Archive for October, 2008

The autobiography of Alan Greenspan, the former chairman of the Federal Reserve (The Age of Turbulence, 2007) reads like a bible of free market fundamentalism or neoliberal economics (as little government interference as possible, markets can regulate themselves !). There is frequent reference to Adam Smith’s wisdom. According to press reports and TV interviews, Greenspan has now changed his mind. He admits that he was wrong in bis belief that banks could regulate themselves.

See also:

http://blog.une.edu.au/klausrohde/2008/10/09/debunking-economics-steve-keen/

http://blog.une.edu.au/klausrohde/2008/10/06/nonequilibrium-in-economy-george-sorosthe-new-paradigm-for-financial-markets/

and my knol article

http://knol.google.com/k/klaus-rohde/free-markets-and-free-trade-ecology-and/xk923bc3gp4/25#

Nevertheless, I cannot suppress a feeling of admiration for somebody who’s entire life’s work was based on a deeply ingrained belief which he has now, at the age of over 80, thrown overboard. Let’s hope that many others, far younger, will follow him. - On the other hand, what else could he have done? The evidence against the holy grail of  free market fundamentalism is fairly strong.

Here are two excerpts of a report in the Huffington Post:

“The deadliest war since Adolf Hitler marched across Europe is starting again — and you are almost certainly carrying a blood-soaked chunk of the slaughter in your pocket. When we glance at the holocaust in the Congo, with 5.4 million dead, the clichés of Africa reporting tumble out: this is a “tribal conflict” in “the Heart of Darkness.” It isn’t. The United Nations investigation found it was a war led by “armies of business” to seize the metals that make our twenty-first century society zing and bling. The war in Congo is a war about you.”
“These resources were not being stolen to be used in Africa. They were being seized so they could be sold on to us. The more we bought, the more the invaders stole — and slaughtered. The rise of mobile phones caused a surge in deaths, because the coltan they contain is found primarily in Congo.”

Full text here.

According to various press reports, the private arm of the World Bank has decided to support a company with a multi-million Dollar loan for extending its cattle ranches in parts of the Amazon in which illegal deforestation has occurred in the past. Is this the function of the World Bank ? Why not give the money to poor African farmers for improving their farming practices?

In the Congo and the Amazon, environmental destruction on a grand scale! This concerns us all: experts have estimated that damage to the environment will have far greater economic consequences than the present financial crisis.

In a recent post and knol article I critically discussed the principles of the theory of evolution by natural selection, and of economy based on free trade and free markets, including Ricardo’s principle of comparative advantage. Now, Professor Krugman of Princeton University has received the Nobel prize for his insights into trade patterns between countries, showing that the principle of comparative advantage does not realistically explain trade patterns.

Below are excerpts from a New York Times article about him. Full article here.

“Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing “…

This model, however, dating from David Ricardo’s writings of the early 19th century, was not reflected in the flow of goods and services that Mr. Krugman saw in the world around him. He set out to explain why worldwide trade was dominated by a few countries that were similar to one another, and why a country might import the same kinds of goods it exported.

Krugman saw that “many companies sell similar goods with slight variations. These companies become more efficient at producing their goods as they sell more, and so they grow. “

He also examined the effects of transportation costs, explaining “under what conditions trade would lead people or companies to move to a particular region or to move away.”

Professor Krugman is also well known for his New York Times articles criticizing G.W.Bush’s policy and neoliberalism.

Der Spiegel 11.2.08. Abschied vom Beton-Brecht (Farewell to Concrete-Brecht)

Neues aus Brechts Notizbüchern. (Something new from Brecht’s note books) (My translations)

Wisse auch, dass etwas nicht glauben, doch etwas glauben heisst.
You should know that not to believe something, also means to believe something.

Immer noch, wie im Pawlowschen Versuch, veranlassen Glocken in mir Prozesse sicherlich chemischer Art, Gedanken metaphysischer Richtung.
Even now, as in Pavlov’s experiments, bells induce processes in me, certainly of a chemical nature, thoughts of a metaphysical nature.

