Sunday, November 28, 2010

Zombie Economics: How Dead Ideas Still Walk Among Us

above: the author - economist, John Quiggin

The following is a summary of a new book:  'Zombie Economics: How Dead Ideas Still Walk Among Us' - submitted to Left Focus by its author, John Quiggin.  John Quiggin is amongst Australia's most accomplished economists;  and a long-time critic of the dominant neo-liberal ideology.  The Global Financial Crisis has shown that something has to change; and Quiggin seeks to refute right-wing economic shibboleths once and for all.  His book is published by Princeton University Press. (more details below)

AND BEFORE YOU CONTINUE!!: If you enjoy this article PLS join our Facebook group - to link up with other readers, and to receive regular updates on new material.

Ideas are long lived, often outliving their originators, and taking new and different forms. Some ideas live on because they are useful, and become more so as they develop. Others die and are forgotten. But even when they have proved themselves wrong and dangerous, ideas are very hard to kill. Even after the evidence seems to have killed them, they keep coming back in zombie form.

If we are to understand the financial crisis, and avoid the kinds of responses that set the stage for a new and even bigger crisis in a few years time, we must understand the ideas that got us to this point. My book, Zombie Economics: How Dead Ideas Still Walk Among Us describes some of the ideas that have played a role in the crisis. They are

* The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability;

*The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment;

* Dynamic Stochastic General Equilibrium: the idea that macroeconomic analysis should not concern itself with economic aggregates like trade balances or debt levels, but should be rigorously derived from microeconomic models of individual behavior;

* The Trickle-Down Hypothesis; the idea that policies that benefit the well-off will ultimately help everybody; and

* Privatization; the idea that any function now undertaken by government could be done better by private firms.

Some of these ideas, such as the Efficient Markets Hypothesis and Dynamic Stochastic General Equilibrium belong to the realm of technical economic theory. Others, such as Privatization are policy prescriptions, derived from these abstract ideas. Still others like the Great Moderation and Trickle-down Economics, are catchphrases for claims about how the economy works, or, at least, how it worked in the thirty years or so before the current crisis.

Together these ideas form a package which has been given various names: ‘Thatcherism’ in the United Kingdom, ‘Reaganism’ in the United States, ‘economic rationalism’ in Australia, the ‘Washington Consensus’ in the developing world and ‘neoliberalism’ in academic discussions.

It is clear that there is something badly wrong with the state of economics. A massive financial crisis developed under the eyes of the economics profession, and yet most failed to see anything wrong. Even after the crisis, there has been no proper reassessment. Too many economists are continuing as before, as if nothing had happened. Already, some are starting to claim that nothing did happen, that the global financial crisis and its aftermath constitute a mere ‘blip’ which should not require any rethinking of fundamental ideas.

A simple return to traditional Keynesian economics and the politics of the welfare state will not be sufficient. It is necessary to develop both theories and policies that respond to the realities of the 21st century economy.

The ideas which caused the crisis and were, at least briefly, laid to rest by it, are already reviving and clawing their way through up the soft earth. If we do not kill these zombie ideas once and for all, they will do even more damage next time.

The book can be purchased via the Princeton University Press website. 

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk Among Us, recently published by Princeton University Press.

for more info on John Quiggin see:

Latest News: The Labor Party in the recent Victorian State Election seems to have suffered a massive swing against it and a conservative government now looks very likely. Labor figures are holding on to a slim hope that a hung parliament may be possible.  In the context of a swing against it of over 6% Brumby Labor needs to hang on to a swathe of ultra-marginals.  The 'wild card' in all this is 900,000 pre-poll and postal votes yet to be counted.  We'll be providing more commentary on this in the near future...

Sunday, November 21, 2010

Last look at Labor and Greens Policies before the Victorian election

above: Does Victorian Labor Premier John Brumby have what it takes to win government for the first time in his own right?

The following article in an analysis of a number of Australian Labor Party and Greens policies which may be crucial to the outcome of the 2010 Victorian State Election; and the kind of legislative agenda that is enacted thereafter.  Crucial issues include social housing, aged care, and renewable energy. Feedback and opinions from readers are welcomed.  And if anyone representing the Australian Greens can provide more information re: modelling for the funding of proposed programs that would genuinely be welcome too!

AND BEFORE YOU CONTINUE!!: If you enjoy this article PLS join our Facebook group - to link up with other readers, and to receive regular updates on new material. see:

by Tristan Ewins

Greens policies for the Victorian State Election

On November 14th the ‘Sunday Age’ carried a feature regarding Greens policies for the coming Victorian State election. On the plus side these policies addressed issues that have been long-neglected – including by Labor. On the downside, Michael Bachelard doubted the affordability of the entire range of policies taken together.

As the Victorian State election approaches, this week we consider Greens and Labor policy in more detail.

