things Marxism explains that mainstream economics can’t – Page 2

Work, Unemployment and Aggregate Demand

(I originally posted this as a series of comments on a 2012 post at Steve Randy Waldman’s Interfluidity. In that post, Steve suggested that we should think of redistribution under capitalism as “the poor collectively sell[ing] insurance against riot and revolution, which the rich are happy to pay for with modest quantities of efficiently produced goods.”)

In Theories of Surplus Value, Marx writes:

Assume that the productivity of industry is so advanced that whereas earlier two-thirds of the population were directly engaged in material production, now it is only one-third. Previously 2/3 produced means of subsistence for 3/3; now 1/3 produce for 3/3. Previously 1/3 was net revenue (as distinct from the revenue of the labourers), now 2/3. Leaving [class] contradictions out of account, the nation would now use 1/3 of its time for direct production, where previously it needed 2/3. Equally distributed, all would have 2/3 more time for unproductive labour and leisure. But in capitalist production everything seems and in fact is contradictory… Those two-thirds of the population consist partly of the owners of profit and rent, partly of unproductive labourers (who also, owing to competition, are badly paid). The latter help the former to consume the revenue and give them in return an equivalent in services—or impose their services on them, like the political unproductive labourers. It can be supposed that—with the exception of the horde of flunkeys, the soldiers, sailors, police, lower officials and so on, mistresses, grooms, clowns and jugglers—these unproductive labourers will on the whole have a higher level of culture than the unproductive workers had previously, and in particular that ill-paid artists, musicians, lawyers, physicians, scholars, schoolmasters, inventors, etc., will also have increased in number.

A large and growing share of employment, in other words, is unnecessary from a technical standpoint. It exists because useless jobs are more conducive to social stability than either mass poverty or a social wage. The payments the majority of the population receives for not rioting or rebelling look better when they are dressed up as payment for our work as mistresses, grooms, jugglers — or as yoga instructors or economics professors. This way, people are still dependent on a boss. In a differently organized world, we could dispense with most of these jobs and take the benefits of increased productivity in some combination of shorter hours for productive workers and a shift toward more intrinsically fulfilling (craft-like) forms of productive work.

By starting from here we can think more sensibly about employment and unemployment. From a macroeconomic standpoint, all we need is that expenditure on unproductive labor changes in some rough proportion with income.

From my point of view, the essential facts about employment are (1) As long as the most socially accepted form of claim on the social product is wages for work, work will be found for people, along the lines Marx suggests. (This is not true in poor societies, where a large portion of the poor engage in subsistence labor, of either the traditional or garbage-picking variety.) And (2) In the short run, employment will rise and fall as the rich feel a smaller or a greater need for the insurance-value of financial wealth.

As soon as you being to think about employment in terms of an input of labor to a production process, you’ve taken a wrong turn. We should not try to give supply-based explanations of unemployment, i.e. to show how the allocation of some stock of productive resources by some decision makers could generate unemployment. Unemployment is strictly a phenomenon of aggregate demand.

Unemployment in advanced countries is not characterized by exogenous factor supplies and Leontief-type production functions, where some factors are exhausted leaving an excess supply of their complements. (The implicit model that lies behind various robots-will-take-all-the-jobs stories.) Unemployment in capitalist economies involves laid-off workers and idle factories; it involves unemployed construction workers and rising homelessness; it involves idle farmworkers and apples rotting on the trees. Unemployment never develops because we need fewer people to make the stuff, but because less stuff is being made. (Again, things are different in poor countries, and in the early stages of industrialization historically.) Unemployment cannot be explained without talking about aggregate demand any more than financial crises can be explained without talking about money and credit. It exists only to the extent that income and expenditure are determined simultaneously.

Unemployment rises when planned money expenditure falls for a given expected money income. Unemployment falls when planned money expenditure rises for a given expected money income. Conditions of production have no (direct) effect one way or the other.

Recognizing that unemployment is an aggregate expenditure phenomenon, not a labor-market phenomenon, helps avoid many errors. For example:

It is natural to think of unemployed people as people not engaged in productive work. This is wrong. The two things have nothing to do with each other. Unemployed people are those whose usual or primary claim on the social product takes the form of a wage, but who are not currently receiving a wage. There are lots of people who do not receive wages but are not unemployed because they have other claims on the social product — children, retirees, students, caregivers, the institutionalized, etc. Almost all of tehse people are capable of productive work, and many are actively engaged in it — caregiving and other forms of household production are essential to society’s continued existence. At the same time, there many people who do receive wages but who are not engaged in productive work; one way to define these is as people whose employment forms part of consumption out of profits or rents.

While there is no relationship between people’s capability for and/or engagement in useful work, on the one hand, and employment, on the other, there is a close link between aggregate expenditure and employment, simply because a very large fraction of expenditure takes the form directly or indirectly of wages, and aggregate wages adjust mainly on the extensive rather than the intensive margin. So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?

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Going beyond the 2012 conversation, two further thoughts:

1. The tendency to talk about unemployment in terms of why some peoples’ labor is no longer needed for production, is symptomatic of a larger confusion. This is the confusion of imagining money claims and payments as a more or less transparent representation of physical and social realities, as opposed to a distinct system that rests on but is substantially independent from underlying social and biological existence. Baseball requires human beings who can throw, hit and run; but the rules of baseball are not simply shorthand for people’s general activity of throwing, hitting and running. Needless to say, economics education assiduously cultivates the mixing-up of the money game with the substrate upon which it is played.

