health.

So if you’re wondering how to make a difference, every little helps…just do it !

[Via http://caroslines.wordpress.com]

Clean Elections Commission fights to retain its unconstitutional power

Passed a dozen years ago by voters responding to its slick name, the Citizens Clean Elections Commission created a publicly funded cash cow for statewide and legislative candidates. Those participating in the process are called “Clean,” creating the inference that traditionally funded candidates are “dirty.” That perception alone creates a compelling reason to engage in the process.  The other, even more persuasive argument is that once a participating candidate qualifies by collecting the requisite number of $5 contributions, they get “free money” to fund their campaigns.

Proponents of the venture say it allows people who might otherwise not run for public office to do so. In return for the money, the candidates agree to participate in debates.

In the election arena having a message that resonates with voters should be the determinant of who rises to the top and generates support. Campaigns are not welfare, but in the case of publicly funded “Clean” elections candidates, that is exactly what it becomes. Taxpayers are compelled to finance, to the tune of millions of dollars, candidates with whom they might vehemently disagree.

And the “matching funds” provision actually penalizes traditional candidates who raise funds, by allowing substantial infusions of public money to be added to the campaign coffers of their publicly funded opponents. Recently, three Arizona elected officials filed an amicus brief in opposition to this “trigger provision” in Connecticut’s law.

Yesterday, a federal court judge — erroneously called a superior court judge in the commission’s press release — ruled that the matching funds provision is unconstitutional and will not be available for the 2010 election cycle. The Commission is appealing Judge Roslyn Silver’s ruling to the liberal Ninth Circus Court of Appeals — the most overturned court in the nation.  The commission is distressed that a number of candidates have already qualified for the public funding.

The issue of timing is irrelevant, since there is never a time that would be agreeable to the commission.

There is another, even more insidious aspect of the so-called “Clean” Elections Commission. The unelected panel has the ability impose hefty fines and remove duly elected officials from office, and has, to date, done so twice. Arizona stands alone among the 50 states with having to endure such an overreach.

[Via http://seeingredaz.wordpress.com]

Reflections on the Supreme Courts decision

This morning, I find myself far more concerned about the implications of the Supreme Court’s recent ruling on corporate money in campaign finance than I am about the Massachusetts Senate election.  In yet another damaging blow from the Bush administration, Bush appointees have tipped the scales just enough to overturn decades of limits on the money corporations can spend in elections, and now the gloves are off.

The new power of corporations to influence the election of national and local politicians, judges, and other officials is staggering, and extremely dangerous to the environment, consumer health and safety, and any other cause that corporations find inconvenient in their search for profits.  The results of the financial industry’s long campaign for deregulation may seem quaint compared to the catastrophes that might arise as a consequence of this decision.

I don’t think it will take too long for the public to recognize the poisonous effect this will have on the political system, but it will take years to correct it.  I feel like we’ve entered a whole new era of personal responsibility for consumer choices as the only effective curb on corporate behavior is consumers who choose not to do business with companies behaving unethically.  We need to be increasingly aware of who we are in bed with, and what they are doing with the money they give us.  We need strong transparency requirements attached to corporate campaign spending, distributed in a manner that supports ethical consumer choice.

More than ever, I feel the weight of the political in every purchase.

[Via http://moresustainableme.wordpress.com]

More Obamanomics Lessons

By Kevin C. Donnelly

Obama talks, the markets listen. From Market Watch:

The dollar gave up earlier gains in afternoon trading on Thursday in a volatile session marked with conflicting signals from economic data, and stocks dropping as President Obama outlined plans to rein in banks. "Talk from the president of a major overhaul of how banks can operate appears to have scared foreign interest away from the greenback," said analysts at Action Economics.

I have written before about Obama’s horrific plan to handicap financial institutions and drag down the economy.  Today, Obama took some time and expanded on his tax raising, job killing scheme and the markets, as expected, responded negatively.  It’s a shame those “fat cats” in the White House don’t have a 401(k) like the vast majority of Americans, or maybe they’d have been personally affected by this proposal like so many us have and will be should this idea pass.

Fox News has a bit more of the detail of his plan:

Obama is placing a new emphasis on Wall Street regulations, with a goal of limiting the financial sector to smaller, less interconnected firms.

…

The proposal would seek to limit bank consolidation and ensure that banks, and financial institutions that contain banks, cannot invest in hedge funds or other funds "unrelated to serving customers" for profit. 

I have a goal too, to make government less complex, small, and less interconnected to the rights of individuals.  Of course that goal makes sense and empowers individuals and embraces the free markets.  Therefore, do not expect any liberal to endorse that particular idea.

All financial transactions involve risk and every single corporation has a duty to its owners (the shareholders) to maximize profits.  Financial decisions are based on a risk/reward matrix and each individual falls somewhere within this matrix.  You are willing to accept a certain level of risk in order to reach a certain level of POTENTIAL profit.  This is understood.  Now, however, Obama is essentially saying that owner of a corporation and the individuals who are consuming this product (in this case banking products) should not be allowed to make decisions based on their own needs and risk levels.  Additionally, the taxes Obama is proposing will be directly passed on to the American consumer, it is simply a lie for the Administration to state otherwise.  Furthermore, this will limit the freedom and choices available to consumers.  This is socialist, or at perhaps statist, but it runs counter to freedom.

Lastly for tonight, let me just mention that the Associated Press and every other liberal outfit in the land needs to pull their heads out of the sand and recognize that the economic policies that Liberals have imposed on this country are a complete and utter failure.  They have damaged our nation and put us into a depression.  Further, more, articles such as this one, where initial claims for unemployment increase yet again, are not “unexpected.”  This is precisely what I and others have long said would continue to happen as government intervention hampers the ability of the economy to rectify itself through the free market.  As I have long said, the economy will recover in spite of, and not because of, the role of government in the marketplace.

[Via http://toourrepublic.com]

All Of That Bribery In Vain!

Just as the opinions from our two conversations with Massachusetts people this A.M. probably did not include ALL of their opinions on how they voted, the auto industry demise is a lot more complicated than just poor design, sloppy construction, or union problems.

No one can say what portion of the final problem each contributed, but all contributed.

The poor design was solved about a decade ago. The sloppy construction BEGAN to be solved about a decade ago, and many American cars now surpass Mercedes in quality of fit and finish – which may not be saying much because Mercedes has slipped badly for a decade.

The union problem was and is a pervasive problem. Management didn’t address it because it was easier to kick that can down the road, until there was no more road to kick it down. Unions had no incentive to address it because that is not in their DNA (they only want “more”), and now they have been rescued by a political bribery team.

