Yves here. Blogger Sell on News echoes an argument made in ECONNED, namely, that “free markets” are a contradictory and incoherent construct, albeit from a different perspective. He also advocates another view near and dear to our heart, namely getting rid of economists (actually, that is overkill and will never happen. Keynes had it right: “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”)
By Sell on News, a macro equities analyst . Cross posted from MacroBusiness
Probably the most wicked intellectual subterfuge of the last three decades — and goodness knows there have been many — has been the pretence that democracy and markets are two sides of the same coin. Both have been extolled under the banner of “liberty”. “Free markets” are somehow the hallmark of democracy and they should be allowed to roam free, untrammeled by evil governments who never doing anything right. Any number of commentators, coincidentally funded by right wing think tanks, warned us that constraining markets represents an attack on basic freedoms. Such elision is, of course, rubbish; and in many cases deliberate deceit. In a market one dollar equals one vote. The more money you have, the more votes you get. In a democracy it is one person, one vote. You can only be one person at a time (except in Florida, it seems). With this in mind, I was intrigued to see a response from Rob Windt mid week about the aftermath of the Icelandic bankruptcy:
What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents.
The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.
This, I would suggest, is real liberty at work. And it is probably an early example of what I expect will become an increasingly political debate, rather than a managerialist debate, about the direction of developed economies. As Jeremy Grantham in his fine piece pointed out mid-week, there has been an unholy alliance between corporate profits and government spending, something he said he “never saw as a faint possibility”. It turns out that business is not in a virtuous war with government; the only victim in America is the ordinary worker. One only has to see the film Inside Job to see how government and the financial system have worked in tandem, in large part because it is the same people playing both sides of the fence.
Grantham puts it down to childishness in the political arena, run by a president he calls “President No-Show”. I think it is not just a matter of maturity, it is a deeper and more pernicious political contest. At the heart of it is a question about the proper role of self organisation. Democracy is, or should be, a self organising system. So are markets. That obviously has advantages over central planning, but it also has potential dangers. The shortcomings are especially problematic in the case of financial markets, which are by necessity a system of rules. Allowing financiers to self organise the rules, means that they can do exactly what has happened — go a long way to destroying the system while enriching themselves to an absurd extent.
Thus they made up rules for everything: credit default swaps, collateralised debt obligations, derivatives on the weather, high frequency trading, more high frequency trading … you name it. Allowing that kind of self organisation is fundamentally absurd because in the end such invention of new rules rely for their validity on the underlying rules that must be set by governments and regulators (The Fed’s interest rate, the underlying cost of money, being the basic one). So when it is allowed to spin out of control, it will inevitably bring the whole system down, as it still threatens to do. Allowed to run amok, it becomes like the serpent that consumes itself.
Which is why the Icelandic example is interesting. The people, then the government, self organised and simply said: we don’t accept the bankers’ rules. “Why should they?” one might reasonably ask.
The Icelandic move is where we are heading. The rule makers in the financial system, who think they can make up rules as they go, are on a collision course with those who have to assent to the rules — the people and the governments they appoint. So far, it is mostly presented as a management problem — how can governments manage their fiscal and monetary levers — but it will become more than that. It will become a question about who has the right to set rules and possess power.
The outcome is not a foregone conclusion, even in democracies. Grantham argues that there needs to be more income distribution, a reversal of the money grab of the rich in the United States, in order to return to a more balanced form of economic growth. But that is by no means inevitable, indeed it is not even the norm. More normal is what happened in South America in the 60s, 70s and 80s where the middle classes were gutted and the rich ruled with increasing violence. As Grantham shows, America is heading the same way — its middle class has been progressively eviscerated for about 40 years, while corporations and the rich have thrived. The history of human behaviour tells us that, unless stopped, the powerful will enslave the weak and America is heading in that direction.
One thing that is needed is an understanding of the right place for self organisation and the wrong place for self organisation. The looters in London did some marvellous self organisation, pursued their liberty to smash windows. Did that make it right? Those who cleaned up the mess also did some marvellous self organisation.
The degree of self organisation does not tell us nearly enough. We need to look at how to set the frameworks in which self organisation occurs; after all there must be frameworks if it is not to be mere chaos. The role of civil society which fed such actions as the London clean up needs to be revisited. The downgrading, or monetisation, of civil society has been one more unfortunate consequences of four decades of market worship. And it is time to see slogans like “liberty”, “freedom”, nonsense about the “invisible hand” as the sleight of hand that they are. Such slogans may have made some sense during the Cold War, but that was last century. A seminal political contest is occurring and there needs to be a new understanding of the role of self organisation (not least because industrial self organisation along industrial-era lines will not be sufficient to deal with the problems of pollution that the world faces, they will make them much worse).
It also means, by the way, abolishing the so called discipline of economics. Disqualifying it on the grounds of its dismal history of spewing out self serving, circular arguments that have led us to assume that transactions come first and humans second, and that the civic and legal bases on which modern democratic societies depend are inevitable, a force of nature, and can be abused at will.