things worth reading – Page 5

In Defense of Debt

I have a new post up at the Jacobin, responding to Mike Beggs’ critical review of David Graeber’s Debt. It’s a much longer, and hopefully more convincing, version of some arguments I was having with Mike and others over at Crooked Timber last month. Mike things there is no useful economics in Debt; I think that on the contrary, the book fits well with important strands of heterodox economics going back to Marx and Keynes (not to mention Schumpeter and Wicksell).

In particular, I think the historical and anthropological material in Debt helps put concrete social flesh on two key analytic points. First, that we need to think of capitalism primarily organized around the accumulation of money, with economic decision taken in terms of money flows and money commitments; not as a system for the mutually beneficial exchange of goods. And second, within capitalism, we can distinguish between economies where the medium of exchange is primarily commodity or fiat money, and economies where it is primarily bank-created credit money. Textbook economic analysis tends to work strictly in terms of the former, but both kinds of economies have existed historically and they behave quite differently.

(There’s a lot more in the book than this, of course, but what I am trying to do — I don’t know how successfully — is clarify the points where Debt contributes most directly to economics debates about money and credit.)

If this sounds at all interesting, you should first read Mike’s review, if you haven’t, and then read my very long response.

… and then, you should read all the other great stuff at The Jacobin. For my money, it’s the most exciting new political journal to come along in a while.

Doug Henwood on Our Current Disorders

Blogging’s been light here lately. Sorry. In the meantime, you should read this:

if you combine net equity offerings—which, given the heavy schedule of buybacks over the last quarter century, have been negative most of the time since 1982—takeovers (which involve the distribution of corporate cash to shareholders of the target firm), and traditional dividends into a concept I call transfers to shareholders, you see that corporations have been shoveling cash into Wall Street’s pockets at a furious pace. Back in the 1950s and 1960s, nonfinancial corporations distributed about 20% of their profits to shareholders…. After 1982, though, the shareholders’ share rose steadily. It came close to 100% in 1998, fell back to a mere 25% in 2002, and then soared to 126% in 2007. That means that corporations were actually borrowing to fund these transfers. …

So what exactly does Wall Street do? Let’s be generous and concede that it does provide some financing for investment. But an enormous apparatus of trading has grown up around it—not merely trading in certificates, but in control over entire corporations. I think it’s less fruitful to think of Wall Street as a financial intermediary than it is to think of it as an instrument for the establishment and exercise of class power. It’s the means by which an owning class forms itself, particularly the stock market. It allows the rich to own pieces of the productive assets of an entire economy. So, while at first glance, the tangential relation of Wall Street, especially the stock market, to financing real investment might make the sector seem ripe for tight regulation and heavy taxation, its centrality to the formation of ruling class power makes it a very difficult target.

For a long while [after 1929], shareholder ownership was more notional than active. … But when the Golden Age was replaced by Bronze Age of rising inflation and falling profits, Wall Street … unleashed what has been dubbed the shareholder revolution, demanding not only higher profits but a larger share of them. The first means by which they exercised this control was through the takeover and leveraged buyout movements of the 1980s. By loading up companies with debt, they forced managers to cut costs radically, and ship larger shares of the corporate surplus to outside investors rather than investing in the business or hiring workers. … [In the 1990s,] the shareholder revolution recast itself as a movement of activist pension funds… the idea was to get managers to think and act like shareholders, since they were materially that under the new regime.

But pension fund activism sort of petered out as the decade wore on. Managers still ran companies with the stock price in mind, but the limits to shareholder influence have come very clear since the financial crisis began. Managers have been paying themselves enormously while stock prices languished. … The problem was especially acute in the financial sector: Bank of America, for example, bought Merrill Lynch because its former CEO, Ken Lewis, coveted the firm, and if the shareholders had any objections, he could just lie to them… It was as if the shareholder revolution hardly happened, at least in this sense. But all that money flowing from corporate treasuries into money managers’ pockets has quieted any discontent.

I do have some doubts about that last paragraph, tho — I suspect that “especially acute” should really be “limited to.” I don’t think it’s as if the shareholder revolution never happened — there still is, you know, all that money flowing into money managers’ pockets — but more a matter of quis custodiet ipsos custodes. If the function of finance is as overseers for the capitalist class — and I think Doug is absolutely right about this — then, well, who’s going to oversee them. Intrinsic motivation, norms and conventions, is really the only viable solution to this sort of principal-agent problem, and the culture of finance doesn’t do it.

Jim Crotty is also very worth reading on this. And I think he’s clearer that this kind of predatory management is mostly specific to Wall Street.