2. It’s natural to think of productive and unproductive labor as two distinct kinds of employment, or at least as opposite poles on a well-defined continuum. Marx usually writes this way. But I don’t think this is right, or at least it becomes less valid as the division of labor becomes more extensive and as productive activity becomes more directly social and involves more coordination of activities widely separated in space and time, and more dependent on the accumulation of scientific and technical knowledge.

Today our collective productive and creative activity requires the compliance of a very large number of people, both active and passive. This post will never be read by anyone if I don’t keep on typing. It will also never be read if the various tasks aren’t performed that are required to operate the servers where this blog is hosted, my internet connection and yours, the various nodes between our computers, the utilities that supply electricity to all the above, and so on. It would not be read if someone hadn’t assembled the computers, and transported and sold them to us; and if someone hadn’t developed the required technologies, step by step as far back as you want to go. It would not be read, or at least not by anyone except me and a few friends, if various people hadn’t linked to this blog over the years, and shared it on social media; and more broadly, if the development of blogs hadn’t gotten people into the habit of reading posts like this. Also, the post won’t be read if someone breaks into my house before before I finish writing it, and steals my laptop or smashes it with a hammer.

All of these steps are necessary to the production of a blog post. Some of them we recognize as “labor” entitled to wages, like whoever is watching the dials at Ravenswood. Some we definitely don’t, like the all-important not-stealing and not-smashing steps. And the status of some, like linking and sharing, is being renegotiated. Again, a factory only runs if the workers choose to show up rather than stay home in bed; we reserve a share of the factory’s output to reward them for making that choice. It also only runs if passersby choose not to throw bricks through the windows; we don’t reserve any share of the output for them. But if we were going to write down the physical requirements for production to take place, the two choices would enter equivalently.

In a context where a large part of the conditions of production appear as tangible goods with physically rival uses; where the knowledge required for production was not itself produced for the market; where patterns of consumption are stable; where the division of labor is limited; where most cooperation takes the form of arms-length exchanges of goods rather than active coordination of productive activity; where production does not involve large commitments of fixed capital that are vulnerable to disruption; then the idea that there are distinct identifiable factors of production might not be too big a distortion of reality. In that context, splitting claims on the social product into shares attributable to each “factor” is not too disruptive; if anything, it can be a great catalyst for the development of productive capacities. But as the development of capitalism transforms and extends the division of labor, it becomes more and more difficult to separate out which activities that are contributing to a particular production process. So terms like productivity or productive labor lose touch with social reality.

You can find this argument in chapters 13-14 and 32 of Capital Volume 1. The brief discussion in chapter 32 is especially interesting, since Marx makes it clear that it is precisely this process that will bring capitalism to an end — not a fall in the rate of profit, which is never mentioned, nor a violent overthrow, which is explicitly rejected. But that thought will have to wait for another time.

The Puzzle of Profits

Part II of Capital begins with a puzzle: In markets, commodities are supposed to trade only for other commodities of equal value, yet somehow capitalists end up with more value than they start with.

In the world of simple exchange, money is just a convenience for enabling the exchange of commodities: C-M-C is easier to arrange than C-C. But profit-making business is different: the sequence there is M-C-M’. The capitalist enters the market and buys some commodities for a certain sum of money. Later, he sells some commodities, and has a larger sum of money. This increase — from M to M’ — is the whole point of being capitalist. But in a world of free market exchange, how can it exist?

Let’s put some obvious misunderstandings out of the way. There’s nothing mysterious about the fact that people can accomplish things with tools and previously acquired materials that they would be unable to with unaided labor. The problem is not that “capital,” in the sense of a stock of tools and materials, is productive in this sense. To the extent that what appears as “profit” in the national accounts is just the cost of replacing worn-out tools and materials, there’s no puzzle. [1]

The mystery is, how can someone enter the market with money and, after some series of exchanges, exit with more money? In the sequence M-C-M’, how can M’ be greater than M? How can the mere possession of money seemingly allow one to acquire more money, seemingly without end?

Before trying to understand Marx’s answer, let’s consider how non-Marxist economists answer this question.

1. Truck and barter. The most popular answer, among both classical and modern economists, is that the M-C-M’ sequence does not exist. All economic activity is aimed at consumption, market exchange is only intended to acquire specific use-values; when you think you see M-C-M you’re really looking at part of some C-M-C sequence(s). The classical economists are full of blunt statements that the only possible end of exchange is consumption. In today’s economics we find this assumption in the form of the “transversality condition” that says that wealth must go to zero as time goes to infinity. That’s right, it is an axiom in modern economics that accumulation cannot be a goal in itself. Or in the words of Simon Wren-Lewis (my new go-to source for the unexamined conventional wisdom of economists): “It would be stupid to accumulate infinite wealth.” Well OK then!

2. You earned it. Another answer is that the capitalist brings some additional unmeasured commodity to the production process. They are providing not just money M but also management ability, risk-bearing capacity, etc. In this view, if we correctly measured inputs, we would find that M’=M. In its most blatantly apologetic form this is effectively skewered by comrades Ackerman and Beggs in the current Jacobin. For unincorporated businesses, it is true, it is not straightforward to distinguish between profits proper and the wages of managerial labor, but that can’t account for profits in general, or for the skewed distribution of income across households. If anything, much of what is reported as managerial salaries should probably be called profits. This is a point made in different ways by Piketty and Saez and Dumenil and Levy; you can also find it offered as straightforward business advice.