Good fortune abounds for the unions, but not necessarily for their rescuers. The public bribe money going to them, and Nelson and Landrieu has aroused the public ire.

There is a political price to pay, and that price has not been completed. Here is the bad news: Unions, Nelson and Landrieu may have lost their reputations by giving support where it was not needed because the Healthcare bill as it now stands, may fall into something that has such bi-partisan support that their support was never necessary!

Reid bought a 60th vote several times, destroying himself and the Democratic Party in the process for something that may not even be needed! President Obama bought union peace for a Healthcare Bill that may never end up even trying to address taxation of “Cadillac” plans, destroying his reputation and his administration for NOTHING!

Karma!

[Via http://usna1957.wordpress.com]

Foreign Migrants in Taiwan and Japan: A Comparative Analysis

Abstract:

Taiwan and Japan share the related problems of an aging population and low fertility rate, both of which have contributed to labor shortages in their nations. Although the two countries have been importing workers from abroad to compensate for labor shortfalls, Japanese descendants from South American countries and mainland Chinese have become the dominant alternative labor force in Japan, while in Taiwan migrant laborers largely come from Southeast Asian countries such as Vietnam, Thailand and the Philippines. Do migration trends into Taiwan and Japan have anything in common given the two countries’ differing cultures and sources of migrants? What role do Chinese migrants play in both cases? To answer these questions, this paper examines labor importation in Taiwan and Japan by discussing the immigration policies of the two governments and comparatively analyzing the impact foreign migrants have had on Taiwanese and Japanese society.

http://wp.me/pISTJ-3m

Author:  Kenji Kaneko

Asia Journal of Global Studies, Vol 3, No 1 (2009)

For Full Text:  http://ajgs.org/index.php/AJGS/article/view/49

Subscribe to this blog,  A Sense of Place: http://lbwedes.wordpress.com/about

[Via http://lbwedes.wordpress.com]

Word on the Street

According to the UN World Tourism Organization, global tourism is set to rebound in 2010 after the economic crisis and swine flu pandemic produced “one of the most difficult years” for the sector. “2010 will be transformational year” for world tourism, UNWTO Secretary General Taleb Rifai told a news conference called to present the organization’s annual World Tourism Barometer yesterday. The report said international tourist arrivals fell by an estimated 4% in 2009, to 880 million, but should recover to grow by 3%-4% in 2010. It said growth in the sector returned in the last quarter of 2009 contributing to better than expected full-year results, led by the Asia-Pacific and Middle East regions.

 

Reference Source: Agence France-Presse

 

[Via http://youngragingbull.wordpress.com]

218. A turning tide - from Houston to Copenhagen

June in Houston. It’s 99F outside as we wait an hour at immigration.

A glossy US arrival video is playing on a giant screen above our booth, but we have to wait an hour and offer all our fingerprints before we’re free to pass.

Welcome to America.

Obama’s America — but has it really changed?

The freeway towards the city looks just the same. A little less traffic perhaps.

Wide blue skies are yawning wide above the endless sprawl beside the road. The downtown towers inch nearer across the final swoop of our 5,000 mile journey to reach The Loop.

In the hotel at last, I flop my bag and body down and switch on the TV. There’s a programme showing all about energy costs, and today’s phone-in prize is (quite remarkably) a free green audit of your home.

And it strikes me that I’ve never heard that stuff in Texas before.

All fresh and showered by sunset, we walk on Main Street to find a place to eat. It’s hotter than July this evening, but after ten hours in an aluminium tube we’re in no mood for air-conditioned civility. Some al fresco nachos, a cold beer and a simple plate of enchiladas are all we seek.

We find them at Cabo on Travis. A perfect terrace to catch the steamy breeze of sundown.

And then unexpectedly, outside the restaurant, I find that change again. A parked Mini, with just the perfect bumper sticker. Actual Size.

* * * * *

The morning is always slow in coming, when you wake six hours before the day.

Finally, the sky lightens and we’re running down the sidewalk. Right on Main Street, left past Cabo and onto Buffalo Bayou’s footpath beyond.

It’s perfect running. If you want to catch America, look above you at the looping freeways. Cast your eyes across the sunrise to a city touching clouds beyond the morning bayou.

We run on to find another bridge. Eventually, I ask a runner. No problem — about a mile ahead, she says. And then, mysteriously,You have to go to war.

Her words puzzle me. Because that’s bloody cryptic, from an American to a Brit. We were there with you in Iraq, you know. Even if we didn’t really want to be. But perhaps she means the running — and if she does, then that’s exactly right. In the morning summer heat, a war is precisely how this feels.

The sun is fully up now. We run east towards a distant skyscraper, and finally beneath it, we find our bridge. Waugh Street.

We laugh our way across the bayou as I look up. I’ve never noticed this tower before, but now the corporate logo screams its tale to anyone from anywhere around the globe. It’s AIG.

It’s three miles back to downtown Houston — towards the searing sun — and amidst my struggle I start to wonder. Can America really change?

It’s early days, here in the energy capital of the world. But there are signs. A little less traffic, a smaller car or two. A feature on energy saving on Texan television. A lonely logo on single skyscraper which symbolises the changing financial climate of this world more strongly than any other image I know.

And suddenly it seems that the tide is turning in this battle, after all.

Copenhagen still lies six months ahead, and a positive outcome may be too much to hope for. But a narrow definition of success or failure at a single conference — however momentous — perhaps that’s not the issue.

The real news this morning is that the world has changed. For now, at least, the economic horizon is painted a different colour.

And on energy and this steamy climate, America will engage.

Related articles:

174. The hidden history of Texas – on Buffalo Bayou, Houston, USA

195. The arc of history – USA election 2008

210. The price of oil: 3 – energy economics and the financial crisis

182. The truth about global warming

110. The hands that built America – Houston skylines

133. Tomorrow – Avril Lavigne and global warming

105. A crisis of energy

193. Through the Gherkin’s glass darkly – nightfall and fear in the City of London

[Via http://roadsofstone.com]

“The Prejudice of Race alone…”

 Capitalism Haiti is no longer the least known poorest nation right off our coast. It is now an attraction of general liberal piety (which in most cases leads to helpful aide, but in some can lead to futile and knowing condescension) and particular conservative ideological fixation. What does an idea need to be considered truly pure? It needs an example of success, a proving ground. The geographical, ecological, and political Lockean “blank slate” unto which can be drawn conclusions about the ideological concepts that are en vogue as a grand explanation for some aspect/s of human activity. What better then a earthquake ravaged (thought style potentially viable) hellscape? With the plethora of aide, charity, and money flooding into Haiti since the aforementioned disaster, conservative American politicians and their economic high capitalist high-priests are using the occasion to highlight their beliefs on the “free” market and poverty alleviation and elimination.