“Ten People Acting Together Can Make a Hundred Thousand Tremble Separately”

Suresh’s excellent post on the Occupy Wall Street movement reminded me of Hannah Arendt’s On Revolution. It’s a funny book; I don’t know if it’s much read today. One of its innovations, or eccentricities, is to place the American Revolution not just in the revolutionary tradition, but right at its center. Another is the focus on the idea of “public happiness” — the idea that there’s a distinct kind of wellbeing that comes from participation in collective decisionmaking. And most relevant to the current conversation, is its emphasis on the role of local councils — non-elected but representative — in every revolutionary situation, from 18th century New England town meetings to the soviets of 1918. These have independently developed, she argues, the”federal principle” — the idea that democratic politics consists not in selecting leaders who then exercise power on behalf of the public, but rather of local bodies delegating specific tasks to more centralized bodies.

The connection to the Occupy movement is perhaps obvious, though Arendt isn’t one of the writers people usually associate with this kind of politics. Her insistence that broad participation in public life is an end in itself, even the highest end, is a nice corrective to people who are impatient with the inward-looking nature — meetings about meetings! — of a lot of conversations around OWS. And the General Assembly structure looks different when you imagine them as proto-soviets. Of course the US today isn’t anywhere close to a revolutionary situation, and one can’t imagine General Assemblies exercising dual power. Or more precisely, there’s no way anything like that will happen; people are imagining it, that’s the point. Maybe the best evidence that Arendt is onto something important is that her book, written in the 1960s mostly about the politics of the 1780s, has distinct echoes not just of OWS, but of popular movements around the world, like the idea of “delegation” rather than “representation” coming out of Venezuela and Bolivia.

I think the connection is interesting enough,it’s worth putting some long quotes from On Revolution here. Which requires us to deploy the new-to-Slackwire technology of the fold. So, after it, Arendt.

While the [French] Revolution taught the men in prominence a lesson of happiness, it apparently taught the people a first lesson in “the notion and taste of public liberty”. An enormous appetite for debate, for instruction, for mutual enlightenment and exchange of opinion, even if all these were to remain without immediate consequence on those in power, developed in the sections and societies… It was this communal council system, and not the electors’ assemblies, which spread in the form of revolutionary societies all over France. Only a few words need to be said about the sad end of these first organs of a republic which never came into being. They were crushed by the central and centralized government, not because they actually menaced it but because they were indeed, by virtue of their existence, competitors for public power. No one in France was likely to forget Mirabeau’s words that “ten men acting together can make a hundred thousand tremble apart.” …

“As Cato concluded every speech with the words, Carthago delenda est, so do I every opinion, with the injunction, ‘divide the counties into wards’.” Thus Jefferson once summed up an exposition of his most cherished political idea… Both Jefferson’s plan and the French societes revolutionaires anticipated with an utmost weird precision those councils, soviets and Rate, which were to make their appearance in every genuine revolution throughout the nineteenth and twentieth centuries. Each time they appeared, they sprang up as the spontaneous organs of the people, not only outside of all revolutionary parties but entirely unexpected by them and their leaders. Like Jefferson’s proposals, they were utterly neglected by statesmen, historians, political theorists, and, most importantly, by the revolutionary tradition itself. Even those historians whose sympathies were clearly on the side of revolution… failed to understand to what an extent the council system confronted them with an entirely new form of government, with a new public space for freedom which was constituted and organized during the course of the revolution itself. …

The ward system was not meant to strengthen the power of the many but the power of “every one” within the limits of his competence [shades of Hardt and Negri]; and only by breaking up “the many” into assemblies where every one could count and be counted upon “shall we be as republican as a large society can be”. In terms of the safety of the citizens of the republic, the question was how to make everybody feel “that he is a participator in the government of affairs, not merely at an election one day in the year, but every day”…

If the ultimate end of revolution was freedom and the constitution of a public space where freedom could appear, the constitutio libertatis, then the elementary republics of the wards, the only tangible place where everyone could be free, actually were the end of the great republic whose chief purpose in domestic affairs should have been to provide the people with such places of freedom and to protect them.”

Shorter Hannah Arendt: We are our demands.

A History of Catastrophes

Schumpeter says:

Even if he confines himself to the most regular of commodity bills and looks with aversion on any paper that displays a suspiciously round figure,the banker must not only know what the transaction is which he is asked to finance and how it is likely to turn out, but he must also know the customer, his business, and even his private habits, and get, by frequently “talking things over with him,” a clear picture of his situation. … However, this is not only highly skilled work, proficiency in which cannot be acquired in any school except that of experience, but also work which requires intellectual and moral qualities not present in all people who take to the banking profession.