3. It was the pictures that got small. The other main classical answer is that profit is the reward for “abstinence” (Senior) or “waiting” (Cassel). (I guess this is also the theory of Bohm-Bawerk and the other Austrians, but I admit I don’t know much about that stuff.) It appears today as a discount rate on future consumption. This invites the same question as the first answer: Is capitalist accumulation really motivated by future consumption? It also invites a second question: In what sense is a good tomorrow less valuable than the same good today? Is the utility derived from a glass of wine in 2013 really less than the utility derived from the same glass consumed in 2012,or 2010, or 1995? (So far this has not been my experience.) The logically consistent answer, if you want to defend profit as the return to waiting, is to say Yes. The capital owner’s pure time preference then represents an objective inferiority of output at a later date compared with the same output at an earlier date.

This is a logically consistent answer to the profits puzzle, and it could even be true with the right assumptions about the probability of an extinction-event asteroid impact/Khmer Rouge takeover/zombie apocalypse. With a sufficiently high estimate of the probability of some such contingency, M’ is really equal to M when discounted appropriately; capitalists aren’t really gaining anything when you take into account their odds of being eaten by zombies and/or suffocated by plastic bag, before they get to enjoy their profits. [2] But I don’t think anyone wants to really own this point of view — to hold it consistently you must believe that economic activity becomes objectively less able to satisfy human needs as time goes by. [3]

4. Oops, underpaid again. We can take the same “profit as reward for waiting” idea, but instead of seeing a pure time preference as consistent with rational behavior, as modern economists (somehow) do, instead interpret it like the classical economists (including Cassel, whose fascinating Nature and Necessity of Interest I just read), as a psychological or sociological phenomenon. Consumption in the future is objectively identical to the same consumption today, but people for some reason fail to assign it the same subjective value it the same. Either they suffer from a lack of “telescopic facility,” or, in Cassel’s (and Leijonhufvud’s) more sophisticated formulation, the discount rate is a reflection of the human life expectancy: People are not motivated to provide for their descendants beyond their children, and future generations are not around to bargain for themselves. Either way, the outcome is that exchange does not happen at value — production is systematically organized around a higher valuation of goods today than goods tomorrow, even though their actual capacity to provide for satisfaction of human needs is the same. Which implies that workers — who provide labor today for a good tomorrow — are systematically underpaid.

5. Property is theft. The last and simplest possibility is that profits are always just rents. Capitalists and workers start out as just “agents” with their respective “endowments.” By whatever accident of circumstances, the former just end up underpaying the latter. Maybe they are better informed.

We could develop all these points further — and will, I hope, in the future. But I want to move on to (my idea of) Marx’s answer to the puzzle.

One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between. What is the relationship between these two forms of income? For someone like Cassel, interest has priority; profit is a derived form combining interest with income from managerial skill and/or a rent. For Marx on the other hand, and also for Smith, Ricardo, etc., profit is the primitive and interest is the derived form; interest is redistribution of profits already earned in production. (Smith: “The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue.”) In other words, are profits an addition to interest, or is interest as a subtraction from profit? For Marx, the latter. The fundamental question is how money profits can arise through exchange of commodities. [4]

Marx gives his answer in chapter four: The capitalist purchases labor-power at its value, but gets the results of the labor expended by that labor-power. The latter exceeds the former. In other words, people are capable of producing more than it takes to reproduce themselves, and that increment is captured by the capitalist. In four hours, you can produce what you need to live on. The next four or six or eight or twelve hours, you are working for The Man.

This is the answer, as Marx gives it. Labor power is paid for at its value. But having purchased labor power, the capitalist now has access to living labor, which can produce more than the the cost of its own reproduction.

I think this is right. But it’s not really a satisfactory answer, is it? It’s formally correct. But what does it mean?

One way of fleshing it out is to ask: Why is it even possible that labor can produce more than the reproduction-costs of labor power? Think of Ricardo’s world. Profits are positive because we have not yet reached the steady state — there are still natural resources available whose more intensive use will yield a surplus beyond the cost of the labor and capital required to use them. The capitalist captures that surplus because capital has the short side of both markets — there is currently excess land going unutilized, and excess labor going unutilized. [5]

Another way: There is something in the production process other than exchange, but which is captured via exchange.

I want to think of it this way: Humanity does have the ability to increase social value of output, or in other words the aggregate capacity to satisfy human needs from nature does in general grow over time. This “growth” happens through our collective creative interchange with nature — it is about pushing into the unknown, a process of discovery — it is not captured beforehand in the market values of commodities.

In a proper market, you cannot exchange a good in your possession for a good with a greater value, that is, with a greater capacity to satisfy human needs in general. (Your own particular needs, yes.) But you can, through creative activity, through a development of your own potential, increase the general level of satisfaction of human needs. The capitalist by buying labor power at its value, is able to capture this creative increment and call it their private property.

Our potential is realized through a creative interchange with nature. It’s not known in advance. What can we do, what can’t we do — we only learn by trying. We push against the world, and discover how the world pushes back, in so doing understand it better and find how it can be reshaped to better suit our needs. Individually or collectively, it’s a process of active discovery.

You as a person can exchange the various things you are in possession of, including your labor power, for other things of equal value. (Though for different use values, which are more desired by you.) But you will also discover, through a process of active learning and struggle, what you are capable of, what are the limits of your powers, what creative work you can do that you cannot fully conceive of now.