In his article in the ‘Sunday Age’ Bachelard listed the following as Greens policies:

• subsidise low-income earners to pay increased power bills

• Increase health funding

• Reduce hospital waiting lists

• Build birth centres everywhere that needs one

• Increase mental health funding

• Fund mental health workers in schools, police stations, prisons

• Aged care for everyone who needs it

• $1 billion a year more for public education

• Free preschool

• Better pay for teachers

• No TAFE or school fees

• More for social housing

• $13 billion for more public transport

• Peak-hour trains and trams to arrive every 10 minutes

• Boost to legal aid funding, providing ‘justice for all’

Bachelard noted that few of these policies had actually been costed. Further, these policies are forwarded in the context of promises to actually cut tax in some areas: “with less gambling revenue, stamp duty and payroll tax”…

But on the other hand: “Taxes on carbon dioxide and electricity transmission would go up, though low income people would be protected from higher energy prices…”

Bachelard explains that the Greens are also assuming a national carbon tax (presumably implemented by the Federal Labor government) with significant funds “[flowing] back to the state”. ‘Wriggle room’ is also assumed in the context of a $43 billion state budget.

The critical question is how these strategies balance out on the budget bottom line if implemented. And with a swathe of new initiatives “holding the line” is not good enough. What would be needed is new revenue. And while Victoria can afford new debt so long as those debts are serviceable, dependence on debt-financing cannot go on forever.

There isn’t scope here for me to consider all the Greens policies listed by Bachelard, but we will look at a selection.

Firstly let’s consider Greens policy on public housing. According to Bachelard this Greens policy would involve a shift “towards social housing, including the construction of 29,000 more ‘affordable’ properties by 2014.” In the Bachelard article “professor of urban studies…Terry Burke” describes this ambition as “financially impossible to achieve”, with a price tag of “over $6 billion” (presumably for Victoria alone), putting “impossible” pressures “on the Commonwealth.”

In response to these claims, though: doing nothing is not an option. And considering the scale of the problem – neither are ‘half-measures’.

The crisis of housing affordability is amongst the worst of the Howard government legacies. The housing bubble has left a lasting impression not only for home buyers, but in the rental market as well.
Partly because of speculation encouraged by the Howard Conservative government, and partly because of undersupply, housing prices have spiralled out-of-control over the past decade or so.

And unfortunately – even considering an investment by Rudd Labor in public housing – Labor governments have not done enough.

In March 2010 ‘The Age’ noted that: “House prices in Australia climbed 13.6 per cent in 2009 alone after a decade in which they posted increases of about 170 per cent, according to the Australian Bureau of Statistics.” In the same article it was observed that Australia suffered a “current shortage of 200,000 homes and an annual shortfall of 60,000”, and that this “would balloon to 800,000 by 2020, if no reforms were undertaken.”

But assuming the level of investment suggested by the Greens was a ‘once in a generation strategic commitment’, replicated interstate and with the support of the Federal government, then it is reasonable to assume such a project would be worth the devotion of resources.

Notably, though: assuming maintenance of the relative effect on supply, lower but sustained levels of investment would need to continue thereafter over the long term – sufficiently as to keep pace with a growing population.

Even if a ‘once-off surge’ of investment reached the vicinity of $20 billion nationally, the crisis is genuinely such as to warrant it. Housing affordability must be a priority; and simply releasing new land at the urban fringe is not enough if government will not commit also to funding the necessary infrastructure.

Greens prioritisation of public transport is also admirable: but with a growing population and an inevitable degree of urban sprawl can new investment in roads be put off forever?

And it will be interesting to see the form power subsidies for those on low-incomes would take. One option could be to create ‘quotas’ for renewable versus dirty (but cheaper) energy. By allowing those on welfare and low incomes to draw fully from non-renewable sources, and by promoting ‘quotas’ of renewal energy use for others - an effective subsidy could come in to play. Perhaps further subsidies should be applied for those on welfare AND low incomes in the case of water as well.

In an area apparently not canvassed by either Labor or the Greens, it is also notable that cross-subsidies could be best applied in the context of a return to natural public monopoly in energy and water. Such conditions could also encourage better value for consumers generally.

Social-commentator Dick Nicholls, in a 2008 article noted how:

“In the corporatised New Zealand industry the wholesale price of electricity declined 17% in real terms between 1987 and 1997, but the retail price increased by 20%.”

And in an Australia-specific example, Nicholls explains that:

“In South Australia, between 1994 and 2002, residential tariffs increased by 40%, with the state's regulator claiming that 20% of the total tariff was due to privatisation.”

Even where efficiency gains have been delivered under private utility ownership, gains have been diverted to maximise profits and share value instead of flowing to consumers.

Re-socialisation of utilities under these circumstances makes sense: and there is a need amongst the major parties (including the Greens and Labor) to scrutinise and ultimately reject the neo-liberal ideology which rules out ‘natural public monopoly’ in order to maintain a ‘pure’ position on the theme of exclusively private markets.

So many of the policies canvassed by the Greens are crucial; but the final policy we’ll consider, here, is Aged Care.

I’ve already considered the Aged Care crisis at this blog elsewhere. Readers are welcome to consider earlier ‘Left Focus’ articles of mine at the following URLs:


And also:

A ‘total package’ for Aged Care must include support for carers; mandatory heating and air-conditioning in all hostels and nursing homes, free dental care, as well as more staff and a better ‘staff mix’ – with more registered nurses, and better pay and conditions to attract these into the system.

Other ‘quality of life’ issues include privacy, and access to individual rooms; as well as: “access to the “simple pleasures”…[such as] parks [and] gardens. Access to television, music – and into the future access to information and communications technology (ICT) must be considered a basic right.