Or rather how the free-market should take the place of poverty alleviation etc. There is no problem of any size or scope, we are told, that cannot nor should not be solved by the more rigorous promotion of western style free-market corporatist/capitalist economics and philosophy. Why help a people who do not have the will to help themselves? The free market, through its greatest manifestation the corporation, should do the work that corrupt and overbearing big brother governments. What better way to help the under motivated masses of the former slave nation. A conservative political action committee with the inane sounding name National Alliance For Liberty and Freedom had this to say about why Haiti is the terrible place to live that it is in a petition they are sending to the White House: “…Further, any donations to Haiti will only serve as a “moral hazard”, in effect underwriting their bad choices. Haiti had some of the highest tax rates in the Western Hemisphere, hampering the natural innovation of its citizens and making it difficult for corporations – today’s engine of prosperity – to operate in that country. Their rules and regulations were among the most onerous as well, preventing true innovation to occur. Without such onerous rules and high taxation, Haiti could have been a thriving commercial center able to better withstand the earthquake and its aftermath.”

An interesting position, as it is largely because of the civil government imposed upon Haiti by its former occupiers the United States and its Military Industrial/Corporate Complex. The implication therein is that the Haitian people are incapable of exerting any effort in regards to their own benefit because they have been stifled by an over bearing liberal government… I wonder if this is the same government that Conservatives have decried as near nonexistent and ineffectual to the point of being essentially non-existent? But we are ignoring the true, coded, meaning of the statement from the PAC quoted above; the not so subtle racist message of why a country populated mostly by blacks should be stricken with such poverty and misfortune. Conservatives and capitalists must play a dangerous and hypocritical game of bait and switch with the critics of its theories and its potential converts to the same. The true racism of the conservative capitalist theories is not just apparent in the ranting of demagogues Like Rush Limbaugh and Pat Robertson (the latter went so far as to suggest a sort of convoluted millenarian view of why Haiti is so trouble; some nonsense involving Devil Worship and a tinge of Imperialist nostalgia mixed with a religious fervor that will not be discussed hear as it deserves its own full treatment in another essay).

The more subtle incipient racism of the Reagan’s and their “welfare queens”, and the Bill Cosby’s and their “dead beat black dads” and baggy trouser wearing ghetto trash, is apparent just beneath the surface of the seemingly well meaning “concern” for the well being of the “inner city” poor who are now joined in absentia by the black Haitian people. For what are Haitians in the minds of most Americans but black, and poor? And this, to many in the conservative capitalist power structure, and the plebian reactionaries who mindlessly follow out of patriotism or ignorance, is an oxymoron of the highest order. So we are truly supposed to believe that the same people who like the columnist Cal Thomas believe that Haiti is “a cursed land by any definition”, believe at the same time that it is the vagaries of the Liberal “tax and spend” system of government that is the cause of all Haiti’s ills? We must remember that Haiti is populated by refugees of the “Dark Continent” another realm that can either be improved by capitalist pragmatism or be condemned as a misfit of geography, markets, and society.

When a society fails in its capitalist pursuits it is blamed upon a liberal bureaucracy and/or a “thug” culture that is seemingly a natural state of affairs in countries that lack that certain… Caucasian je ne sais qua. South Africa… better left to the whites. Ditto Zimbabwe and the former colonial centers in Africa and to a lesser degree the Indian Sub Continent. When the capitalist system succeeds it is because of the “bright minds” who lifted themselves out of squalor and deprivation (overcoming their natural place in the world?) in order to BECOME an exemplar of the sanctified corporate class. Why is it that when a disadvantage person of color succeeds he does so in spite of the poverty and the culture into which he is born, but the Caucasian does so by learning from the very same? We must therefore wonder whether the conservative capitalists have not already condemned Haiti and its people to their condition and use their seemingly well meaning suggestions and solutions as something of a mask with which to hide the true face of their greed and condescension?

For what are we to believe when the all giving corporate market system that is seemingly designed to save and better lives is described by Milton Friedman, one of the premier minds of the conservative/corporatist philosophical system, thusly: “When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoid­ing pollution and whatever else may be the catchwords of the contemporary crop of re­formers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Busi­nessmen who talk this way are unwitting [sic] pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.”

A free society undermined by the false idea that corporations should have any social conscience? But what is this blasphemy? Had we not been told by the heirs of Friedman that the market was the true source of human compassion and betterment in a world otherwise beset by “socialistic” liberal milquetoasts? We must realize one unpleasant, but essential, fact: conservative capitalist thinkers do not want Haiti to succeed as a nation, they do not want any “third world nation” to succeed without first their having established a well ordered aristocracy that can control the passions of the “natives” in a “free” market. In the eyes of the these capitalists those who were not born into a world that “nurtures” their urge to acquire and succeed in the ways the see as civilized and proper are doomed to a unfortunate, though deserved, slavery that will never end and indeed should never end. The Republicans, Capitalists, and Fundamentalists of the world sneer at the words of Haitian Revolutionary Toussaint L’Overture: “I was born a slave, but nature gave me a soul of a free man….” The only freemen in a capitalist system are those who learn quickly how to enslave others, and then blame that state of servitude upon the one lying in chains.

[Via http://lennemi.wordpress.com]

The Grecians and the Hyperboreans

The united city-states of Greece is in trouble. And their hyperborean cousins to the north don’t want to help them. Germania has just asked Athenia to mind its finances. The Economic and Monetary Union (EMU) must be commended for imposing fiscal discipline on modern European civilization, the Platonic civilizational evidence about Europe’s Germanic antiquity being of uncertain nature.

Greece has violated the Maastricht fiscal criterion for the ratio of deficit to GDP and national debt to GDP. Greece is being asked to bring its annual deficit to GDP ratio back to under the 3% threshold from more than 4 times that limit and to bring its exploding national debt to GDP ratio back to under the Maastricht 60% limit from more than double that. Finally, the European Central Bank (ECB) in Frankfurt, the successor of the post-Nazi Bundesbank, ever hawkish about inflation, thought it was time to crack down. Still, there is something troubling about asking Greece to bring its debt into order for more than one reason.