Through the process of education, you don’t just acquire something that you understood clearly at the outset. You transform yourself and learn things you didn’t even know you didn’t know. When you do creative work you don’t know what the finished product will be until you’ve finished it. I still — and I hope for the rest of my life — find myself reading economics and having those aha moments where you say, “oh that’s what this debate is all about, I never got it before!” And science and technology above all involve the discovery of new possibilities through a process of active pushing against the limits of our knowledge of the world.

The results of these active process of self-development and exploration form use-values, but they are not commodities. They were not produced for exchange. They were not even known of before they came into being. But while they are not themselves commodities, they are attached to commodities, they cannot be realized except through existing commodities. I may produce in myself, through this process of self-testing, a capacity for musical performance, let’s say. But I cannot realize this capacity without, at least, a sufficient claim on my own time, and probably also concrete use-values in the form of an instrument, an appropriate performance space, etc., and also some claim on the time of others. In this case one can imagine acquiring these things individually, but many — increasingly over time — processes of self-discovery are inherently collective. Science and technology especially. So specifically a discovery that allows cheaper production of an existing commodity, or the creation of a new commodity with new use-values, can only become become concrete in the hands of those who control the process of production of commodities. By purchasing labor power — in the market, at its value — capitalists gain control of the production process. They are thus able to claim the fruits of humanity’s collective self-discovery and interchange with nature as their own private property.

In some cases, this is quite literal. Recall Smith’s argument that one of the great advantages of the division of labor is that it allows specialized workers to discover improved ways of carrying out their tasks. “A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it.” Who do you think gained the surplus from these inventions? This still happens. Read any good account of work under capitalism, like Barbara Garson’s classic books All the Livelong Day and The Electronic Sweatshop. You’ll find people actively struggling to do their jobs better — the customer service representative who wants to get the caller to the person who can actually solve their problem, the bookshelf installer who wants it to fit in the room just right. The results of these struggles are realized as profits for their employers. But these are exceptional. The normal case today is the large-scale collective process of discovery, which is then privately appropriated. Every new technology draws on a vast history of publicly-available scientific work — sometimes we see this directly as with biomedical research, but even when it’s not so obvious it’s still there. Every Hollywood movie draws on a vast collective project of storytelling, a general collective effort to imbue certain symbols with meaning. Again see this most directly in the movies that draw on folktales and other public-domain work, but it’s true generically.

It is this vast collective effort at transformation of nature and ourselves that allows the value of output to be greater than the value of what existed before it. Without it, we would eventually reach the classical steady state where the exercise of labor could produce no more than the value of the labor power that yielded it. So when Marx says the source of profits is the fact that labor can produce more than the value of labor power, lying behind this is the fact that, due to humanity’s collective creative efforts, we are continuing to find new ways to shape the world to our use.

Capital is coordination before it is tangible means of production. Initially (logically and historically) the capitalist simply occupies a strategic point in exchange between independent producers thanks to the possession of liquid wealth; but as the extension of the division of labor requires more detailed coordination between the separate producers, the capitalist takes over a more direct role in managing production itself. “That a capitalist should command on the field of production, is now as indispensable as that a general should command on the field of battle.”

There is another way of looking at this: in terms of the extension of cooperation and the division of labor, which is realized in and through capitalist production, but in principle is independent of it. I’ll take this up in a following post.

[1] Marx makes this point clearly in his critique of the Gotha program. Elimination of surplus as such cannot be a goal of socialism.

[2] It would seem that we have enough evidence to rule out a sufficiently high probability of world-ending catastrophe to explain observed interest rates, assuming the minimum possible return on accumulated wealth is zero. But of course in some conceivable circumstances it could be negative — that’s why I include the Khmer Rouge takeover, where your chance of summary execution is presumably positively related to your accumulated wealth. Also, maybe we have reason to think that catastrophe is more likely in the future than we would naively infer from the past. It would be funny if someone tried to explain interest rates in terms of the doomsday argument.

[3] There has been a lot of discussion of appropriate social discount rates in the context of climate change. But nobody in that debate, as far as I can tell, takes the logical next step of arguing that excessively high discount rates imply a comprehensive market failure, not just with respect to climate change. There is not a special social discount rate for climate, there is an appropriate social discount rate for all future costs and benefits. If market interest rates are not the right tool for weighing current costs against future benefits for climate, they are not the right guide for anything, including the market activities where they currently govern.

[4] Yes, interest exists independently of profits from production, and indeed is much older. Marx recognizes this. But capitalism is not generalized usury.

[5] And substitution between factors is impossible — Marx’s “iron law of proportions” — or at least limited.

When Do Profits Count?

From today’s New York Times story about the new crop of billion-dollar internet startups:

Most of these chief executives are also veterans of the Internet bubble of the late ’90s, and confess to worries that maybe things are not so different this time. Mr. Tinker… said, “The reality is, I’ve taken $94 million in investors’ money, and we haven’t gone public yet. I feel that responsibility every day.” …

The nagging fear is that valuations, which are turned into profits only if the company goes public successfully or is bought for a high price, could still plunge.

The cheap pleasure here is gawking at the next stupid Pets.com. (The NYC subway right now is plastered with ads for some company that, wait for it, lets you order pet food online.) But maybe all of this lot will thrive, I have no idea. What I’m interested in is that bolded phrase.