But the broad range of initiatives canvassed by the Greens would cost money – and lots of it.

Amidst all these issues, the bottom line is that crises involving an ageing population (with related health and welfare costs); and involving housing supply and insufficient urban fringe infrastructure – cannot be addressed without an increase in revenue. Increasing the retirement age is not fair, though – and the timid response to such proposals in Australia by the labour movement is mind-boggling.

A rising cost-of-living also demands welfare reform as well as further tax-rebates for those on low incomes. The best place to address this is at the Federal level, with progressive tax restructure, and vital grants flowing through to the states for provision of services.

If the Greens are serious about the reform agenda they propose they need to consider how these ambitions can be realised in the context of Federal and State government co-operation. To provide these kind of outcomes we need a progressively-structured increase in taxation nationally; rising for this term of the Federal Labor government in the vicinity of 1%-1.5% of GDP.

The Greens have the right kind of ambitions, and their policy writers look to have their hearts in the right place. But they need to be clear on how they are going to deliver. If any of their spokespeople are able and willing to elaborate on this, they are most welcome to do so via Comments at this blog.

Labor policies for the Victorian state election

Looking to the Victorian ALP website it appears that Brumby Labor is putting a lot of emphasis on Liberal costings, and the sustainability of their promise to slash Stamp Duty. The Labor line seems to be that Ballieu is making promises he simply cannot deliver; and that it is Labor who enjoy a 'proven history of fiscal discipline.'

In response on Stamp Duty, Labor is promising a targeted and focused (hence smaller) reduction of their own – tightly focused on newly-built first homes in regional Victoria. This is smart urban planning, also: as by focusing on the development of regional centres, pressure is lifted from the Melbourne housing market, while partly-containing urban sprawl.

Brumby Labor is also claiming to hold the ‘high ground’ on the environment; re-iterating their commitment to reduce emissions by 20% based on 2000 levels. As part of this commitment, Brumby Labor is emphasising their plans for a “staged closure” of the ‘dirty’ Hazelwood power plant.

For the Greens these measures have not gone far enough; but the dilemma for voters is whether to ‘reward’ Labor in expectation this will encourage further action; or whether to apply greater pressure by supporting the Greens. There are issues of ‘electoral synergy’ between the ALP in Greens which I raised in the ‘Left Focus’ instalment immediate prior to this.

Meanwhile: with fear of violent crime spiralling, public transport safety has also become a major issue. In response to Liberal policies, Labor has committed to “returning staff to every station on the electrified metropolitan rail network” and “delivering a central CCTV control room that will make our trains safer for commuters.” Further Labor are promising to “fund 100 additional Transit Police for a total of 350 across the network.”

And yet today’s ‘Sunday Age’ (21/11/2010) – on its front page - exposes the fear campaign around violent crime as being founded upon false and exaggerated claims. While Victoria’s overall crime rate has fallen by 29.9% since 2000-2001, Victorians are being confronted with a “law and order election”. The Liberals imagine they could be swept to office upon a wave of fear; and Labor has done little to question this trend – for fear of inviting a backlash in the face of what for many is ‘indisputable’ and ‘common sense’.

The role of the media for cultivating these perceptions also needs to be scrutinised.

What is also notable is the extensive record of Victorian Labor when it comes to support for Public Private Partnerships. (PPPs) Columnist for ‘The Age’, Ken Davidson, has long taken Labor to task on just this issue, accusing the government of ‘fleecing’ the public. In March 2010 Davidson observed that “[according the the government’s budget papers] there are now $10 billion worth of public-private partnerships on Victoria's books as liabilities.” (approximately $4 billion of this related to the Wonthaggi desalination plant)

Davidson continued:

On the assumption that the overall return to investors on these projects is a conservative 10 per cent, the cost to Victorians as taxpayers and water consumers will be of the order of $1 billion a year. Given that the government's AAA credit rating means it could borrow the same amount of money for an interest expense of $500 million… “Half a billion dollars could finance the interest expense on $10 billion - enough to transform Victoria's transport, education and health systems.” see:

Meanwhile -- Davidson’s proposed alternative

“involves piping water from north-west Tasmania that can supply the whole of Melbourne. This frees up 90 per cent of Melbourne's water from the Thomson and Upper Yarra dams.”

The trend towards Public Private Partnerships – which originally gathered pace under the Kennett Liberal government – has rarely been subjected to proper scrunity. Public debt finance has always been cheaper (this is usually the case for governments, and especially given Victoria’s ‘AAA’ rating); and provision for private profit margins has always meant that the public pay comparatively more for PPPs over the long-term.

Arguments for ‘PPPs’ based on diverting ‘risk’ also seem empty in the face of contracts which bind Victorian taxpayers to pay billions for desal plant water even when there is no demand – and when there is an abundance of supply.

On the other hand, Victoria’s population is growing, and there will be expanded demand for water into the future.

Furthermore, with stress upon the Marray-Darling basin, some have argued that Tasmania may arise as the country’s new ‘food bowl’. These matters were discussed on the 7:30 Report in September 2010. (see: )

The consequence of this is that Tasmania may need its supply of water into the future.

But even assuming this, a fully-public desalination plant would have provided better value for tax-payers. And the project might also have been deferred until such a time that the need was more immediate and indisputable.