For the EMU countries, who are already members, violating their own rules seems to be acceptable to the egregious extent that Greece has done, even as several eastern European countries have been waiting in line patiently to get into the EMU through the ups and downs of the European business cycle. Their de facto euroization has not convinced the European Commission (EC) in Brussels yet of their admittance into the EMU.

The sustainability of the EMU, a common currency area, is under stress. And this is a test for the EU to see if it can deal with the crisis, the first the euro is facing since its inception in 2001 as a common currency. In the United States, a single country, states with many electoral votes have the power to direct tax receipts at the federal level if their economies are not doing well. The EMU, however, as yet does not have that ability. Brussels has a highly inadequate supra-national fiscal structure which does not permit the EU to contribute to a common European fiscal pot and then to redistribute to countries that are in need of fiscal intervention without having to raise their debt level above the Maastricht limits. Without such supra-national fiscal policy the union could be under risk of dissolution.

ECB’s admonition of Greece to restructure its government expenditures is as necessary as it is for countries within the Maastricht limits in the EMU or in the EU-at-large to find ways to come to the aid of those that are faltering. At the same time it is important for countries which could falter to take corrective action in the run up to the potential violation of the treaties governing the union so as not to free ride on the fiscal welfare provisions of the union, should they be set up.

If the EU cannot figure out a way to save Greece, the quiet civil war could go on in Europe.

[Via http://ctamirisa.wordpress.com]

Two illustrations of a bust economy

Credit card use for paying mortgages/rents and basic household bills is increasing, as is the cost of living beyond retirement age.

Here are two separate stories of gloom received today that are perhaps uncomfortably related:

House of Cards

More than one million householders used credit cards to pay their mortgage or rent in the last 12 months. A Shelter survey reveals the highest proportion of those who pay their rent or mortgage through credit card were from working class professions (8% of those in the C2DE social grouping), but the poll also showed that middle/upper class (ABC1 category) are also falling victim, with 4% of respondents saying they use credit cards in this way.

Although being a credit card tart is still possible for some of us, opportunities to increase or transfer balances are narrowing and availability of mortgage products remains tight. The buck is about to stop – and people’s homes will ultimately be at risk.

How much in old money?

The average retired household needs to find up to £429 extra a year to maintain the standard of living they enjoyed 12 months ago. MGM Advantage estimates the cost of living for the average home has risen by £670 or 1.85% over the last year. The annual household expenditure for a home where the main occupant is aged 65 – 74 is now around £23,107, compared to £14,926 for a household where the main occupant is aged 75 and over, and £36,889 for the average home.

Estimated expenditure (£) Commodity or service 65-74 75 and over All households Food & non-alcoholic drinks 3216.18 2233.69 3668.93 Alcoholic drinks, tobacco & narcotics 710.96 307.23 756.97 Clothing & Footwear 849.97 550.97 1696.84 Housing(net), fuel & power 2464.65 2323.80 3936.23 Household goods & services 1877.74 1217.17 2624.04 Health 465.35 301.64 371.61 Transport 2909.13 1414.30 5033.29 Communication 691.23 448.06 1103.94 Recreation& Culture 3701.04 1949.24 4433.14 Education - - 381.02 Restaurant & hotels 1612.86 896.12 2943.84 Miscellaneous goods & services 1603.33 1336.24 2926.45 Other  expenditure groups 3004.14 1947.33 7012.27 Total Spent 23,106.58 14,925.78 36,888.58

——————————————–

Help is available!

If you are struggling to make ends meet, contact Community Legal Advice for your debt, housing and employment problems. They can also do a benefit check to see if you are entitled to Tax Credits or local and state benefits. Do it now!

[Via http://russellcavanagh.wordpress.com]

Wall Street Compensation

The popular zeitgeist seems to be that we need to put a cap on Wall Street bonuses.  However, I believe that everyone is missing the point.  The real question is why banks are so profitable that they can give out huge bonuses at all.  What should a company do with huge profits?  Isn’t it more egalitarian in some sense to give it to the employees rather than the shareholders?

So why are banks so profitable?  I can see at least three possible reasons.  The first is that banks have very large fluctuations in revenue so in up years they reap huge profits but then they lose a lot in down years.  However, since the government bails them out when they go down, they have an effective ratchet so that they only make money. The second is that the people on Wall Street are just so much smarter and talented that they just create more wealth.  The third reason is that Wall Street banks have an effective monopoly.

So let’s break down these hypotheses.  The first one probably has some merit because these banks take highly leveraged positions so that they can make a lot of money.  If you borrow and bet big then you’ll win or lose really big.  Getting bailed out whenever you lose sure comes in handy as well.  I can’t fully buy the second explanation.  I’m sure the people on Wall Street are very smart but I doubt that they’re a lot smarter than people in Silicon Valley, big pharma or academia, which are all less profitable (especially academia).  A physicist on Wall Street can easily make (at least in the hey days) ten to a hundred times more than a full professor at a prestigious university but there is no way she is ten times smarter.  Now some would argue that the professor may lack some personality traits that are necessary for success on the street (or they are unaware that they could be making more money) and that may be partially true but I think there are plenty of aggressive smart quantitative people that are not taking in huge bonuses.  While the likes of Warren Buffet and George Soros are simply better than everyone else, their talents are nonalgorithmic and not what the big banks use to make money.

That then brings us to explanation three.  There must clearly be barriers to entry and advantages for being big that the banks enjoy.  If there were no such advantages then their would be more firms and more people on the street eroding the profitability.  Microsoft does so well because it is a monopoly.  The big three US car companies only did really well when they were an oligopoly.  Google has an effective monopoly (except in China).

So what exactly are these barriers?  Well I think one is that the fixed costs of doing business on the street are pretty high so being big gives you a definite edge.  Small entities simply can’t compete because they lack the infrastructure, personnel and capital.  Now, if the advantage increases as you get larger then you end up with a classic winner-take-all network.  The firms that have a slight edge get bigger, which amplifies their advantage and that crowds out the weaker firms.  Being big also allows you to make bigger bets.  Repealing the Glass-Steagall Act, which separated commercial banking from investment banking, also gave an advantage to banks, because they had access to even more capital to leverage into even bigger bets.  There is probably some collusion between the big banks as well to keep other firms out.  Hence, it seems to me that if we want to curb Wall Street excesses then reducing bonuses is not the answer at all.  That may be the only fair thing taking place on Wall Street.  What we really should do is to re-institute Glass-Steagall and eliminate the monopoly power the banks have.

