Adam Smith critiques the Deficit Reduction Commission
by ilene - December 7th, 2010 3:55 am
Courtesy of Michael Hudson
What would Adam Smith have said about the Bowles-Simpson economic report last week?
What a pity the great free marketer was not around to serve on the Deficit Reduction Commission. He not only would have rolled over in his grave, he would have risen up wielding an ax to the fiscal proposals that are diametrically opposite to the fiscal principles that he and his original free market contemporaries urged.
Writing in the wake of the French Physiocrats with their Impôt Unique to collect the revenues that France’s landed aristocracy drained from the countryside and towns, Smith endorsed the idea that the least burdensome tax was one that fell on land rent:
A more equal land-tax, a more equal tax upon the rent of houses, and such alterations in the present system of customs and excise as those which have been mentioned in the foregoing chapter might, perhaps, without increasing the burden of the greater part of the people, but only distributing the weight of it more equally upon the whole, produce a considerable augmentation of revenue.
(Wealth of Nations, Book V.3.68)
If Britain were to become a dominant economic power, Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Groundrent charged by its landed aristocracy should be taxed away, on the logic that it was the prototypical “free lunch” revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were “some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market.”
In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers – what economists call a zero-sum game at another’s expense.
The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.” It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo’s Principles of Political Economy and Taxation elaborated the concept of economic rent. Under conditions of
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The Overlapping Crises of Neoliberal Global Capitalism
by ilene - September 10th, 2010 9:04 pm
The Overlapping Crises of Neoliberal Global Capitalism
Courtesy of Charles Hugh Smith, Of Two Minds
Conventional wisdom holds that today's global financial crises are political rather than systemic to Neoliberal Global State Capitalism.
It is tempting to place the blame for the U.S. economy's deep woes at the feet of our corrupt, captured political system of governance and those who captured it via concentrated wealth and power. But that would avoid looking at the crises unfolding in global capitalism itself.
From the "progressive" ideology, the "problem" is inequality of income and wealth, and the "solution" is to take more of the wealth and income away from "the rich" (i.e. those who make more than I do) and redistribute to the "have-less" citizenry.
From the "conservative" ideology, the "problem" is that the Central State, in cahoots with public unions and Corporate Overlords, grabs an ever-larger share of the national income to redistribute to reward its cronies and favorites. In so doing, it mis-allocates the nation's capital away from productive investments and strangles free enterprise, the only real engine of wealth.
There is of course a grain of truth in each point of view. As I describe in Survival+, there is a positive feedback in the process of concentrating wealth and thus political power: the more wealth one acquires, themore political influence one can purchase, which then enables the accumulation of even more wealth as the State/Elite partnership showers benefits and monoplies on those who fund elections, i.e. the wealthy.
This process eventually leads to over-reach, when the nation's capital and income are so concentrated that the economy become precariously imbalanced and thus vulernerable to devolution and collapse. Returns on favoritism and capital become marginal, and it take more complexity and capital to wring ever-smaller profits and power from ever-greater investments.
It is also true that the State and the Power Elites mask their massive redistribution to the wealthy and powerful behind politically popular redistributions to the lower-income and/or unproductive citizenry, garnering their loyalty and complicity.
It is also true that as the State and its private-sector Elites channel an ever-larger percentage of the national income to the Central State and its fiefdoms, both public and private, then the productive…
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Bernanke is “Unusually Uncertain” – Is that an Improvement?
by ilene - July 22nd, 2010 4:29 pm
Bernanke is "Unusually Uncertain" – Is that an Improvement?
Courtesy of Mish
In response to Bernanke Says Economic Outlook is "Unusually Uncertain", Fed Prepared for "Actions as Needed" I received this comment from "Economics Teacher".
ET Writes…
Ben is forecasting uncertainty and saying the Fed’s prepared for action as needed. Did Uncle Ben strain his cerebrum coming up with that one (forecasting uncertainty)?
I suppose there’s a difference between "unusually uncertain" and "typically uncertain." Either way it comes out this way – Ben doesn’t know squat!
Is "Uncertain" an Improvement?
Bernanke was pretty certain there would not be a recession, that housing was not in a bubble, that the unemployment rate would peak at 8.5%, that paying interest on reserves would enable the Fed to hold short-term rates above 2%.
Bernanke was wrong on every count. At least now he admits he is guessing.
Let’s recap the Fed Uncertainty Principle to see what it suggests may be certain or uncertain.
Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier
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Guest Post: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism
by ilene - March 5th, 2010 10:07 am
Guest Post: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism
Courtesy of JESSE’S CAFÉ AMÉRICAIN
"…exposes the mechanism by which one market operator set out to profit from the credit boom, and even more, from the bust…it’s an eye-popping story of vandalism-for-profit."
Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.
Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.
I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author’s performance on her blog, and her detailed industry knowledge and experience, it looks to be a ‘must read’ for those following the financial crisis and its associated developments.
Reading ECONned
By Richard Smith
The Financial Crisis of 2007-2009 (no-one’s settled on a name yet; we are still too close to the action, and that end date might still need some discreet pushes to the right) has naturally set off a book publishing frenzy. With the first wave of instant histories now spent (the startlingly fast-out-of-the-blocks chronicle “Bailout Nation”, the elephantine “Too Big To Fail” etc, etc), we are now getting a second wave of books, whose authors have had time to dig deeper and reflect more on how we got into this mess. Yves Smith’s offering is the first integrated account of the root causes of the financial crisis, and a compelling one.
For Smith, it turns out to be a matter of bad economic theory, self-serving ideology, and, under cover, plain old rapacity. The author gives us a brisk historical sweep through what sounds like deeply unpromising, but, as it turns out,…
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This Is Where Goldman Can Stick Their Guns
by ilene - December 1st, 2009 4:38 pm
This Is Where Goldman Can Stick Their Guns (PHOTO)
Courtesy of The Daily Bail
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Goldman Executives Reportedly Buying Guns To Defend Against Angry Taxpayer Vigilantes
We’re not making this stuff up. For pure entertainment value, life destroys art once again.
From Bloomberg commentator Alice Schroeder
Dec. 1 (Bloomberg) — “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.
I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter” it believes some of the bankers I inquired about do have pistol permits. The NYPD also said it will be a while before it can name names.
Henry Paulson, U.S. Treasury secretary during the bailout and a former Goldman Sachs CEO, let it slip during testimony to Congress last summer when he explained why it was so critical to bail out Goldman Sachs, and — oh yes — the other banks. People “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.”
Torn Curtain
There you have it. The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.
This slip-up let the other bailed-out banks happily hand off public blame to Goldman, which is unpopular among its…
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Capitalism, Socialism or Fascism?
by ilene - October 25th, 2009 4:43 pm
Washington argues that when metastatic cancer takes over the body, identifying the type of cancer is more of an interesting dinner party conversation than a cure (metaphorically) – Ilene
Capitalism, Socialism or Fascism?
Courtesy of Washington’s Blog
What is the current American economy: capitalism, socialism or fascism?
Socialism
Initially, it is important to note that it is not just people on the streets who are calling the Bush and Obama administration’s approach to the economic crisis "socialism". Economists and financial experts say the same thing.
For example, Nouriel Roubini writes in a recent essay:
This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest…
The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.
Roubini has previously written:
We’re essentially continuing a system where profits are privatized and…losses socialized.
Nassim Nicholas Taleb says the same thing:
After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.
[Interviewer]: But aren’t those the very problems we’re supposed to be fixing?
NT: They’re all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient’s symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.
[Interviewer]: Are you saying the U.S. shouldn’t have done all those
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.