Economics: A Matter of Life or Death
(first posted at European Tribune, Jan 18, 2007)
When I took economics at the University of Minnesota in the early 1970s, one of my professors was Walter Heller. Heller was President Kennedy’s Council of Economic Advisors chairman and would claim, quite seriously, that he taught Kennedy Keynesianism.
In those days, the Keynesians were utterly dominant in academe and government. There were so many of them, they had subdivided into various schools. It could be argued that Heller represented the right wing of the Keynesian school. His economics department used the Neoclassical Samuelson text and his primary accomplishment in the Kennedy administration was his tax cut suggestion. But even from the right wing of the Keynesian impulse, Heller was quite clear that he thought folks like Milton Friedman were at best mistaken and quite possibly insane. Yet by the time I graduated, the acolytes of Friedman were running the economy of Chile with their sights set MUCH higher. And yes, they would set the economic operating assumptions for planet earth for a generation.
There has been a lot of invented terminology to describe the change in fortunes of the Keynesians and the Friedmanites. But the MOST descriptive was that it marked the change from Industrial to Finance Capitalism. If River Rouge was the defining symbol of Industrial Capitalism, then the archetypical example of Finance Capitalism was Enron.
Enron embodied the major flaws of Finance Capitalism--it was only possible because of economic deregulation, it relied on a willing suspension of disbelief in all reasonable measures of prudence, it sold cotton-candy products like weather futures, and it relied on industrial sabotage to make its fantasy profit targets.
All of these maneuvers were done in public with the main movers featured prominently on the covers of the business press. Phil Gramm, who shepherded Enron’s enabling deregulation through the Senate, was a regular talking head on the television news shows because he was a true believer who preached, as a trained economist, that deregulation was necessary and virtuous. This was not some sort of invisible conspiracy, this was a seizure of the intellectual high ground.
But, scream the apologists for Finance Capitalism, we are not industrial saboteurs, vandals, and rip-off artists. We are SCIENTISTS and one of our members has been rewarded with a Nobel since 1968.
And sure enough, the defenders of Finance Capitalism have erected an awesome intellectual apparatus to justify their crazy ideas and when all else fails, they point to rising numbers at their Meccas--the trading pits of the various stock exchanges world-wide.
The problem is that under the rules of Finance Capitalism, stock markets become a measure of economic destruction. If the strategy of wealth accumulation is plunder, then the higher the markets, the greater the destruction. This fact highlights the most obvious difference between Finance and Industrial Capitalism. When the Capitalist strategy is to profit from creating complex and difficult products, markets actually measure (if not produce) real growth. Otherwise they are as economically useless (and destructive) as any other casino.
No sane person believes the faith-based economic explanations of Finance Capitalism any longer, because it cannot deliver on its promises. The list of its failures is almost infinite but some highlights include: the collapse of the Russian economy into an orgy of corruption and plunder with the arrival of the high priests of Finance Capitalism; the rejection of neo-liberalism in nine countries (and counting) in Latin America; the rejection of Finance Capitalism’s one-sided EU constitution in of all places, France; and the fact that the economists who preach Finance Capitalism must now gather behind squads of armed police because millions of people have realized that whatever these intellectual prostitutes decide in their closed-off meetings, their lives are about to get much worse.
When it comes to delivering generalized prosperity, Finance Capitalism is an utter failure no matter how high the stock markets may climb. In fact, the soaring markets in a world where misery grows daily is the perfect condition for open and violent class warfare. But even worse than creating pre-revolutionary conditions, Finance Capitalism’s penchant for destruction has now reached the stage where the survival of the biosphere is at stake.
Why this is so
Whenever a “progressive” politician wants to prove his gravitas in USA, he or she will say something like, “what this country needs is an Apollo-like program to ensure energy independence.” As a self-confessed space nut as a child, I think the metaphor is pretty damn good.