In der Welt, die ich mir wünsche, komme ich nicht vor.
In the world which I like that should exist, I do not occur.

Was ich nicht gern gesteh: gerade ich verachte solche, die im Unglück sind.
I do not admit this easily: Just I despise those who are unfortunate.

Der Mensch ist kein Schwimmer, der Mensch ist kein Flieger: Er ist aus der Gattung der Rückenlieger.
Man is not a swimmer, he is not a flyer, he is of the genus of backlyers (people lying on their backs).

Ich hätte mein Versprechen gern gehalten. Aber ich konnte nicht/Warum?/Ich hatte keine Lust.
I would have liked to keep my promise. But I could not/Why?/I did not feel like it.

Wie lange dauern die Werke? So lange bis sie fertig sind.
How long do works last? Until they are completed.

Some of my earlier posts have cast doubt on the validity of free market fundamentalism: don’t worry, leave it to the market it will sort itself out! The fewer restrictions, the better! Any external interference with markets is harmful!

But are free markets (as practised in today’s capitalist world) really a universal and universally accepted mechanism driving economic progress?

Medieval Christian ethics did not accept usury, which is the basic tool of capitalism. Max Weber, in a famous essay, traced the origin of capitalism back to the Protestant ethic, especially its Calvinist (Pietist) variety. Islam still does not accept usury. So, how does the Islamic approach to finance do in the modern world?

Loretta Napoleoni: Rogue Economics. Capitalism’s New Reality. Allen&Unwin 2008 discusses the essentials of the Islamic banking system, which is based on sharia law and best developed in Malaysia. Its essentials are prohibition of any kind of ’speculation’ and of interest charges. ‘Immoral’ investments such as in casinos are also forbidden. Islamic banks have to make a profit. They do this by buying assets on behalf of the customer, who has to repay the ‘loan’ and a fee for using the asset. When the ‘loan’ is paid off, the asset’s ownership is transferred to the borrower. The advantage of this arrangement is that the bank shares not only the profit but the risk as well. For that reason, it will also have a very close look at the potential borrowers. For example, take as an example the case of a person or persons who want to buy a factory. They approach an Islamic bank which, after a thorough personal check, agrees to support the purchase. It buys the factory on behalf of the customer(s). Since it bears part of the risk, it has to make sure that this risk is not excessive. In toto, partnership (sharing risk and profit) and avoidance of excessively risky investments are characteristic of Islamic banking.

Napoleoni discusses the Asian financial crisis of the nineties. Several countries (Thailand, South Korea, Indonesia, Philippines) decided to accept financial support from the IMF and its restrictive conditions, which resulted in a worsening of the crisis. Malaysia, blaming international speculators for the crisis,  refused to take the offer and relied on Islamic banking instead. It was the only country which survived the crisis without much damage.

In a recent article in the Sydney Morning Herald (October 11-12, 2008), Clancy Yeates (’Islamic finance rides the storm’) shows that the story is being repeated. Whereas we in the West are in a severe global crash, the Dow Jones’s Islamic financial index rose 4.75 per cent in the most recent September quarter and lost a modest 7 per cent in the previous years.

What does this teach us? I would say that, beside the immense debts accumulated particularly in the US,  the almost unrestricted speculation (which is often connected with accumulation of debt) is at least to a large degree responsible for the present meltdown.

A propos speculation: The US-magazin Fortune reports that Credit Default Swaps (CDS’s) have doubled annually over the last decade. Trading in CDS’s is completely non-transparent, therefore the CDS volume can only be estimated. Such estimates arrive at US$ 54.5 trillion (compared with the global GNP of US$ 54.3 trillion). What would be the result if sellers default on their payments?

(Wikipedia: “A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the “buyer” makes periodic payments to the “seller” in exchange for the right to a payoff if there is a default or credit event in respect of a third party or “reference entity”.)