You might naively think that whether a business makes profits is independent of who happens to own it. Profits appear as soon as a commodity is sold for more than the cost of its inputs. So the bolded sentence really only makes sense with the implied addition, profits for venture capitalists or for finance. But in the disgorge-the-cash era, that’s taken as read.

Capitalism is still about M-C-C’-M’, same as it ever as. But C-C’ now includes not just the immediate process of production, but everything related to the firm as a distinct entity. Profits aren’t really profits, under the current regime, as long as the claim on them is tied to a specific business or industry. And the only real capitalists are owners of financial assets.

(Of course what is interesting about the internet economy is the extent to which this logic has not held there. Functionally, profitability for internet companies has meant a relationship of sales to costs that allows them to grow, regardless of the level of payouts to financial claimants. Whether articles like this are a sign of a convergence of Silicon Valley to the dominant culture, or just an example of the bondholder’s-eye view reflexively adopted by the Times, I don’t know.)

EDIT: From the Grundrisse:

It is important to note that wealth as such, i.e. bourgeois wealth, is always expressed to the highest power as exchange value, where it is posited as mediator, as the mediation of the extremes of exchange value and use value themselves. … Within capital itself, one form of it in turn takes up the position of use value against the other as exchange value…: the wholesaler as mediator between manufacturer and retailer, or between manufacturer and agriculturalist, or between different manufacturers; he is the same mediator at a higher level. And in turn, in the same way, the commodity brokers as against the wholesalers. Then the banker as against the industrialists and merchants; the joint-stock company as against simple production; the financier as mediator between the state and bourgeois society, on the highest level. Wealth as such presents itself more distinctly and broadly the further it is removed from direct production and is itself mediated between poles, each of which, considered for itself, is already posited as economic form. Money becomes an end rather than a means; and the higher form of mediation, as capital, everywhere posits the lower as … labour, as merely a source of surplus value. For example, the bill-broker, banker etc. as against the manufacturers and farmers, which are posited in relation to him in the role of labour (of use value); while he posits himself toward them as capital, extraction of surplus value; the wildest form of this, the financier.

Finance stands with respect to productive enterprises as capitalists in general stand with respect to labor (and raw material). So it makes sense that, from finance’s point of view, profit is not realized with the sale of the commodity, but only with the sale of the enterprise itself.

Pain Is the Agenda: The Method in the ECB’s Madness

Krugman is puzzled by the European Central Bank:

I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates… The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is). This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need?

He is certainly right that if the goal is resolving the crisis, or even price stability, then refusing further rate cuts is mighty strange. But who says those are the goals? His final question is meant to be rhetorical, but it really isn’t. Because the more austerity you want, the more enforcement you need.

I met someone the other day with a fairly senior position at the Greek tax authority; her salary had just been cut by 40 percent. When, outside of an apocalyptic crisis, do you see pay cuts like that? Which, for you or me or Paul Krugman, is an argument to End This Depression Now. But if you are someone who sees pay cuts as the goal, then it could be an argument for not quite yet.

It’s a tenet of liberalism — and a premise of the conversation Krugman is part of — that there are conflicting opinions, but not conflicting interests. But sometimes, when people seem to keep doing things with the wrong outcome, it’s because that’s the outcome they actually want. Paranoid? Conspiracy theory? Maybe. On the other hand, here’s Deutsches Bundsbank president Jens Weidmann:

Relieving stress in the sovereign bond markets eases imminent funding pain but blurs the signal to sovereigns about the precarious state of public finances and the urgent need to act. Macroeconomic imbalances and unsustainable public and private debt in some member states lie at the heart of the sovereign debt crisis. It may appeal to politicians to abstain from unpopular decisions and try to solve problems through monetary accommodation. However, it is up to monetary policymakers to fend off these pressures.

That seems pretty clear. From the perspective of the central banker, resolving the crisis too painlessly would be bad, because that would allow governments to “avoid unpopular decisions.” And it’s true: If there’s something you really want governments to do, but you don’t think they will make the necessary decisions except in a crisis, then it is perfectly rational to prolong the crisis until you see the right decisions being made.

So, what kind of decision are we talking about, exactly? Krugman professes bafflement — “whatever that is” — but it’s not really such a mystery. Here’s an editorial in the FT on the occasion of last summer’s ECB intervention to support the market for Italy’s public debt:

Structural reform is the quid pro quo for the European Central Bank’s purchases last week of Italian government bonds, an action that bought Italy breathing space by driving down yields. … As the government belatedly recognises, boosting Italy’s growth prospects requires a liberalisation of rigid labour markets and a bracing dose of competition in the economy’s sheltered service sectors. This is where the unions and professional bodies must play their part. Susanna Camusso, leader of the CGIL, Italy’s biggest trade union, is threatening to call a general strike to block the proposed labour law reforms. She would be better advised to co-operate with the government and employers… The government’s austerity measures are sure to curtail economic growth in the short run. Only if long overdue structural reforms take root will the pain be worthwhile.

A couple of things worth noting here. First the explicit language of the quid pro quo — the ECB was not just doing what was needed to stabilize the Italian bond market, but offering stabilization as a bargaining chip in order to achieve its other goals. If ECB was selling expansionary policy last year, why be surprised they’re not giving it away for free today? Note also the suggestion that a sacrifice of short-term output is potentially worthwhile — this isn’t some flimflam about expansionary austerity, but an acknowledgement that expansion is being give up to achieve some other goal. And third, that other goal: Everything mentioned is labor market reform, it’s all about concessions by labor (including professionals). No mention of more efficient public services, better regulation of the financial system, or anything like that.