[Via http://sciencehouse.wordpress.com]

Review: Heavy Time, by C. J. Cherryh

I know, I’m reviewing them in the wrong order, but it’s a reread review and I started out with Hellburner just because that was the book I remember liking the best.

It was not my first reread of Hellburner, either, but this was my first reread of Heavy Time. In retrospect I think that was because when I finished the pair I a) felt them to be very different, and b) while I had enjoyed Heavy Time I had enjoyed Hellburner more. Well, now is the time to admit it – I was wrong!

Hellburner does stand on it’s own. Yes. But – reading both of them is preferable; even recommended. At least by me.

Heavy Time tells three different tales, at least on the surface. It tells how Ben Pollard, Sal Aboujib, Meg Kady and Paul Dekker came to know each other. It tells about how small people are exploited by big corporations. And is sets the stage for the Company Wars suite, in which this is the first book, chronologically; sketching how the push to build the carriers affected corporations and small people both. While the perspective is intensely personal, often claustrophobic, it’s also more issue-oriented than it’s sequel; the politics are obvious there too, but the focus is on the people and what happens to them – that we might not agree, from a value judgement point of view, that sinking money in military tech aimed for use in a war Sol is doomed to lose is sane we still want the ‘program’ to succeed. Because that’s what the protagonists want.

In Heavy Time the we don’t get to see much of the military but they’re part of the “establishment”, and the “establishment” is presented as corrupt; as being backwards; as having the “wrong” ideas about what’s going on out in space – we view life from the eyes of the disenfranchised, the alienated and the outcast, with all what it means.

Maybe this difference between the books was what got to me the first time, and what made me decide I liked the sequel better. Today I’d say they are both good, both worth reading.

I recommend reading them back to back, preceded by a reading of Downbelow Station but prior to Merchanter’s Luck, Rimrunners, Tripoint and Finity’s End.

[Via http://reconsidering.wordpress.com]

Free-rider Businesses

Over lunch the other day, Noah mentioned this really interesting product that was announced at CES.  It’s called Airnergy and it somehow harvests the energy emitted by nearby WiFi signals and converts it into electricity that can be used to power and recharge various devices.

It reminded me of a concept I’ve been toying with for a while–free-rider businesses.  Mancur Olson discussed the problem of free-riders and the incentives that produced them in his classic The Logic of Collective Action.  Large groups have trouble creating public goods since each individual has an incentive to free ride on the efforts of others (since the good is non-excludable, meaning there isn’t a practical way to prevent specific individuals from benefiting from the public good once it’s produced).  In many instances there will be individuals or small groups that have a large enough incentive to create a particular good, thereby creating the opportunity for their work to be exploited by free-riders.  My thought was that there are some business that are free-riders, or at least benefit from this practice.  Free-rider businesses are those that develop a product or service that relies in some significant way on the physical resources or creative content produced by others without providing compensation to those third parties or having helped create the resource or content themselves.  In most cases, the third party resources serve as a critical input (sometimes even the main content) for a firm’s key product or service.  The most obvious example of this type of firm is Google.

The core of Google’s business is to mine, analyze, and organize the massive amount of content produced by third parties on the web. In this way they are dependent on others to create a critical input, an input that they don’t pay for (Ed. although, the recent deal with Twitter is an exception to the rule). Media mogul Rupert Murdoch has publicly characterized the practice of news aggregators and, in particular, Google’s use of this content as “theft”. One can easily scan the Internet and stumble on other examples.  Certainly the explosion of data and content that the Internet has facilitated creates an environment that is quite conducive for firms of this type.

The Airnergy product, on the other hand, would be an example of a free-riding device that relies on some kind of physical input or infrastructure. Airnergy is leveraging a preexisting infrastructure built and maintained by third parties who, to my knowledge, would not be compensated for the use of their WiFi networks. It’s as if the WiFi networks have become a massive public good that, after being established by a small group of actors that had a greater interest in their existence, can now be leveraged by all sorts of players free of charge. (I am still trying to figure out how this is not illegal.)

Noah and I tried to think if this was a trend unique to this time period or if there were historical analogs. We couldn’t come up with one at the time, but after some reflection I can think of a couple.

One would be the automobile industry. While manufacturers do not leverage some kind of input for their product they do rely on the physical infrastructure that makes car travel possible (i.e. roads, bridges, etc.). However, the difference here is that the physical infrastructure they rely on was established and is maintained by the government, who funds that work through taxation (which automakers must pay).

To be fair, the term has somewhat of a harsh connotation, and I certainly don’t mean it to. I’ve been struggling to come up with a term that more accurately reflects the relationship I’ve been thinking about. These businesses do provide something of value (to consumers, if not to the source of those inputs or the greater society at large). Additionally, these businesses are developing their own unique and innovative offerings that happen to leverage these inputs. For example, no one questions the innovative value of Google’s PageRank or the utility of LinkedIn or Facebook.

As I said, it was an idea I have been toying with and I am obviously still trying to work through the logic.  Would be curious to hear others thoughts on this.

[Via http://billpetti.com]

Against Trafficking, of Whatever Flavor

I winced when I saw this Columbus Dispatch headline – Call to toughen “slavery” law – but the article surprised me. In a good way.

An Ohio legislator, Teresa Fedor, is about to introduce a law that would make human trafficking a stand-alone crime and not just an adjunct to other crimes. She’s supported in this by Mark Lagon, head of the Polaris Project, for whom “trafficking” and “slavery” are apparently not just code words for cracking down on prostitution:

Lagon recommended that Ohio law be changed to make human trafficking a stand-alone crime and to include a broader definition that covers forced labor in addition to coerced sexual activity.

(Source, here and below: Columbus Dispatch)

Now, I’m not a big fan of prostitution. I think it enshrines a type of male privilege that I’d rather see die out: the privilege to avail oneself of a fuckable body at all times. I don’t see that as advancing women’s sexual autonomy. However, I really don’t want to see sex workers be persecuted for making choices that are rational and not, to my mind, immoral.

Nor do I want to see trafficked domestic workers (for instance) completely ignored because there’s nothing sexy about their enslavement. (As if forced prostitution might be sexy??!!?)

Also, I hate hearing that underage girls were arrested whenever a prostitution ring is busted. A thirteen- or fifteen-year-old girl is not mature enough to consent to sex work. She should be treated with kindness and helped to finish her education, not branded a law-breaking tramp.

Lagon said that Ohio needs to increase assistance, such as emergency housing, to trafficking victims, particularly juveniles.