Finally, Brumby Labor is trying to claim the ‘high ground’ on social justice – pointing to its ‘Fairer Victoria’ initiative, and refuting claims that it ‘no longer stands for anything’. Specifically, Labor is pointing to investments of “$1 billion a year for the past five years under the Fairer Victoria package.” Professor David Adams describes this “co-ordinated and preventive” “umbrella of investment across vulnerable communities, childhood development, education opportunities, mental health and disability services” as positioning Victoria nationally ''just ahead of the game''.

And yet while overall Victorian investment in public housing is seen by some as lagging, the Liberals are also portraying Labor’s homelessness policy (a $42 million package; see: ) as having ‘come too late’. There are around 20,000 homeless people in Victoria alone.


This article has only involved a small sample of Labor and Greens policies. There has not been sufficient scope to provide an exhaustive exposition. But hopefully the analysis here will have provided for some a deeper understanding of the issues at stake.

The ‘Sunday Age’ editorialised today (2/11/2010) under the heading “Labor? Liberal? What difference would it make?” Although drawing to this editorial’s conclusion there was at least the observation that – 'unlike in NSW' – “[Victorian] Labor offers a competent managerial government.”

Years of Public Private Partnerships, outright privatisations and policy convergence have left much of Labor’s core support-base deeply cynical.  Many have defected to the Greens. And even now some are speculating about future private toll-roads under Labor.

The Liberals would be no better. Their commitment to the neo-liberal ideology means there will be no scrutiny of ‘privatisation gone too far’. And their ‘tough on law and order’ policies represent crass and dangerous population at its worst.

What is more - Labor’s ‘Fairer Victoria’ programs – while needing to be expanded upon – could also imaginably be targeted by the Conservatives to pay for their $750 million in Stamp Duty cuts. (which are several times the scope of Labor’s proposal)  see:

No-one seems to be talking about utility re-socialisation to restore natural public monopolies. Hopefully it’s not too late for Labor and the Greens to reconsider these issues into the future.

Again: The Greens are mostly making ‘all the right noises’ but have to come up with a workable model for funding. Conceivably this might involve co-operation with Labor at a Federal level to provide funds for water and energy subsidies, aged care, public housing and other priorities. Progressively-structured tax reform (ie: expansion) over the coming three years of the scope of 1.0%-1.5% of GDP could provide room for these initiatives.

It would also be refreshing were the Greens to take a high-profile position against infrastructure privatisation.

Despite the rivalry, Labor and the Greens actually need each other if progressive reform is to be achieved.

Here’s hoping Labor/Greens co-operation in the Victorian parliament ‘bears fruit’ with real, tangible and genuinely realisable change over the coming years.

Sunday, November 14, 2010

Debating ‘Red’ and ‘Green’ politics – Have your Say

This week at ‘Left Focus’ I’m posting excerpts from discussions I’ve had recently at Facebook. In particular I’ve been talking about electoral competition between the Greens and the ALP (Australian Labor Party) – including the state of Victoria – where an election is due later this month.

What I’m hoping is that this week’s post spurs some real debate here at Left Focus: about the state of Australian politics, and broader issues regarding Green parties, and parties of the traditional Left. These dynamics are now of truly international dimensions. So please have your say!

Compiled and largely-written by Tristan Ewins

The ALP and the Politics of Class

Carlo Carli – the retiring Member for Brunswick (in Victoria) - was promoting the blog post linked to below as part of a debate over whether or not the Greens in Australia were ‘Left’, and what difference (if any) there is between ‘progressive’ and ‘Left’ politics:

I responded to Carlo with an analysis of the decline of class politics within the ALP; the thrust of my arguments being that with the abandonment of class politics as a point of reference, the ALP stands to alienate significant areas of its traditional support base.

"Carlo - I'm also worried about the decline of class as a 'point of reference' on today's Left. And many of our own people have been complicit in this; There are arguments like "post-industrialism means the end of class"; or there is a stigma against class struggle which in some ways we contributed to with our emphasis on 'conciliation' in the 80s. But if we REALLY want to reclaim the mantle of class politics, and for the ALP to revivify its ties with the broader labour movement [and working class] - we have to deliver the goods; And class politics needs again to become a day-to-day part of our rhetoric and discourse. What practically then? Well at a Federal level - what about bringing forward the dissolution of the ABCC? (nb: this stands for ‘Australian Building and Construction Commission – a special body set up by the former Conservative Australian government which acts as an ‘industrial star chamber’, and which can send workers to jail for failing to inform on their mates)

What about allowing pattern bargaining? And what about observing our original promise that no-one would be worse off under Award modernisation? Finally: What about restructuring tax to help those on low incomes; but also give a fairer deal to average workers? (and by this I don't mean people on $80,000/year and more....) If we want to take this line of promoting our 'red' politics as against 'green' politics - we need to deliver the goods - and rebuild our credibility."

Federal Left ALP MP and former Secretary of the ACTU (Australian Council of Trade Unions), Greg Combet, was also trying this week to re-emphasise a sense of Left/ALP values in response to a growing sentiment that today’s ALP ‘doesn’t know what it stands for’.

Combet’s contribution can be found here:


There was a lot of criticism from the radical/militant Left in response to Greg. I responded with an analysis of the potential synergy I believe could be set in motion between the Greens and ALP.