I  watched the ABC’s 7.30 Report yesterday (8.10.08), in which Steve Keen, Professor of economics at the University of Western Sydney, was interviewed about his views on the present global financial crisis. This reminded me of a book I read about four years ago by Steve Keen: Debunking Economics. The Naked Emperor of the Social Sciences. Pluto Press 2001. I read it very carefully from beginning to end, making numerous annotations, but had forgotten most of it.
I recommend the book strongly to anybody who is interested in economics, but particularly to those who believe that they have all the answers about the economy, without being blessed with the necessary background knowledge.

Steve Keen wrote the book to correct the misleading teaching of economics at universities. According to him (p.5), many students do only introductory courses in economics and then take their wisdom into their careers as managers, politicians etc. “They might learn, for example. that ‘externalities’ reduce the efficiency of the market mechanism. However, they will not learn that the ‘proof’ that markets are efficient is itself flawed. One needs an understanding of quite difficult areas of mathematics to realize the intellectual weaknesses of economics. ” However, Keen does not target economics in general, but the mainstream ‘neoclassical economics’.

A few quotes from the book:

p.2: “Economists blame these crises on particular economic policy failings by the relevant governments… Yet many non-economists harbour the suspicion that perhaps these crises were in some sense caused by following the advice of economists” This perspective was recently supported by none other than Joseph Stiglitz, a renowned economist, Chief Economist and Vice-President of the World Bank (he gives the examples of the collapse of the Russian economy after rapid privatization, and the Asian crisis, where the IMF’s enforcement of austerity seriously worsened a crisis which had been initiated by the international capital markets).

p.4: “Virtually every aspect of conventional economic theory is intellectually unsound; virtually every economic policy recommendation is just as likely to do general harm as it is to lead to the general good”.

p.7:”though weather forecasts are sometimes incorrect, overall meteorologists have an enviable record of accurate prediction” whereas the economic record is tragically bad.

p.8:”the intellectual discipline of economics shows no tendency to reform itself.”

p.11: the book’s message, that the economic mantra (”individuals should pursue their own interests and leave society’s overall interests to the market”) is wrong, is not new. Many books have made the same point in the past. What is new about this book is that it makes that point using economic theory itself.

Keen ‘debunks’ almost every assumption of neoclassical economics, including equilibrium assumptions. For each argument, he goes back to the basics, such as Jeremy Bentham’s utilitarianism, which really is at the basis of neoclassical economics with its claim that human behaviour is the product of innate drives to seek pleasure and avoid pain.

Of particular interest in the context of the present financial crisis is his detailed discussion of causes of crashes, e.g., those responsible for the Great Depression (the economic guru of the time, Irving Fisher, was dead sure that stock markets had permanently stabilized just weeks before the crash, an assumption based on his equilibrium theory, later distilled into the efficient markets hypothesis. He personally lost $100 million in the crash. He changed his ideas incorporating nonequilibrium assumptions. When the crash was over, people happily returned to his efficient market hypothesis, although it had been proven wrong).

I leave it at that and, again, recommend the book.

See also: http://knol.google.com/k/klaus-rohde/free-markets-and-free-trade-ecology-and/xk923bc3gp4/25#

George Soros, the multibillionaire and author of The Bubble of American Supremacy (in which he pointed , five years ago, to the problems leading to the present financial crisis), has just published another book, The New Paradigm for Financial Markets.

I have not yet read it, but certainly will. This brief account is based on an article by Paul Sheehan in the Sydney Morning Herald (October 6, 2008) dealing with the book. It arrives at some of the same conclusions which I presented in my Knol article on Free Trade and Free Markets, Ecology and Economics, namely that one cannot expect free markets to be self-regulatory, leading to equilibrium.

Here are some excerpts from the newspaper article:

He says we should not trust financial markets to be self-correcting, or innately stable, or innately wise.”Prices in financial markets do not necessarily tend towards equilibrium. They do not just passively reflect the fundamental conditions of demand and supply.” He is rejecting the supposed truism that the market is always right.

Soros points out that we are not just caught in an asset bubble that is rapidly deflating, we are currently experiencing the bursting of a credit bubble that has involved the entire financial system” and will affect commodities.

Among other remedies, Soros recommends “the rapid development of fuel alternatives to oil, and a crackdown on financial derivatives speculation.