… In the case of bankers, however, failure to be up to what is a very high mark interferes with the working of the system as a whole. Moreover, bankers may, at some times and in some countries, fail to be up to the mark corporatively: that is to say, tradition and standards may be absent to such a degree that practically anyone, however lacking in aptitude and training, can drift into the banking business, find customers, and deal with them according to his own ideas. In such countries or times, wildcat banking develops. This in itself is sufficient to turn the history of capitalist evolution into a history of catastrophes.

From Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process.

What a magnificent book! Leaving my heavily-annotated copy on the NYC subway is one of my great regrets in life, bookwise. It doesn’t seem to be in print now. Does anybody still read it?

Selfish Masters, Selfless Servants

Via Mike the Mad Biologist, a Confucian parable for the financial crisis:

Mencius replied, “Why must your Majesty use that word ‘profit?’ What I am provided with, are counsels to benevolence and righteousness, and these are my only topics.
“If your Majesty say, ‘What is to be done to profit my kingdom?’ the great officers will say, ‘What is to be done to profit our families?’ and the inferior officers and the common people will say, ‘What is to be done to profit our persons?’ Superiors and inferiors will try to snatch this profit the one from the other, and the kingdom will be endangered….

Indeed, there are deep contradictions hidden in that word “profit.” Reminds me of a classic article on corporate governance, Bruce Greenwood’s Enronitis: Why Good Corporations Go Bad.

The Enron problem is … the predictable result of too strong of a share-centered view of the public corporation… Corporate law demands that managers simultaneously be selfless servants and selfish masters. On the one hand, it directs managers to be faithful agents, setting aside their own interests entirely in order to act only on behalf of their principals, the shares. On the other hand, in the service of this extreme altruism, they must ruthlessly exploit everyone around them, projecting on to the shares an extreme selfishness that takes no account of any interests but the shares themselves. Having maximally exploited their fellow human corporate participants, managers are then expected to selflessly hand over their gains…

Altruism and rationally self-interested exploitation are extreme and radically opposed positions, psychologically and politically. … For managers, one easy resolution of these tensions is a simple, cynical selfishness in which managers see themselves as entitled, and perhaps even required, to exploit shareholders as ruthlessly as they understand the law to require them to exploit everyone else. …

Internally, the share-centered paradigm is just as self-destructive. Corporations succeed because they are not markets and do not follow market norms of behavior. Rather, they operate under fiduciary norms as a matter of law and team norms as a matter of sociology. However, the share-centered paradigm of corporate law teaches managers to treat employees as outsiders and tools to corporate ends with no intrinsic value. Just as managers are unlikely to learn simultaneously to be selfish maximizers and selfless altruists, they are unlikely to be simultaneously cooperative team players and self-interested defectors. Thus, the share-centered view undermines the prerequisite to operating the firm in the interests of shareholders. …

Managers constructing the firm as a tool to the end of share value maximization treat the people with whom they work as means, not ends. …they learn as part of their ordinary life to break ordinary social solidarity. Learning to exploit ruthlessly is surprisingly difficult. … But cynicism can be learned, and managers subjected to the powerful incentives of the share value maximization principle do eventually learn it. … This training, however, surely creates cynics, not faithful agents. … A manager whose lived experience is a pretense of selflessness (with respect to employees, customers and business partners) covering real disinterested exploitation (on behalf of shares) is unlikely to suddenly see himself as “in a position in which thought of self was to be renounced, however hard the abnegation” and voluntarily hand over these hard-won gains of competitive practice to his principal. If you can properly lie to your subordinates, why not lie to your superior as well? … In the end, the cynicism of the share value maximization view must eat itself alive.

Something like Enronitis was clearly involved in the financial crisis. Indeed, some of the most famous controversies around the crisis hinge precisely on disputes about whether a transaction was between the parties linked by a fiduciary duty, or was an arm’s-length one where predatory behavior was expected, and even a moral duty. You can get yourself out of legal trouble, as Goldman has in the case of the Paulson trade, by establishing that you were on the war-of-all-against-all side of the line; but obviously, a system where predatory and trust-based relationships are expected to exist side by side, or even to overlap, is not likely to be a sustainable one. (Of course if the goal of our rentier elite is simply to stripmine the postwar social compromise, then sustainability is moot.) Friedman’s idea that a corporation’s duty is “to make as much money as possible while conforming to the basic rules of the society” isn’t coherent psychologically or logically, since it demands that management regard certain norms as absolutely binding and others as absolutely non-binding, without any reliable way of saying which is which.