"Labor's record in government has to be held up to scrutiny, but at the same time I think Greg's trying to promote a narrative and identity for the ALP to encourage a return to Left values across the whole party. Without such a return Labor will continue to leak voter support the Greens - and there are some who are only now waking up to the fact that this is reaching critical proportions. My feeling is that there needs be a synergy between the ALP and the Greens in producing outcomes for social justice. An electoral threat to Labor from the Left could drive it to the Left on policy. These pressures will remain only so long as the Greens remain a threat to Labor; but at the same time the pragmatists in Labor need to see gains from a move to the Left. It's a delicate balance: but I hope these forces combine to promote real and ongoing progress."

In this same Facebook thread focusing on the Greens and the ALP Fernando Rodriguez Magallan wrote in response to Socialist Alliance activist Terry Townsend. Magallan’s position appeared to be an ALP/Centrist position which I am critical of; but I think it’s appropriate to reproduce some excerpts to put my response in context:

"There seems to be this overly-optimistic perception that [an alliance between the ALP and Greens] would bring about more social progressiveness - swinging Labor back towards the Left and give the Greens an all-time-first nudge towards Centre, whereby the two would meet somewhere along the way and exchange and embrace ideologies and miraculously create a modern, moderate, Centre-Left party however the reality would be far from this.

…The main problem I believe would be the Greens lack of patience for sustainable transition and that they are detrimental to many of the working class….The Reds…join a party that can make a bit of noise every so often enough to be noticed but not enough to ever win in the political realm…

Does the ALP need a refresh? Why of course. Should it be criticised for its failures? By all means, but there should equally be credit given, where and when credit is due. By this I mean there should no longer be a monopoly of media in Australia that always paints the glass-half-empty picture when it comes to the ALP's policies… The far Left, play right into the hands of the conservative moguls… Because of this, [they] end up (perhaps inadvertedly) batting for the other team - I guess this is why they say that in politics both extremes the furthest possible away from each other will eventually meet.

In the end - I am convinced more and more each day when seeing what the clowns at either end of the political spectrum have to offer - that Labor, the Third Way, is the only way forward. (nb: Readers might like to debate this issue of the ‘Third Way’ as well)"

I responded Magallan as follows:

"Fernando - there's some truth in what you say; which is why I've written elsewhere that the Greens should give 'reasonably conditional' support for Labor. (ie: compromising enough to hold together an electoral coalition which can maintain power)

(Comment: for me this is part of the politics of ‘alliance building’; building what Gramsci would call a ‘counter-hegemonic historic bloc’; or in the context of parliamentary politics – ‘an electoral bloc’. This refers to the kind of synergy I was talking about before; but with an understanding by all parties that they need to ‘pitch their message’ in a way which makes overall success possible…)

But just recently there are issues where I think we've failed and could have done better. For example: Failure to ensure no worker be worse off under 'modernised' Awards; Failure to debate a rising cost of living (housing, water, energy), and to sufficiently reform tax and welfare in response; Failure to address the housing bubble legacy and make housing affordable - especially for those on low incomes; Failure to build sufficient infrastructure in the context of urban sprawl.

I could go on - and I'll give one more example: Aged Care - which is supposedly a 'second term issue' - but I've heard nothing, and we have the most vulnerable people of all living in conditions of neglect and indignity - An ageing population means tax MUST rise to provide adequate Aged Care, broader Health care, welfare - But there's not even a DEBATE.... So where is all this leading in 10 years time???...

BTW - there's nothing wrong with being 'a bit red' - and I maintain my earlier statements re: possible 'ALP/Green synergy'. But look at it this way: Someone has to appeal to the relative centre to construct a majority; But we should always be trying to shift that relative centre towards social justice; And the Greens at least can make more radical arguments which we cannot because of this play of electoral forces; The Greens need us, and it seems we need them - But I think it's good at least that more radical arguments be heard; that's in the interests of a Labor social justice agenda over the long term..."

Doug Cameron speaks up in favour of open debate in the Labor Party:

Finally, ALP Senator, Doug Cameron has recently (ie: late last month – October) intervened on the question of whether the ALP is seen to stand for anything; and how too-much discipline in ‘towing the party line’ could actually be detrimental. Cameron was speaking on Radio National in the program ‘The World Today’.


The following are excerpts:

“There are issues that certainly for a progressive party there should be more debate about and not just be stifled and we need to reach out to progressive people in the community and have a strong voice on progressive issues…”

“…I still don't think it is sufficient just to have behind-closed-doors debates on key issues…. I've always taken the view that difference of opinion is not a weakness, it's a strength and I think that has been lost in the party….”

“we've helped establish [a] culture…where no one speaks out…[Then] if someone does speak out, it becomes this great disastrous split in the party and I don't think that is good for democracy in this country. I don't think it is good for the Labor Party and we really need to address this.”

“[Progressive voices] are stifled in the caucus, they are stifled in the public and so people see the Labor Party having no values and no vision on a whole range of issues and I think that must change.”

Please discuss these issues!