The Apollo metaphor is apt because any complex or long-term space mission must be able to power itself with the energy it can gather on the fly. This dictates a strategy of solar collection combined with a hyper-efficient use of the precious energy that has been captured. Scale this up to a planetary scale and the scope, direction, and the magnitude of the energy problems facing us all become abundantly clear.
The Apollo metaphor also applies because it was a stunning example of an incredibly complex project done successfully in a short time. Yet it is here where the differences between Finance and Industrial Capitalism are especially manifest. Just because the original Apollo project could be done under the rules of Industrial Capitalism does NOT mean a much more complex project like energy independence could be accomplished under a regime of predatory finance. In fact, it almost certainly cannot.
Folks forget that Apollo was an act of industrial whimsy. At best, it was an exercise in a ‘my rockets are bigger than yours’ show of force. But mostly it was a demonstration of industrial potential--we went to the moon because we could. The space race was the world’s largest air show and folks from every corner of the planet enjoyed it.
The key component of space travel was the liquid-fueled rocket. It was invented by a good Yankee named Robert Goddard. Poor Goddard was forced to raise private funding for his experiments so essentially his life was wasted creating demonstration projects. Even during the Great Depression when public works became official government policy, public investment in aerospace was stingy. Rocketry requires too much expensive experimentation to be funded privately so Goddard remained a sideshow freak.
The Germans, on the other hand, understood the benefits of public funding in aerospace. So when their rocketeers set about to build their liquid-fueled boosters, they had government backing AND total industrial cooperation. While Goddard was an inventive genius, Von Braun was like an orchestra conductor whose players were the research departments of the finest schools and most accomplished industrial firms in the land.
Needless to say, Von Braun made MUCH more interesting rockets than Goddard. That’s what happens when the support system is a government rather than charity. So when the great conductor fell into the hands of US Army, the systems that helped build the V-2 had to be duplicated as well. And they were. Public money invested in aerospace made 1945-1970 the golden age of American aviation.
By 1970, American aerospace had not only figured out how to land men on the moon, it had produced the best subsonic airliner (747) and the fastest airplane (SR-71). Since then, the economic forces that have crippled the rest of industrial America have produced a generation of stagnation. On Dec 17, 2003, a replica of the Wright Flyer was scheduled to re-enact the first flight on the 100th anniversary. 100 years of American aerospace wound up stuck in the sands of Kitty Hawk, propellers flailing uselessly.
And an economic system that can do that much damage to rocket science is somehow going to figure out a way to scale up the Apollo program to a planetary scale? Impossible!! A system that pays a $54 million dollar year-end bonus to a money changer will not hire 540 top-notch engineers at $100,000 a year to figure out a way to power planet earth on its solar income. Unless there are economic conditions similar to those that enabled the original Apollo program to happen, the idea that we can design our way out of the energy trap we built for ourselves with a mega-Apollo program is an absurd fantasy.
Removing the ultimate roadblock
When my mother was 87, she was watching some stupid blowhard pontificating about the wonders of economic deregulation on the McNeil / Lehrer report. She turns to me and snorts, "FOOL! doesn't anyone remember what the economy was like before regulations?!!"
My mother is now dead. So are most of the people who really remember why we gave up on Finance Capitalism in the first place. In the end, this isn’t about Milton Friedman, or Alfred Marshall, or David Ricardo, or any of the other defenders of Finance Capitalism. Their appearance is so predictable, one could easily believe they grow such folks in vats. Why would it be otherwise? Money-changers hire these “economists” to justify their existence--it is no surprise there is a profession of hacks dedicated to promoting the interests of the investing classes.
The problem is, their theories never work. Finance Capitalism should have been discredited in 1873 or 1893 or 1921. It actually WAS discredited in 1929. But it never really died. By 1974 when Finance Capitalism made its comeback, it resumed its place at the head intellectual table overnight. It was like it had never left. And the key to its comeback was the death of folks who could remember why it had been discredited in the first place.