Greenwood is talking about the “corporation as polis.” But the same point applies to the polis as polis.

It may not be the benevolence that makes the butcher, baker or brewer hand over the beef, bread or beer. But it is benevolence– or at least something other than self-interest — that ensures that it’s not full of E. coli. And if you say, well, it’s just their self-interest in avoiding the penalties of the law, that begs the question of why the authorities enforce the law. Or as Hume famously observed,

as FORCE is always on the side of the governed, the governors have nothing to support them but opinion. It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular. The soldan of EGYPT, or the emperor of ROME, might drive his harmless subjects, like brute beasts, against their sentiments and inclination: But he must, at least, have led his mamalukes, or prætorian bands, like men, by their opinion.

Boris Groys develops a similar line of thought in The Communist Postscript:

The theory of Marxism-Lenisnism is ambivalent in its understanding of language, as it is in most matters. On the one hand, everyone who knows this theory has learnt that the dominant language is always the language of the dominant classes. On the other hand, they have learnt too that an idea that has gripped the masses becomes a material force, and that on this basis Marxism itself is (or will be) victorious because it is correct.

This is a particular instance of Groys’ broader argument about the inherent power of rational speech:

The listener or reader of an evident statement can of course willfully decide to contradict the compelling effect of this statement… But someone who adopts such a counter-evident position does not really believe it himself. Those who do not accept what is logically evident become internally divided, and this division weakens them in comparison to those who accept and affirm the evidence. The acceptance of logical evidence makes one stronger; to reject it, conversely, makes one weaker.

Similarly, the decisionmaker who acts on norms consistently is stronger, in the long run, than the Enronitic manager whose honest service to “shareholder value” requires dishonest, strictly instrumental treatment of workers, customers, regulators, and the rest of humanity.

All of which is another way of saying that, despite the fantasies of libertarians, and cynics, that it’s self-interest all the way down, we can’t dispense with intrinsic motivation, analytically or in practice.

UPDATE: Added Groys quote. Had intended to include it in the original post, but I’d lent the book to someone…

On Other Blogs, Other Wonders

… or at least some interesting posts.

1. What Kind of Science Would Economics Be If It Really Were a Science?

Peter Dorman is one of those people who I agree with on the big questions but find myself strenuously disagreeing with on many particulars. So it’s nice to wholeheartedly approve this piece on economics and the physical sciences.

The post is based on this 2008 paper that argues that there is no reason that economics cannot be scientific in the same rigorous sense as geology, biology, etc., but only if economists learn to (1) emphasize mechanisms rather than equilibrium and (2) strictly avoid Type I error, even at the cost of Type II error. Type I error is accepting a false claim, Type II is failing to accept a true one. Which is not the same as rejecting it — one can simply be uncertain. Science’s progressive character comes from its rigorous refusal to accept any proposition until every possible effort to disprove it has failed. Of course this means that on many questions, science can take no position at all (an important distinction from policy and other forms of practical activity, where we often have to act one way or another without any very definite knowledge). It sounds funny to say that ignorance is the heart of the practice of science, but I think it’s right. Unfortunately, says Dorman, rather than seeing science as the systematic effort to limit our knowledge claims to things we can know with (near-)certainty, “economists have been seduced by a different vision … that the foundation of science rests on … deduction from top-level theory.”

The mechanisms vs. equilibria point is, if anything, even more important, since it has positive content for how we do economics. Rather than focusing our energy on elucidating theoretical equilibria, we should be thinking about concrete processes of change over time. For example:

Consider the standard supply-and-demand diagram. The professor draws this on the chalkboard, identifies the equilibrium point, and asks for questions. One student asks, are there really supply and demand curves? … Yes, in principle these curves exist, but they are not directly observed in nature. …

there is another way the answer might proceed. … we can use them to identify two other things that are real, excess supply and excess demand. We can measure them directly in the form of unsold goods or consumers who are frustrated in their attempts to make a purchase. And not only can we measure these things, we can observe the actions that buyers and sellers take under conditions of surplus or shortage.

One of the best brief discussions of economics methodology I’ve read.

2. Beware the Predatory Pro Se Borrower!

In general, I assume that anyone here interested in Yves Smith is already reading her, so there’s no point in a post pointing to a post there. But this one really must be read.