The FT editorialist is accurately presenting the ECB’s view. My old teacher Jerry Epstein has a good summary at TripleCrisis of the conditions for intervention; among other things, the ECB demanded “full liberalisation of local public services…. particularly… the provision of local services through large scale privatizations”; “reform [of] the collective wage bargaining system … to tailor wages and working conditions to firms’ specific needs…”; “thorough review of the rules regulating the hiring and dismissal of employees”; and cuts to private as well as public pensions, “making more stringent the eligibility criteria for seniority pensions” and raising the retirement age of women in the private sector. Privatization, weaker unions, more employer control over hiring and firing, skimpier pensions. This is well beyond what we normally think of as the remit of a central bank.

So what Krugman presents as a vague, speculative story about the ECB’s motives — that they want to hold politicians’ feet to the fire — is, on the contrary, exactly what they say they are doing.

It’s true that the conditions imposed by the ECB on Italy and Greece were in the context of programs relating specifically to those countries’ public debt, while here we are talking about a rate cut. But there’s no fundamental difference — cutting rates and buying bonds are two ways of describing the same basic policy. If there’s conditions for one, we should expect conditions for the other, and in fact we find the same “quid pro quo” language is being used now as then.

Here’s a banker in the FT:

The future of Europe will therefore be determined by the interests of the ECB. Self-preservation suggests that it will prevent complete collapse. If necessary, it will overrule Germany to do this, as the longer-term refinancing operations and government bond purchase programme suggest. But self-preservation and preventing collapse do not amount to genuine cyclical relief and policy stimulus. Indeed, the ECB appears to believe that in addition to price stability it has a mandate to impose structural reform. To this extent, cyclical pain is part of its agenda.

Again, there’s nothing irrational about this. If you really believe that structural reform is vital, and that democratic governments won’t carry it out except under the pressure of a crisis, then what would be irrational would be to relieve the crisis before the reforms are carried out. In this context, an “irrational” moralism can be an advantage. While one can take a hard line in negotiations and still be ready to blink if the costs of non-agreement get too high, it’s best if the other side believes that you’ll blow it all up if you don’t get what you want. Fiat justitia et pereat mundus, says Martin Wolf, is a dangerous motto. Yes; but it’s a strong negotiating position.

But this invites a question: Why does the ECB regard labor market liberalization (aka structural reform) as part of its mandate? Or perhaps more precisely, when the ECB negotiates with national governments, on whose behalf is it negotiating?

The answer the ECB itself might give is, society as a whole. After all, this is the consensus view of central banks’ role. Elected governments are subject to time inconsistency, or are captured by rent seekers, or just don’t work, so an “independent” body is needed to take the long view. It’s never been clear why this should apply only to monetary policy, and in fact there’s a well-established liberal view that the independent central bank model should be extended to other areas of policy. Alan Blinder:

We have drawn the line in the wrong place, leaving too many policy decisions in the realm of politics and too few in the realm of technocracy. … the argument for the Fed’s independence applies just as forcefully to many other areas of government policy. Many policy decisions require complex technical judgments and have consequences that stretch into the distant future. Think of decisions on health policy (should we spend more on cancer or aids research?), tax policy (should we reduce taxes on capital gains?), or environmental policy (how should we cope with damage to the ozone layer?). Yet in such cases, elected politicians make the key decisions. Why should monetary policy be different? … The justification for central bank independence is valid. Perhaps the model should be extended to other arenas. … The tax system would surely be simpler, fairer, and more efficient if … left to an independent technical body like the Federal Reserve rather than to congressional committees.

I’m sure there are plenty of people at the ECB who think along the same lines as the former Fed Vice-Chair. Indeed, that central banks want what’s best for everyone is practically an axiom of modern economics. Still, it’s funny, isn’t it, that “structural reform” so consistently turns out to mean lower wages?

Martin Wolf’s stuff on the European crisis has been essential. But it has one blind spot: The only conflicts he sees are between nations. What perplexes him is “the riddle of German self-interest.” But maybe the answer to the riddle is that national interests are not the only ones in play.

It’s hard not to think here of Perry Anderson’s thesis, developed (alongside other themes) in The New Old World, that the EU project is fundamentally a response by European elites to their inability to roll back social democracy at the national level. The new supra-national institutions of the EU have allowed them to bypass political cultures that remain stubbornly (if incompletely) egalitarian and solidaristic. In Alain Supiot’s summary:

In Anderson’s view, the European project has engendered neither a federation nor an intergovernmental organization; rather it is the most fully realized form of Hayek’s ultraliberal ‘catallaxy’. … Like a secular version of faith in divine providence, belief in the spontaneous order of the markets entails a desire to protect it from the untimely interventions of people seeking ‘a just distribution’ which, according to Hayek, is nothing more than ‘an atavism, based on primordial emotions’. Hence the need to ‘dethrone the political’ by means of constitutional steps which create ‘a functioning market in which nobody can conclusively determine how well-off particular groups or individuals will be’. In other words, it is necessary to put the division of labour and the distribution of its fruits beyond the reach of the electorate. This is the dream that the European institutions have turned into a reality. Beneath the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy.