“We don’t have a place to put these prostituted teens when we find them,” Lagon said. Too often, they are viewed as criminals to be locked up rather than victims to be helped, he added.

Of course, not all sex workers are victims. Many choose their work consciously and deliberately. Some enjoy it more than many other folks enjoy flipping burgers or scrubbing other people’s toilets. For of-age sex workers, the victim/criminal dichotomy is not especially helpful. Many of them are neither, and we need to find new language (like, um, worker?) to describe their status. That can’t happen, though, as long as they’re still subject to criminal prosecution.

So even the revised law in Ohio will fall far short of ideal – and that’s assuming 1) it passes 2) with Lagon’s preferred language. But it’s at least a start, in a state that’s usually quicker to judge than to empathize.

[Via http://kittywampus.wordpress.com]

U.S. Loan Effort Is Seen as Adding to Housing Woes

U.S. Loan Effort Is Seen as Adding to Housing Woes

January 1, 2010 by PETER S. GOODMAN

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

[Via http://feltd.wordpress.com]

True Security

Personal security.

Home security.

Financial security.

Job security.

Airport security.

National security.

All of these issues are important in today’s world.  The papers have been filled lately with lapses in security from the White House Party Crashers to the Christmas Day Bomber; from our banks, to our jobs, to our home loans and our retirement funds.  All of these issues have two things in common. 

The first is that we should properly research, plan, prepare, execute and evaluate.  We should research the pertinent information.  We should make plans that are sufficient for our needs.  We should do the necessary groundwork to be properly prepared.  We should follow through on the execution of the plan.  We should evaluate effectiveness and adjust as necessary.

The second is to realize that all of our best efforts can still be undermined.  

True security comes from God.  Proverbs 21:31 says “ The horse is prepared for the day of battle, but deliverance is of the Lord.” NKJ 

I understand this to mean that it is appropriate for us to make all of the necessary preparations, that we are responsible to do what we can, but, that we should realize that ultimately God is our true security.  Even as we are reminded by the phrase still on our coins, “In God we trust”.   We would do well to remember that.

[Via http://cgirod.wordpress.com]

Econ: The family, women, and the economy [L4.4]

WHAT IS REPRODUCTION FOR ECONOMISTS?

Most of us associate reproduction with romantic notions like love, commitment, patriotism, fulfillment, or sex. However, economists have a different view of reproduction. Remember, economics is the dismal science – it is known to make exciting ideas dull and dry. For economists, reproduction is the economic reproduction of the human race; it is the creation of new and productive workers and bosses.

Economists view reproduction more than as a biological process. Aside from the 9 month gestation period of most humans, economic reproduction also encompasses the sustenance, care, and training of people so that they can be productive individuals. To become productive, people must pass through the following developmental tasks: physical, cognitive or mental, and psycho-social. Reproduction does not stop with the raising of babies – it continues through adolescence (your mother calling on your cellphone to tell you are past your curfew) and adulthood (your wife preparing your daily baon.)

WHAT ARE THE ECONOMIC IMPACTS OF REPRODUCTION?

Most of the work that goes into reproduction is hidden at home. No money changes hands, no profit is made, and since it has no monetary value, it does not appear in GDP statistics. Most economists tend to ignore reproduction as a private, non-economic matter.

But remember what I told you about economics? Since you were born (actually, as far as back as the intention to bear you), your life has been circumscribed by work. Many of you come from families that support themselves through wage labor, thus, you are born into worker households. And worker households, by default, produce workers. Think of your family as a worker-making factory. You are the product, the would-be worker of the next generation.

You are not only a product, but an investment, and self-respecting households do their best to improve their investments. You are sent to school, given nutritious foods, allowed liberties for your social development, etc. Your parents work for you so that you’ll become better workers for yourself, or as an insurance against old age. Almost all the work that your parents do goes into you. In the past, when economic reality was harsher, families produced more workers or children of little quality (poor education, poor nutrition), but with the rising standards of living, families are now producing less workers of higher quality.

Most of the consumption that occurs in the economy also occurs at home. Indeed, many families sink into debt just to finance consumption (especially last Christmas season.) Little is saved except for higher-income families.

Lastly, aside from you, the most important investment of your family is the place where work occurs – the home. You are all fortunate to live within well-furnished homes that will soon become your property.

WHO DOES MOST OF THE WORK IN THE HOUSEHOLD?

Most of the work done in the household is done by women. Since they are not sold in the market, the work women do are considered as inferior to the paid work done by most men. Women do more unpaid work than men. Their job has less status or recognition. How we value work is sexist, and is influenced by a complex mixture of tradition, religion, media, economic pressures and even violence. Men who work outside the home are exempted from household chores, but women who work outside must “double shift.” Women work harder. Thus, the unequal relations between men and women are perpetuated.

As our standards of living increase, the contribution of women to the household lessens. Household tools make household chores easier. Manufactured goods replace the unpaid labor women do. Higher-income families hire people (gardeners, drivers, yayas, etc.) to do the work for them, with pay. The government also shoulders some the burden with day-care centers and public schools. However, though paid, work traditionally done by wives is valued less and is usually done by women.

Aside from pure discrimination our society imposes on women, women’s career prospects are also limited by domestic responsibilities and by pregnancy.  The jobs where women are restricted (caring professions and service industries) are also low-paying. Women are reduced into a dependency with men, especially when their husbands overtake them – poverty rates among single mothers and pensioners are higher than the rest of the population. In our country, to be a single mother carries with it the economic pressure to provide for your children and the social stigma of being promiscuous. In fairness, our country is one of the most gender-friendly countries in Asia; Korean, Chinese, Japanese, Arab and Indian women are worse off (actually to be born a girl in Bangladesh is the worst.)

So, women, take care of yourself and never engage in a relationship where you become dependent or take-advantaged. Men, take care of your wives and your mothers – give them freedom and recognize how much work they do for you. The age of cloistered women are now over – now is the age for genuine equality and recognition of importance.

WHAT IS THE EFFECT OF POPULATION GROWTH ON THE ECONOMY?

Women give birth so it is no doubt that the real power over bearing children resides in the woman, not the man. However, many women are powerless against the sexual predations of their husbands. Uncontrolled sex often brings about pregnancy, and pregnancy has much to do with economics, particularly the labor force.

A high rate of population growth has the advantage of providing more workers for the country. However, the disadvantages often outweigh the advantages. The disadvantages of too high population growth are the following:

1. Rapid population growth leads to a high rate of unemployment.
2. Too many people depress resources and puts additional strain on the environment.
3. Jobless or unemployed people pose economic, social and political problems to their country.