Of course, as we know, others believe that the markets are always right. See for example Michael Sterner: The Mind of the Market, who compares Adam Smith with Darwin, concluding that both free-market economics and evolution by natural selection are “unimprovable”. I refer again to my knol article and repeat that market fundamentalism and a fundamentalist belief in the evolutionary mechanisms proposed by Darwin are wrong.

Listen to an interview with George Soros here:

http://www.pbs.org/moyers/journal/10102008/watch.html?ref=reddit

Baruch de Spinoza

Es gibt in der Natur nichts Zufälliges, sondern alles ist gemäss der Notwendigkeit der göttlichen Natur bestimmt, auf gewisse Weise da zu sein und zu wirken.

Nothing in nature is accidental, everything is determined by the necessity of divine nature to exist and act in a certain way.

I do not know how to teach philosophy without becoming a disturber of established religion.

Ich weiss nicht wie man Philosophie lehren kann ohne etablierte Religion zu verstören.

Johann Wolfgang von Goethe

Nichts ist widerwärtiger als die Majorität, denn sie besteht aus wenigen kräftigen Vorgängern, aus Schelmen, die sich akkomodieren, aus Schwachen, die sich assimilieren und der Masse, die nachtrollt, ohne nur im mindesten zu wissen, was sie will.

Nothing is more disgusting than the majority, because it consists of a few strong forerunners, of imps who accommodate themselves, of weaklings who assimilate, and of the masses who imitate without knowing in the least what they want.

Oscar Wilde

Nowadays people know the price of everything and the value of nothing.

Heutzutage wissen die Leute den Preis von allem und den Wert von nichts.

(My translations)

Jedoch nimm nichts zu ernst, selbst Zitate nicht:

(However don’t take anything, even quotes, too seriously:)

Der verrückte Maler von (the jolly painter by) Klaus Rohde:

“Damned, again, nothing sold today (Verdammt, wieder heute nichts verkauft)”

(A quote by, Zitat von Klaus Rohde)

I have published a knol on how recent developments in ecology might influence our views on economics. Have a look at the knol here and comment either in this post or on the knol.

Two excerpts here:

Summary.
Darwin’s theory of evolution by natural selection was deeply influenced by a leading geologist, a demographer and an economist, who had the ideas that geological changes in the past can be explained by the same factors that are operative now, that changes have been gradual, that demand grows faster than supply, leading to competition for resources, and that market forces lead to equilibria. Darwin’s theory is at the basis of much of modern ecology, i.e., equilibrium ecology. Its three pillars are competition for resources (struggle for existence), survival of the fittest, and equilibrium in nature. - In parallel, the pillars of free market economy are competition for resources, the principle of comparative advantage, and equilibria. - Here we examine how recent findings on ecology have changed our views on equilibrium in ecological systems, and whether these findings can be applied to economics.

What can ecology teach us about economics?
As we have seen, the fundamental assumptions of classical economics and equilibrium ecology are surprisingly similar. The pillars of the former are competition for resources, the principle of comparative advantage, and equilibrium; the pillars of the latter are competition for resources (struggle for existence), survival of the fittest, and equilibrium. Concerning ecology, we have seen that resources are seldom exhausted, that competition occurs but is not of the overriding importance often assumed, and that equilibrium conditions are not as common as non-equilibrium ones. This should give us some reasons to at least have a closer look at the assumptions of free market economics. There can be little doubt that there often is competition for resources, but it seems that shortages frequently are of a temporary nature. On the supply side: recent evaluations suggest that wave energy alone would be sufficient to provide all of Australia’s energy; solar energy in Saharan Africa, among others, is only being talked about. On the demand side: demand is artificially and almost(?) hysterically driven up by advertising that plays on greed and “doing better than your neighbour”; and is the political hysteria leading to an ever increasing expenditure on defense perhaps the result of aggressive instincts of man cleverly exploited by nations’ military-PR industrial complexes? - Equilibrium in economy appears to be a fairly transient condition, as shown at this very moment by the global financial crisis.