Jerry Epstein puts it more bluntly. The ECB’s insistence on structural reform “represents a cynical raw power calculus to destroy worker and citizen protections without any real belief in the underlying neo-liberal economics they use to justify it.” (If you prefer your political economy in audiovisual form, he has a video talking about this stuff.)

This kind of language makes people uncomfortable. Rather than acknowledge that the behavior of people in power could represent a particular interest — let alone that of the top against the bottom, or capital against labor — much better to throw your hands up and profess bafflement: their choices are “bizarre,” a “riddle.” This isn’t, let’s be clear, a personal failing. If you or I occupied the same kind of positions as Krugman or Wolf, we’d be subject to the same constraints. And I anyway don’t want to find myself talking to no one but a handful of grumpy old Marxists.

But on the other hand, as Doug Henwood likes to quote our late friend Bob Fitch, “vulgar Marxism explains 90 percent of what happens in the world.” And then, I keep looking back through FT articles on the crisis, and finding stuff like this:

The central bank has long called for eurozone economies to press ahead with structural reforms. That the ‘E’ in EMU, or Economic and Monetary Union, has not occurred is a complaint often voiced by ECB officials. On this score, the central bank has managed to win an important concession in forcing Italy to sign up to liberalising its economy. Some may see this as a pyrrhic victory for the damage that the bond purchases have done to the central bank’s independence. But there was a significant threat to stability if the central bank did not act. …That Mr Trichet, always among the more politically savvy of central bankers, managed to get some concessions on structural reform was all that could be hoped for.

One has to wonder: What does it mean for the ECB to “win an important concession” from an elected government? Who is it winning the concession for? And if the problem with the ECB is just an ideological fixation on its inflation-fighting credibility, why would it be willing to sacrifice some of that credibility to advance this other goal?

It’s hard to suppress a lingering suppression that central bankers are, after all, bankers. And then you think, isn’t there an important sense in which finance embodies the interests of the capitalist class as a whole? (In an anodyne way, this is even sort of what its conventional capital-allocation function means) You wonder if the only reason Karl Marx called “the modern executive is a committee for managing the common affairs of the whole bourgeoisie,” is that central banks didn’t yet exist.

Imagine you’re a European capitalist, or business owner if you prefer the sound of that. You look at the United States and see the promised land. Employment at will — imagine, no laws limiting your ability to fire whoever you want. Private pensions, gone. Unions almost gone, strikes a thing of the past. Meanwhile, in 2002, 95 out of every 1,000 workers in the Euro area — nearly ten percent — was on strike at some point during the year. (In Spain, it was 270 out of every 1,000. In Italy, over 300.) And of course there’s the vastly greater share of income going to your American peers. Look at it from their point of view: Why wouldn’t they want what their American cousins have?

It seems to me that what would really be bizarre, would be if European capitalists did not see the crisis as a once-in-a-lifetime opportunity. They’d be crazy — they’d be betraying their own interests — if, given the ECB’s suddenly increased power vis-a-vis national governments, they didn’t insist that it extract all the concessions it can.

Isn’t that what they’re doing? Moreover, isn’t it what they say they’re doing? When the “Global Head of Market Economics” at the world’s biggest bank says that the ECB should only cut rates “as part of a quid pro quo with governments agreeing to more far-reaching structural reform,” what do you think he means?

What Do Bosses Want?

The New York Times paywall is here. Felix Salmon has the details, and what looks like the definitive critique:

What does all this mean for the New York Times Company? I can’t see how it’s good. The paywall is certainly being set high enough that a lot of regular readers will not subscribe. These are readers who would normally link to the NYT from their blogs, who would tweet NYT articles, who would post those articles on Facebook, and so on. As a result, not only will traffic from these readers decline, but so will all their referral traffic, too. The NYT makes more than $300 million a year in digital ad revenue, so even a modest decline in pageviews, relative to what the site could have generated sans paywall, can mean many millions of dollars foregone. On top of that, the paywall itself cost somewhere over $40 million to develop.

Against all that, how much revenue will the paywall bring in?… extra revenues of $24 million per year.

$24 million is a minuscule amount for the New York Times company as a whole; it’s dwarfed not only by total revenues but even by those total digital advertising revenues of more than $300 million a year. … So by my back-of-the-envelope math, the paywall won’t even cover its own development costs for a good two years, and beyond that will never generate enough money to really make a difference to NYTCo revenues. … I just can’t see how this move makes any kind of financial sense for the NYT. The upside is limited; the downside is that it ceases to be the paper of record for the world. Who would take that bet?

(For the record, in the past couple weeks I devoted a few idle moments to considering just how much I would pay for digital access to the NYT, and decided that $15 a month was just about my upper limit. But in fact I won’t pay it, since top news stories will continue to be free on the iPhone.)

What makes this bad decision so interesting is how many other companies seem to make the same kind of bad decisions. And in particular, how completely they overlook the value of the kind of free marketing and brand development that Salmon describes in the first paragraph.

For instance, here’s an interesting new working paper by Yi Qian on the effect of counterfeit goods on clothing brands, which finds

heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales.

In other words, when someone buys a rip-off pair of Manohlo Blahniks, they may be foregoing a purchase of an authentic pair. But maybe not. And either way, their visible endorsement of the brand increases its appeal to others in a way that the company would otherwise have to spend scarce advertising dollars to achieve. Not surprising, it’s the high-end brands that benefit on net from counterfeiters, since purchasers of counterfeit goods are less likely to be able to afford the real thing and the brand identity is more valuable. This is consistent with other research I’ve seen suggesting that in some cases, the advertising effect outweighs the substitution effect even at the level of the individual consumer — buying a counterfeit handbag (or illegally downloading a piece of music, or whatever) makes a person more likely to subsequently buy that item legally.