Unemployment usually causes the vicious cycle of idleness and promiscuity, which leads to more children, and so on. Bearing too many children does not only pose great troubles to our country but also to the children themselves: their physical, cognitive and psycho-social development are often stunted by inadequate resources.

HOW CAN WOMEN IMPROVE THE ECONOMY?

Family planning means the limitation or control of the number of children a family will have. There are various methods of family planning from the one-child policy of China to the tax incentives that limit family size in many countries. Family planning methods are not the same as contraceptives or anti-STDs, but many of the methods of family planning (e.g. condoms) belong to one or all. Family planning is also concerned with spacing births. It has been proven that in countries where women are treated more or less equally as men, and where contraceptives are widely available and accessible, there were less unwanted pregnancies, less unemployment, and greater standards of living for all.

The following are some family planning methods:

1. Abstinence
2. Rhythm method
3. Coitus interruptus
4. Condom use
5. Diaphragm
6. Intrauterine devices (IUD)
7. Birth control pills
8. Sterilization (ligation and vasectomy)
9. Counseling
10. Late marriage
11. Abortion

Our country has a pro-life Constitution and it bans abortion as a means of family planning. The Roman Catholic Church also has a pro-life policy and further bans all forms of artificial birth control other than those which are preventive in nature.

CONCLUSION

This module discussed about household work. Reproduction is more than mere sex – it includes the continuing nurturing and improvement of human potential. Most of the work that goes into reproduction is done by women. Women are taken advantage by complex social forces and must seek genuine equality to lead better economic lives. Reproduction leads to new workers but too much of it has negative social consequences. Women are integral to the economic health of a country; wise childbearing and childrearing is fundamental to a productive labor force.

RIGHT-PRODUCTION

Reproduce

With the right person,

At the right time,

At the right place,

With the right means,

For the right reason.

WEEKLY ASSIGNMENT (due Friday, 15 January 2010)

Write a life plan, that is, your career and family plans until you reach 65 years old (retirement.) Be detailed with your plans and timetable. Include in your plans the course you intend to pursue in college, the age you want to bear children, the description of the person you want to have a family with, the number of children you want to have (you can include their names), the job you want to have, etc.

Make your work brief and concise. Use only one sheet of yellow pad (back-to-back if need arises.)

And, please, write legibly. You are allowed to computerize your work if your handwriting is too painful to read.

*****

Source:

Stanford, Jim. (2008). Economics for Everyone: A Short Guide to the Economics of Capitalism. London: Pluto Press.

[Via http://socscistudent.wordpress.com]

Will the 21st century revive family businesses?

Will the 21st century revive family businesses?

Yeomanry making a comeback

Phillip Longman | Friday, 8 January 2010 Mercatornet

For reasons of technology, demography, culture, and efficiency, big is no longer necessarily better. Will the 21st century revive family businesses?

Two years ago in Warsaw, I had the great honor of speaking to this Congress about a global phenomenon that has come to be known as “The Demographic Winter.”  A documentary by that title, much of which was filmed at the last World Congress, has done much to further spread knowledge of the reality I was addressing.  But for those who are still unfamiliar with the Demographic Winter,  I will briefly describe it here before adding some new thoughts on how it will affect, and be affected by, the great global economic downturn that began last year.

Many of us grew up amidst warnings of “the population boom.” And indeed, world population has doubled in my lifetime. Yet today, in nations as diverse as Italy and Iran, Lebanon and China, Canada, and Cuba, the number children born each year is no longer sufficient to replace the population.

The trend at first glance contradicts the notion taught by Darwin and modern biology that all organisms breed up to the limits of their available resources. Indeed, it was precisely among the world’s most peaceful, prosperous and well-fed nations where the phenomenon of sub-replacement fertility began, specifically here in Western Europe.

Yet Darwin could preserve his theory by countering that these slow-breeding segments of human population have simply become maladapted to their changing environment, including a manmade environment that often makes the cost of parenthood seem prohibitive to rational individuals.  If we accept this hypothesis, does that imply that humans are on the road to extinction?

It would if fertility rates were falling below replacement rates consistently among all people, but that is not the case.  Rather than facing extinction, we are facing a dramatic slowdown, and eventual decline in human population, accompanied by dramatic changes in its composition.

Why is this?  Especially where childlessness and one-child families have become the norm, a larger and larger share of future population is produced by an initially narrow, but comparatively fast-growing segment of society. Specifically, in today’s low-birthrate countries, the next generation is overwhelmingly being formed by people who either reject or ignore the economic and social incentives that in modern nations have made large families not only unfashionable, but often prohibitively expensive.

Disproportionately, these people include those who are motivated by religious conviction to “go forth and multiply.” In modern societies, with their pension systems and other means of replacing the functions of the family, there has been little economic incentive to have children, and strong reasons not to. Thus, almost by default, what people have children, and especially those who have more than one or two, tend to be people who have non-economic motives to procreate.

Today, there is a strong correlation around the world between adherence to traditional Christian, Islamic or Judaic religious values and high fertility. The result is an emerging world in which in which the ancient, patriarchal values of these religions are becoming stronger, while secularism suffers demographic decline.

 The current world economic crisis will most likely compound the trend, for a variety of reasons. The widespread loss of jobs and retirement savings gives a survival advantage to those who still have abundant human capital upon which to rely, specifically, strong, largely self-sufficient families in tight-knit, high-trust, self-financing communities. Under currently unfolding conditions, the “fittest” are those who invest heavily and successfully in building up strong families and local community support networks.

Many people may try to contend with their financial and economic losses by forming secular communes. History suggests, however, that families and communities bound by common blood and religious faith are more likely to succeed in fostering the necessary sacrifice of individualism and consumerism.

These changes we are living through are very scary, but they also, I think, have the long-term promise of restoring the economic basis of the natural family and renewing society generally. Seeing more specifically how this future might unfold requires dwelling briefly on a few poorly remembered traditions from the past. 

In a recent issue of Foreign Policy Magazine, I have published a brief article entitled The Return of Yeomanry.  This word “yeomanry” is now obscure in English, and may be impossible to translate into many other languages.  But particularly in America during the 18th and 19th century, it stood for a clear ideal of human organization, which was small-scale production centered on a self-sufficient family unit.

One of America’s most prominent founding fathers, Thomas Jefferson, for example, wrote frequently the superior virtue of the country’s then substantial yeomanry, which mostly comprised family farmers who owned their own land and small family business owners.