Firstly: International readers please feel welcome to raise your own national contexts as they relate to the issues raised here!;

The point of this week’s post at Left Focus is to spur productive discussion of the issues raised! Assuming your position is ‘broadly left’ - your opinions on the ALP and the Greens – whether at a national level – or with reference to the coming Victorian election – are welcome here! PLS feel welcome to respond to the specific issues I raise here to: ‘Labor/Greens synergy’, and also ‘alliance building’ in the ‘counter-hegemonic/cultural’ sense, as well as that of forming an ‘electoral bloc’. Also: What are the situations in other countries? (eg: Sweden, Germany , Italy etc)

Your opinions are also welcome on the issue of the decline of class politics in the ALP, and also more broadly. (again: also internationally) What should the response of the Left be? What positions should the ALP and Greens take? Can class politics be revivified?

Finally: What about Doug Cameron’s comments? Should there be more freedom in the ALP for Left MPs to speak out? And if so – what should they be saying? And what about the position of the Left in the ALP more broadly?

Looking forward to your comments!

AND BEFORE YOU GO!!: If you enjoyed this article PLS join our Facebook group - to link up with other readers, and to receive regular updates on new material.

Sunday, November 7, 2010

A Honey Pot and a Swarm of Bees

above: an image expressing the dynamics identified by Anisimov in this article

This week's contribution has been submitted by Boris Anisimov - a Russian-based political economist who manages the website 'National Political Economy'.  'National Political Economy' states its purpose as being "to facilitate understanding of the modern economic reality outside the boundaries of the conventional economic paradigm."  This article considers the dynamics driving investment internationally, including core-periphery economic relations which effectively facilitate the exploitation of under-developed and developing economies. Anisimov explains how these dynamics in capitalism are linked with a constant search for new markets - as asscociated with the ecomonic phenomenon of 'over-production' or 'over-accumulation'.

by Boris Anisimov

Modern economic theories believe that developed countries are rich because extensive small- and medium-size businesses are the driving force of market economy. In my article, I argue that things are quite the opposite - enormous capital inflows into developed countries cause higher profitability and breed small- and medium-size businesses as a result.

After the collapse of the Soviet economy, several countries (so-called countries in transition) have pledged their allegiance to market economy growing more and more fascinated by the developed economies of Europe and North America. The new pro-Western governments did not have to spend time convincing their people of the benefits of free market. The Bolsheviks’ economic and political experiment undertaken in 1917 had in fact turned out to be a complete fiasco and was considered worthy of nothing else but scorn and ridicule.

The preachers of free market liberalization would passionately explain that only the market free of any government intervention is capable of bringing about prosperity and successful economic development. The newly-converted countries promised to uphold liberties and private enterprise and, without further delay, inscribed them into economics textbooks as the obligatory prerequisites for any successful market economy. Nobody bothered to give the free market fundamentalism a second thought as economists were joyfully pushing political economy aside and embracing economics – the gospel of the rich. Seasoned marxists would turn into devout monetarists in a twinkling of an eye.

I admit I also shared that optimism when those changes were taking place. Eventually, the bleak reality of what was happening started standing out to me as I observed a very peculiar thing – the liberalization of markets had hardly anything to do with the enormous profits of countries proselytizing in the name of laissez-faire capitalism. There appeared to be some mechanisms (hardly ever mentioned in the new "free-speech" media) that distributed wealth globally on conditions that Adam Smith could hardly consider conductive to the unrestricted exchange of goods and services among equal and independent market players.

So is it free market that brings about prosperity and abundance? What was it that developed countries did to prosper? Was it political freedom and maximum deregulation that made those countries so successful? Let me share with you some of my observations from the standpoint of political economy. Here, I claim neither monopoly on the truth nor a comprehensive reflection of all the factors involved in this matter. If you feel like treating these thoughts of mine presented below as food for thought, be my guest. If you look at things from the standpoint of mainstream economics, there is no need for you to continue reading – you are most likely going to get upset and angry. And I will have to bid you farewell, since I do not claim any right to tell people what they should believe in or think about.

What sparked my renewed interest to the subject of what makes rich nations rich was statistical data that I needed for my term papers on the world economy. I later went to the official UNCTAD site to check the numbers for myself because I was quite stunned when I first saw it. I compared data on the stock of global foreign direct investments (FDI) for the year 2008 and saw that the developed economies’ share is 68.5%, the developing countries’ share being 28.68% with transition economies left far behind with a meager 2.82%. Since 1988, similar average proportions (70%, 29%, and 1% respectively) have been preserved unchanged. In 2008, 56.69% of global FDI flows went to developed countries, 36.57% went to developing economies, while countries in transition accounted for only 6.74%. Again, the average numbers from 1980 show that the developed world accounts for the overwhelming majority of all global FDI flows with a clear increase in FDI outflows from developing countries and economies in transition.

My initial bewilderment was not due to the size of the respective proportions. Mainstream economists explain them by the rule of law and thriving democracy in developed countries. It was something else that puzzled me – the relative stability of those proportions. They have remained almost unchanged for decades. It seems as if, no matter how much wealth is created, it ends up being channeled into the same groups of countries in exactly the same proportions. Isn’t that strange? Where are the unpredictable market forces that elevate the most efficient economies and bring down the inefficient ones?