(Qian is also co-author of this fascinating survey of the economics of counterfeiting, which identifies a remarkably broad range of theoretical and empirical cases where laxer IP protections turn out to benefit sellers. For instance, there’s evidence that academic journals were able to charge higher prices as a result of the widespread availability of photocopiers starting in the 1980s, because the greater value of journals to subscribers who were now able to make copies of articles outweighed the loss of sales to people who read the copies.)

Sellers of branded goods can’t be unaware of this research, or at least of these general effects. Yet we see sellers of branded goods going to ridiculous lengths to strengthen IP proections, even sellers of high-end goods who are least likely to be harmed by infringement. In effect, these companies, like the New York Times, are going to great lengths to deprive themselves of free advertising. It’s almost like they put a higher value on controlling their brand, than on profiting from it.

Which they probably do.

It makes one think about the Marxist literature on the labor process, and the idea that for capitalists, maximizing the surplus they extract from workers is secondary to maintaining the conditions under which surplus can be extracted at all. This is Stephen Marglin’s argument in his classic article What Do Bosses Do? — that the factory system was not initially adopted because it was any more technically efficient than alternative forms of worker-controlled production, but because of the strategic leverage it gave the owner of capital. He quotes a contemporary article in The Spectator observing that worker-managed cooperatives were competitive with capitalist enterprises:

Associations of workmmen could manage shops, mills and all forms of industry with success, and the immensely improved the conditions of the men, but then they did not leave a clear place for the masters. That was a defect…

Similarly, bloggers and social media may successfully generate immense traffic for the Times, and counterfeiters may successfully build the value of the brands they rip off; but the owners of these properties may not be (only) confused when they object, since this uncontrolled activity has a less of a clear place for the masters.

As Kalecki famously said,

“Discipline in the factories” and “political stability” are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound.

Profits come second to power. So when the results of productive labor aren’t appropriated as private property, the class instinct of the bosses of the information industries must tell them this is unsound, even if it’s more immediately profitable than the alternative. As Kalecki says in the same essay, “The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means.” That, I suspect, is fundamentally why the Sulzbergers et al. object to free ice cream, even when they can make more money by giving it away than by selling it.

Is Liberalism Done Yet?

I don’t have much to add to Mike Konczal’s respectful but thorough rebuttal of the idea that the passage of health care reform marks the end of the liberal project; Yglesias is so clearly wrong, for so many reasons. Most immediately, the health care bill as passed will leave 8 percent of the population uninsured, so even if universal health insurance is the finish line, we haven’t crossed it yet. More generally, there are clear areas where expansion of public provision and regulation is almost inevitable, whenever the political climate turns favorable. Most obvious is childraising (and caring labor more generally), where our current system of uncompensated household labor is being steadily eroded by the acid of the market, even while the demands on it increase. In a few years, universal childcare will be seen by liberals as essential to a civilized society, just as universal health coverage is now.

More broadly, I’m reminded of Stephen Resnick’s story of his fellow MIT grad student Stephen Hymer going in to ~~Robert~~ Paul Samuelson’s office (this would be the early ‘60s) and asking him if there was anything important in Marxism that you couldn’t talk about using conventional economics. Samuelson’s answer: “Class struggle.”

Liberals and radicals do disagree over ultimate ends – more stuff, more equitably distributed, for them; the full and free development of human capacities, for us. But the more salient disagreement, at least in the current conjuncture, is over means. Liberals believe that the political process is ultimately a form of rational debate, in which the objectively best ideas win out and are then executed by a neutral administrative mechanism. Political engagement means situating yourself within shouting distance of the seat of power, and then making the case that your preferred policy is in the best interests of everyone. Who you are doesn’t matter, just the merits of your views. Carl Schmitt, interestingly enough, gives one of the clearest statements of this conception of politics:

All specifically parliamentary arrangements and norms receive their meaning first through discussion and openness. This is especially true of the fundamental principle that the representative is independent of his constituents and party… The characteristic of all representative constitutions … is that laws arise out of a conflict of opinions, not out of a struggle of interests. … Conduct that is not concerned with discovering what is rationally correct, but with calculating particular interests and the chances of winning and with carrying these through according to one’s own interests is … not discussion in the specific sense.

Schmitt, the anti-liberal, saw better than liberals that this mode of politics is specific to the particular institutional context of parliamentarianism. A context that remains very important, of course, outside of the formal political domain as well as within it. [1] But it’s not universal, and in particular it can’t be the last word in a society that is divided by fundamentally conflicting interests.

Radicals, by contrast, see the conflict of interests as fundamental. Or rather, we see it as inescapable in politics as long as it exists in economic life and society generally. From this point of view, arguments are won in parliament only thanks to the rioters, literal or figurative, in the streets outside. And liberalism as a concrete political project is a compromise between opposing interests, one that’s always open to renegotiation when the balance of forces changes. So unlike in science (liberalism’s implicit ideal), progress is always reversible, so no political struggle is ever definitely finished. Any given compromise is only sustainable to the extent that there are social forces striving for a horizon beyond it.

[1] For example, I’m current serving on a university hiring committee, and the norm that discussions must be conducted only in terms of differing opinions, never opposing interests, is very strongly felt.