Jefferson’s vision of America’s future was that widespread family ownership of small scale productive would remain the dominant form of social and economic organization, and that the influence of both Big Business and Big Government would be held in check.  

Since then all manner of social philosophers in many different traditions and different generations, have articulated and defended this vision. It was the dream for example, of Pope Leo XIII. It was also the dream Bulgaria’s Alexander Stamboliski and the other leaders of Eastern Europe’s mostly forgotten democratic “Green” movement, who in the aftermath of World War I reconfigured the former Austro-Hungarian Empire by redistributing royal lands and converting tenant farmers into self-sufficient freeholders. (1)

But until recently, real-life yeomen could be and were dismissed–often violently. Joseph Stalin, for example, made short work of Eastern Europe’s land-holding peasant class.  During the 20th century, both capitalists and communists, for different reasons, were hostile to the idea of a property owning, prosperous peasantry. Capitalists wanted agriculture to be industrialized, while Communists wanted it collectivized, with both opposed to any possible third way.  For both Capitalists and Communists, the future would be one of ever greater division of labor and increasing economies of scale, with the family stripped of nearly all productive function.

Yet today there are signs that the yeoman ideal of small-scale ownership and production, having already out-survived communism, maybe be poised for a big comeback around the world. This is not to predict the end of globalism, if by that we mean simply high levels of interconnectivity. But it is to suggest that for reasons of technology, demography, culture, and efficiency, big is no longer necessarily better and the yeoman has a chance.

We see this most vividly the realm of finance. For decades now, experts have argued that bigger is better in banking. With their economies of scale, larger institutions are more efficient, has gone the reasoning. They can match up lenders and borrowers on a global scale. In places where money was piling up (like China or the United Arab Emirates), banks with worldwide reach could tap into these savings and direct them to borrowers in places where money was scarce (like Stockton, California, or East Cleveland, Ohio). And so large-scale “transactional” banking largely displaced small-scale “relationship” banking, following the “logic of the market.” Looking back, however, we can see that global-scale finance wasn’t really so efficient after all, except in the sense of being very efficient at wasting the world’s capital on over-priced tract houses and worthless insurance. By contrast, small-scale community banks have held up quite well during the crisis, with micro-lenders in the developing world doing the best of all.

We see this also in the realm of agriculture. In the United States, for the first time in generations, the number of farmers is again on the rise.  Mostly they are small-scale family farmers producing food for local consumption, using organic, or regenerative techniques.

The trend is driven by two factors.  One is rising consumer resistance to, and fear of, the products of industrial agriculture, including genetically modified food, highly processed food, and food laced with pesticides and growth hormones. 

The other factor is that industrial agriculture is reaching a tipping point in its productivity. Oil and water, its essential inputs, are becoming increasingly scarce.  Meanwhile, the natural fertility of the soil in places that practice industrial agriculture is becoming exhausted.  Already, the rate of productivity growth on American and European agriculture has dropped substantially in this decade compared to the 1990s, and still more compared to the 1980s and ‘70s. World food production no longer produces a surplus, and in recent years has fallen below the rate of population growth, even as population growth itself has been slowing dramatically.

 I predict that small scale farming in the United States, anyway, will continue to boom, due it comparative advantage in oil and water use and in consumer preference.  This will be particularly true once policy makers realize that organic farming can both substantially reduce carbon emissions and go a long way toward solving the nation’s worsening health care crisis.  By one credible estimate, if every farm in the United States converted to organic production techniques, the nation’s carbon emissions would fall by 40 percent. (2) Meanwhile, processed foods produced by industrial means using high concentrations of fat and sugar are deeply implicated in the epidemic of obesity that is a major threat to public health and the nation’s solvency.

At the same time, many of the world’s citizens are being thrown back toward some form yeomanry for lack of any attractive alternative. The train stations of coastal China are packed with unemployed young people returning the countryside.  To alleviate Africa’s suffering, both the World Bank and the G-8 are prescribing a revival of small-scale farming using organic techniques.  With the decline of communism and union power, employers, whether in Tokyo or Detroit, no longer feel compelled to offer lifetime employment with generous benefits to forestall a revolution. So now mass production shrinks along with mass consumption,

Even home production of manufactured items seems around the corner. A technological development to watch is the emergence of so-called “personal fabricators.” These are digitally-driven machines, already used by companies like Nike to produce rapid prototypes. The machines effectively allow you to “print” a three dimensional object, such as, say, a sneaker. As with personal computers, the size and cost of these machines (currently starting at around $18,000) will drop quickly even as their power and potential expands.

Today, it is already possible to use a 3-D scanner, such as the Z Scanner 700, to create a digital blueprint of, say, a BMW tail light, and then simply print a replica for a cost of a few cents in materials. Maybe few consumers will wind up printing new cars in their garages, but they may well buy cars from small dealers who have printed them locally, with huge savings in the cost of logistics and inventory.

In concept, you can even print a house as demonstrated Behrokh Khoshnevis of the University of Southern California and the Center for Rapid Automated Fabrication Technologies.

A final reason to expect a return of yeomanry involves the global trend of falling birthrates. In the long run, perhaps the greatest shortcoming of both communism and corporate capitalism has been their failure to reconcile the tensions of work and family life. For the majority of the world’s population that no longer lives on farms or relies on home production, children are no longer an economic asset, but an avoidable liability. And so we get fewer and fewer of them, with resulting populating aging and for countries such as Japan and Russia now, absolute population decline.

By a Darwinian process, the future now appears to belong to whatever societies figure out or stumble upon forms of organization that reduce the direct and opportunity costs of parenthood, and widespread yeomanry and home production may be just the system to that winds up doing the trick.

Dr Phillip Longman is a Schwartz Senior Fellow at the New America Foundation. He formerly worked as a senior writer and deputy assistant managing editor at U.S. News & World Report. His best-known book is The Empty Cradle (2004). Republished from the World Congress of Families with permission. 

Endnotes

(1) For an excellent account of this movement, see Allan C. Carlson’s Third Ways: How Bulgarian Greens, Swedish Housewives, and Beer-Swilling Englishmen Created Family-Centered Economies — and Why They Disappeared. ISI Book, 2007.

(2) Tim J. LaSalle, et al, Regenerative Organic Farming: A Solution to Global Warming, Rodale Institute, 2008, http://www.rodaleinstitute.org/files/Rodale_Research_Paper-07_30_08.pdf

 Full article here

[Via http://steveblizard.wordpress.com]