Again, mainstream economists would now start babbling about democratic institutions installed by the developed countries in order to create conditions conductive to free entrepreneurship, which entail investments being made in countries with the most favorable business environment, etc. But, for political economy, that is not an explanation – it is utter nonsense. Political economy considers institutions, political and business environment to be derivative of underlying economic processes. In Marx’s terms, it is an economic base that determines a superstructure, not the other way around. So I dismissed the mainstream babbling and went on to investigate this subject further.

Now, let us take Marx’s general formula of capital (M – C – M’) and apply it to a hypothetical economic system (let it be called “Economy A” or “Market A”) with closed economic borders (i.e. no exports or imports, no foreign investments, no cheap illegal immigrant workforce, etc.) and the golden standard. For certain, I am going to allow certain generalizations in this model. So capital in the form of money (thus M) gets transformed into a commodity (for the sake of generalization, services are also included here) (thus C), which then gets transformed back into the money form but at a greater exchange value (thus M’). To assign some roles in this play, business owners (including the government that protects their interests) invest their money in production of goods and services, which they then sell to consumers (hired employees) directly or indirectly at a price that covers costs and brings in profit. A major portion of the sum thus returned gets re-invested again for more profits. So in this particular economic system consumer spending generates investment resources essential for financing further reproduction of profit for business owners and the governments.

So the economic cycle can be represented with a diagram (see above). Here, for the sake of further reference, I have added the (I) quadrant called “income distribution”, which is responsible for distribution of investment resources. It does not really add anything to the formula since investment resources are also in the form of money, but it will be important to separate it from the other quadrants when we open the economic borders of this closed-door economic system and change the nature of money circulating in it.

Considering constantly rising competition costs as well as the fact that hired employees in our hypothetical economic system are the only consumers and that total production costs include additional expenses besides salaries and wages, we will have to come to a logical conclusion that the economy will not eventually be able to generate enough investment resources relying solely on its domestic consumers. The total amount of salaries and wages will not be able buy all the goods and services produced in the economy. This is called the crisis of over-production (or over-accumulation) – in other words, the system’s ability to produce exceeds, in a natural way, its ability to consume what it has produced. As a result, deflation destroys profits throughout the entire economy while business owners lay off employees thus bringing consumption to even lower levels and causing even more deflation. The economic collapse triggers a financial crisis and eventually leads to social unrest and very unpleasant times for the entire economic system. This is the logic behind Marx’s criticism of capitalism.

Of course, the real economic life is more complicated then the presented model. In reality, no economic system can be utterly closed. And now we are going to see why. So now let us imaging that the elite in our hypothetical economy realizes that the system is incapable of increasing consumption thus being incapable of generating sufficient investment resources to finance further profit-making. They decide to find a nearby economic system that would be willing to buy some of their unsold products. It gets even better if that other economy (let us call it “Economy B” or “Market B”) turns out to be able to increase domestic consumption, which naturally speaks of more profits to be generated.

While Market B can still grow, Market A’s problems are temporarily solved. Businesses will proliferate, new technologies will be developed, and new institutions will be created. Why? Because somebody has paid for that? Overtime, an increased number of external markets will make Economy A indifferent towards domestic spending because foreign sales are now generating enough investment resources. The booming Economy A will create new jobs, spend more on infrastructure, raise life standards and increase domestic consumption. Like bees around a honey pot, small businesses will be swarming around the increased inflow of capital into the economy.

Economy A in relation to Economy B (and its counterparts) is thus similar to a business owner (M) in his relation to a consumer (M’). This type of relations implies a transfer of money from the (M’) quadrant to (M) quadrant via the (I) quadrant. So in other words, we can see a flow of investment resource from one economy to another at the expense of the former. Economy B, whose economic cycles (as they are renewed over and over again) ends in the (M’) quadrant, is giving away its investment resources and will not be capable to finance its further economic growth unless it relies on some other economic systems to finance its growth.

The problem is that as soon as consumption potential of Economy B is exhausted, the expanded economic system A will need to expand even further. But new economies may not be as compliant or there may be other economies looking for ways to expand their economic systems. This situation can potentially lead to military conflicts. Besides expanding an economic system is not a cheap undertaking. So other ways to provide an unceasing inflow of capital must be invented.

And they have been invented. For example, the elite in Economy A may demonetize gold and grant its central bank a monopolistic right to issue fiat currency. If effective mechanisms for removing excessive liquidity out of Economy A are introduced (implying that there is natural or artificial demand for its currency outside its borders), its central bank can constantly increase the money supply thus bringing down credit rates and boosting both (M) and (M’) quadrants through cheap credit. In this situation, some business owners will no longer be interested in the (C) quadrant at all preferring to ever stay in the (I) quadrant. As long as consumers are able to increase (M’) by taking new loans and refinancing old loans, Economy A’s problems are temporarily solved.

Once economies become deeply integrated, Economy A may decide to use its growing investment resources to finance expensive R&D projects thus obtaining a competitive advantage over Economy B by implementing newer technologies. Lack of capital will not allow Economy B to compete with Economy A in these markets, and Economy B will be permanently put on a “technology needle” paying for rapid constant innovations initiated by Economy A. As long as Economy B is lagging behind in technologies, Economy A’s problems are temporarily solved.