The reasons that the operating assumptions of Finance Capitalism simply must go are many. But two related problems--peak oil and climate change--are SO far from being meaningfully addressed by current economics that all other problems are trivial by comparison.
Al Gore is currently catching flack from the scientifically illiterate over his harmless and childishly upbeat film on climate change. But the biggest flaw in Inconvenient Truth is how it trivializes the problems. We are already in uncharted waters so far as it relates to atmospheric carbon, EVEN IF we were to douse all fires worldwide tomorrow. Fire has been essential to human existence and we have spent the last 10,000 figuring out ever more clever ways to start fires. Dousing ALL fire on earth in 10 YEARS is an astonishingly huge task (and even THAT might not help much for decades.)
Of course, we will probably not have much to say about how many fires must be quenched because supplies of the MOST wonderful fuels of all time are about to start drying up. The difference between modern life and a junkyard is liquid fuels. The difference between 21st century and 19th century reality is gasoline. The designs of our cities, our methods of transportation, our means of providing food--are all based on the assumptions of cheap petroleum products. The idea that someone who has dedicated his life to explaining the “economic” reasons why a hedge-fund operator is qualified to address problems of the sweep and scope of climate change and the end to the Age of Petroleum is fundamentally absurd. These are problems of industrial design and Finance Capitalists are almost, without exception, economic Luddites. A lot of industrial skills have been destroyed in the last 30 years by these people. To expect these same people to become builders overnight is delusional.
What is even worse, our schools of economics have been churning out clones who actually believed that the strategies of the Finance Capitalists were virtuous because they led to prosperity. To get an advanced degree in economics at an American university, you not only have to drink the Kool-Aid, you have to be willing to mix it up and serve it. The key ingredient in the Kool-Aid apparently made it impossible to differentiate between growth and destruction. To take on a mindset that well entrenched seems hopeless. The Finance Capitalists own the schools, the journals, and the awards. Even though they possess no evidence, they believe they have been successful. NOT a crowd likely to roll over and play dead.
So they must be circumvented. If we wish to mount an Industrial Capitalistic response to the large economic problems, we need three sorts of modern economists:
1) Those who specialize in understanding which of the rules of Industrial Capitalism worked best when last tried (this group can include anyone over about 60 who learned industrial economics, the French who were taught the principles of dirigisme, etc.)
2) Those who can expand on previous wisdom to create a new Industrialism designed to convert our societies from ones that burn energy capital to ones that allow us to live on our energy income.
3) Those who can come up with simple explanations to be used in public for why Industrial Capitalism ALWAYS outperforms Finance Capitalism.
We have the technology and institutions to fix major problems but cannot because of corruption in the political sector, intellectual laziness in education and the media, and runaway greed in the financial sector. The problems caused by political corruption and runaway greed can be handled by political will, taxation, and stricter regulations. The intellectual disintegration brought on by 35 years of Finance Capitalism is a much more serious problem.
John Maynard Keynes, one of the architects of Industrial Capitalism in the 1930s, understood the problems of intellectual inertia so well. He claimed that "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than it is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves quite exempt from any intellectual influences, are usually slaves of some defunct economist." The interesting question is, Can we dethrone the Finance Capitalists in time to save planet earth for human habitation? The Industrial Capitalists provided the institutions that gave us the Internet. It should be used to finally and completely discredit Finance Capitalism.
I have already started a personal attempt to bring back the sort of economic thinking that enables the LARGE projects--such as a conversion from a fire based economy to a solar-powered one.
This attempt includes a book entitles Elegant Technology dedicated to reassembling the values, sociology, and political economy of the mega-builders.
It includes a 10 minute video (in many sizes and formats, scroll down) called “Creating Prosperity” which highlights the differences between the current economy and the one some of us fondly remember from 1970.
I have also built an intellectual tribute to Thorstein Veblen (1857-1929)--a towering figure in political economy and a critically important inventor of Industrial Economics in the USA.
For further information on Walter Heller's economics