It’s a presentation from a law firm representing mortgage servicers, with the Dickensian name LockeLordBissell, meant for servicers conducting foreclosures that meet with legal challenges. That someone would even choose to go to court to avoid being thrown out of their house needs special explanation; it must be a result of “negative press surrounding mortgage lenders” and outside agitators on the Internet. People even think they can assert their rights without a lawyer; they “do not want to pay for representation,” it being inconceivable that someone facing foreclosure might, say, have lost their job and not be able to afford a lawyer. “Predatory borrowers” are “unrealistic and unreasonable borrowers who are trying to capitalize on the current industry turmoil and are willing to employ any tactic to obtain a free home,” including demands to see the note, claims of lack of standing by the servicer, and “other Internet-based machinations.” What’s the world coming to when any random loser has access to the courts? And imagine, someone willing to employ tactics like asking for proof that the company trying to take their home has a legal right to it! What’s more, these stupid peasants “are emotionally tied to their cases [not to mention their houses]; the more a case progresses, the less reasonable the plaintiff becomes.” Worst of all, “pro se cases are expensive to defend because the plaintiff’s lack of familiarity with the legal process often creates more work for the defendant.”

If you want an illustration of how our masters think of us, you couldn’t ask for a clearer example. Our stubborn idea that we have rights or interests of our own is just an annoying interference with their prerogatives.

Everyone knows about bucket lists. At the bar last weekend, someone suggested we should keep bat lists — the people whose heads you’d take a Louisville slugger to, if you knew you just had a few months to live. This being the Left Forum, my friend had “that class traitor Andy Stern” at the top of his list. But I’m putting the partners at LockeLordBissell high up on mine.

3. Palin and Playing by the Rules

Jonathan Bernstein, on why Sarah Palin isn’t going to be the Republican nominee:

For all one hears about efforts to market candidates to mass electorates (that’s what things like the “authenticity” debate are all about), the bulk of nomination politics is retail, not wholesale — and the customers candidates are trying to reach are a relatively small group of party elites…. That’s what Mitt Romney and Tim Pawlenty have been doing for the last two-plus years… It’s what, by every report I’ve seen since November 2008, Sarah Palin has just not done.

Are you telling me that [Republican Jewish Committee] board members are going to be so peeved that Sarah Palin booked her Israel trip with some other organization that they’re [going to] turn it into a presidential nomination preference, regardless of how Palin or any other candidate actually stands on issues of public policy?

Yup. And even more: I’ll tell you that it’s not petty. They’re correct to do so. … if you’re a party leader, what can you do? Sure, you can collect position papers, but you know how meaningless those are going to be…. Much better, even if still risky, is assessing the personal commitment the candidates have to your group. What’s the rapport like? Who has the candidate hired on her staff that has a history of working with you? Will her White House take your calls? …

It’s how presidential nominees are really chosen. … Candidates do have to demonstrate at least some ability to appeal to mass electorates, but first and foremost they need to win the support of the most active portions of the party.

It’s not a brilliant or especially original point, but it’s a very important one. My first-hand experience of electoral politics is limited to state and local races, but I’ve worked on quite a few of those, and Bernstein’s descriptions fits them exactly. I don’t see any reason to think national races are different.

It’s part of the narcissism of intellectuals to imagine politics as a kind of debating society, with the public granting authority to whoever makes the best arguments — what intellectuals specialize in. And it’s natural that people whose only engagement with politics comes through the mass media to suppose that what happens in the media is very important, or even all there is. But Bernstein is right: That stuff is secondary, and the public comes in as object, not subject.

Not always, of course — there are moments when the people does become an active political subject, and those are the most important political moments there are. But they’re very rare. That’s why someone like Luciano Canfora makes a sharp distinction between the institutions and electoral procedures conventionally referred to as democracy, on the one hand, and genuine democracy, on the other — those relatively brief moments of “ascendancy of the demos,” which “may assert itself within the most diverse political-constitutional forms.” For Canfora, democracy can’t be institutionalized through elections; it’s inherently “an unstable phenomenon: the temporary ascendancy of the poorer classes in the course of an endless struggle for equality—a concept which itself widens with time to include ever newer, and ever more strongly challenged, ‘rights’“. (Interestingly, a liberal like Brad DeLong would presumably agree that elections have nothing to do with democracy, but are a mechanism for the circulation of elites.)

I don’t know how far Bernstein would go with Canfora, but he’s taken the essential first step; it would be a good thing for discussions of electoral politics if more people followed him.

EDIT: Just to be clear, Bernstein’s point is a bit more specific than the broad only-elites-matter argument. What candidates are selling to elites isn’t so much a basket of policy positions or desirable personal qualities, but relationships based on trust. It’s interesting, I think it’s true; it doesn’t contradict my gloss, but it does go beyond it.