Another approach to integrated economies has to do with international division of labor. Economy B may be rich with natural resources but incapable, for whatever reason, to process them upon extraction. Economy A, on the other hand, may have been investing heavily in innovations to boost its processing industries. So Economy A will be able to process Economy B’s natural resources and sell processed products back to Economy B thus making it pay through the nose for its own natural resources as well as “outsourced” processing works performed by Economy A. In this situation, the winner is the economy with the largest added value of its products. As long as Economy B is lagging behind in developing processing industries, Economy A’s problems are temporarily solved.

There can be other capital-channeling mechanisms. I do not intend to discuss them all here and now. Let us now apply these theoretical models to real life and see what we will get.

As international competition pushes countries’ economic development further towards greater accumulation of capital and investment resources on the global scale, we end up living in a world different from the idolized free-market ideal – the world with a rigidly structured world economy, where countries (even entire clusters of countries) are assigned specific roles, which they play according to the rules established by those distributing investment resources in the global economy, i.e. members of the transnational financial elite.

And this is where foreign investment resources in form foreign direct investments or foreign credit come into the picture. In the modern economy, they turn out to be playing a significant role in boosting further economic development of a country they are flowing into. A developing country cannot possibly rely on its own economy to generate enough profits to get such a boost. That is why modern developed countries resorted to attracting foreign capital in one way or another in the process of economic development. Note that most of the rich and influential countries these days used to have colonies or are former colonies themselves. The colonies’ role was to provide their mother countries with cheap resources, which, in a sense, are similar to FDI’s, the only difference being the method of their extraction. Obviously, more sophisticated mechanisms are employed these days.

So a developing country has no other way but to seek inputs from outside, narrow domestic markets being unreliable as a source of economic growth. While it is true that foreign investors prefer to invest in countries with a predictable political and economic environment, we must remember the reciprocal nature of the symbiosis between an institutional climate and objective economic conditions. In other words, some institutions claimed to be prerequisite to market economy always come with a bill, which developing countries will never be able to foot. You simply cannot export democracy and the rule of law if they are backed by nothing but slogans and promises. At the outset of their economic development, modern affluent countries could hardly boast of following the noble ideals they seem to be upholding now. As their prosperity grew, so did their ability to foot the development bills. It also works the other way – if a developed country’s profits shrink for whatever reason and stay low for a long time, it can easily turn back into a developing country with all its institutional and economic problems.

Obviously, this center-periphery relationship between countries is not mutually beneficial. The economic logic of market economy proves that the best way to beat a competitor is a monopoly, so as soon as a country climbs up to a particular level of economic dominance, it always seeks ways to “kick away the ladder”, as Friedrich List, a famous German economist of the 19th century, has eloquently put it. In particular, this what he wrote about Great Britain, the maritime superpower of his time: “Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.”

I think the picture will get even clearer if we remember that Great Britain had numerous colonies throughout the world and abolished slavery a couple of decades prior to the industrial revolution. Could it be possible for tiny local markets of the 19th-century Britain, which did not yet formed a unified national market at that time, to generate enough investment resources so as to drive the industrial revolution? Obviously, it was not free market alone that was involved.

In fact, the modern developed world and the newly industrialized countries seem to have long put Adam Smith back on the shelf and pulled out Friedrich List’s Das Nationale System der Politischen Ökonomie initially published in 1841. Their rapid expansion into other markets, while their domestic markets remain safe and sound under protectionist measures, seems to be a significant factor of their economic development. That explains the enormous role of the US as the largest consumer in the world economy. As American consumers were able to constantly increase their spending (first by reducing savings, and then by running debts), many countries could boost their sales, provided that the worldwide trust in the US currency remained adamant. No wonder that business gurus cite the American experience as a prime example of how to do business. Considering the inflow of investment resources (often in the form of Fed-issued greenbacks), starting a small consumer-oriented business does not appear difficult – just find the right product, market it, and consumers are sure to run your way scattering their money all over the place. But as soon as US consumers get a bit jittery about their future spending ability, the rest of the world gets a massive bumpy ride down their market graphs.

Globally, the US alone accounted for 13% of all FDI inflows and 18% of all FDI outflows in 2006. The same indicators for the EU consisting of 27 member-states show 43% and 47% respectively. Combined, these two global market players were responsible for 56% and 65% respectively. After such an extensive analysis above, these numbers do not seem surprising – they are quite natural.

Going back to where I started, the current crisis showed once again (as in the 1930’s), that markets are neither rational nor efficient. The analysis of national economies in globalization is pretty unequivocal that there are other forces at work besides the market. A country that attributes its success to unique entrepreneurial skills it possesses can instead thank its lucky starts that there are still fools out there willing to pull out their wallets and pay its bills.

This reminds me of a story I read some time ago about a shrimp fleet and seagulls. At a sea port, generations and generations of seagulls were able to feast on shrimp stuck in the nets and they would teach their young to do the same. The gulls seemed to live the happiest life of all as no actual fishing was necessary any longer. Guess what happened when the fleet was relocated…The gulls all perished.

So it is not the market that determines economic development. On the contrary, it is economic development that conditions the market. To put it metaphorically, while it is true that a swarm of bees can bring about a pot of honey, as soon as you open a pot of honey, it quickly collects a swarm of bees around it. From the standpoint of political economy, this makes perfect sense.

Boris Anisimov

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