What is the economy FOR?

Thanksgiving is a peculiarly US-American holiday that, by stressing the
important bonds of family and friends, provides us a good opportunity
to reflect on the often-neglected question of what the economy that we
(nearly) all participate in is actually for.

The word “economy” itself gives us a strong hint. “Eco”– seen also in
the science of “ecology– comes from “oikos”, a hearth or home.
“Nomos,” seen also in astronomy, gastronomy, etc., has to do with an
attempt at discovering the underlying laws in the field mentioned. So
we could say that what economics is fundamentally about is the
discovery of what makes for a well-provisioned home, or a
well-provisioned community at any larger level of which the family home
can be seen as a microcosm…. And then, of course, the practice of
using that understanding to make the arrangements and provisions
necessary for the home or community to be accordingly well-run.

It has to do with community, and with wellbeing. More precisely, it has
to do with the material components of the wellbeing of the community in
question.

Notice that two words I haven’t mentioned thus far are “profits” and
“stock market.”

I’ll grant the proponents of Reagan-era “trickle down economics” this
much: At least they made some attempt to explain how it was that the
hyper-wealth of the plutocratic few who were expected to profit from
the Regan-era tax cuts– and in fact, did– would in some way connect
with the wellbeing of the great mass of currently non-wealthy people.

But since the 1980s, the overwhelmingly dominant view in US public
discourse has been one that sees stock market profits as ipso facto
desirable and good, and that has very often not even bothered to make
any argument at all about the connection between stock market profits
and the wellbeing of the national community as a whole. Just recall the
way economic news is presented in the mainstream media: the prominence
given to shifts in share prices; and the gross disproprotion between
the coverage given those shifts and that given major developments in
the real, brick-and-mortar lives of real Americans like plant
closings, evictions, shifts in the national figures regarding hunger or
infant mortality, or the health-care crisis in general.

The word “economy” has another, related meaning, too. It has to do with
good stewardship
of the available resources– as in the terms, “economy of words” or
“economy of force”.  Folding in this meaning, too, we could
say that a well-run national economy would be one that delivers good
outcomes on the broad indicators of human wellbeing to all members of
the nation concerned, and that does so with as little waste as
possible. Here, as you can see, the idea of good stewardship also
connects with the broader “ecology” of the environment.  

One example: Do we really want to continue a national economy
that’s based overwhelmingly on reliance on personal ownership
of motor vehicles? Especially when we know that (1) our use of private
autos– however we might choose to fuel them– is a major contributor
to our country’s bloated and world-damaging CO₂
emissions; (2) other models of human mobility that rely much
more  on mass transit systems exist, and provide a
very enjoyable quality of life to people in other countries; and (3)
having an auto-centered society keeps many of our fellow-citizens here
at home marginalized from the mainstream of economic opportunity and
social engagement.

Other examples of wastefulness abound, in the homes and lives
of large numbers of Americans…

But the mainstream media view does not look at the many superfluous
things so many of us have as evidence of personal wastefulness and
excess. It looks as them through the lens of desire and aspiration. The
MSM– a large portion of which works, after all, according to business
plans that make them deeply reliant on advertsiements for high-end
goods and services– doesn’t even seem to have a concept that some
amount of material goods might actually be “enough” for a good life.

Mainstream economic thinking backs up this materialist prejudice.
Economic orthodoxy, buttressed even by a number of declarations from
the United Nations, tells us that every nation has the “right” to
further economic development. For nations still suffering from a lack
of basic material inputs required for human thriving– homes,
transportation, food, schools, basic decent medical care– having the
“right” to economic development in terms of more stuff
probably makes a lot of sense. But in the US, Japan, or the rich
countries of western Europe? Why should we all, in perpetuity, be
guaranteed the right to additional, ever-increasing amounts of
stuff? Why shouldn’t the demand be, rather, that we use the stock of
available stuff that we already have in our rich countries more
efficiently, more wisely– dare I say it, more economically? And we
could also use it more generously, by investing the surpluses
we have in many fields, in a wise way, including by increasing the
wellbeing of people in need in other countries as well as our own…

….

So there is the traditional meaning of “economy”, having to do with the
good stewardship of resources by and for a family or broader cmmunity.
And then there’s casino capitalism, a state of affairs in which the
financial sector grows and grows and grows, taking over an ever larger
portion of the economy. You can see how that has happened over recent
decades in the US, here:

(Source: Jerome a Paris, here.)

But what does the financial sector actually do, you
might ask? Well, recently, my 23-year-old recently did ask me this.

There are some very useful things it does. It takes in people’s savings
and makes them available to other people– often, perfect strangers–
who need loans to get their businesses started. Thereby, these useful
kind of financial institutions, we could call them banks, manage to
mobilize capital for new projects, hopefully doing so in a way that is
both efficient and generally useful.

But then, over the years, many bankers and others with access to bank
capital figured out they could use this money– which is nearly always
other people’s money– to speculate with. And that was where the
troubles started. In far too many cases investments became not a good
faith effort to support the efforts of worthy entrepreneurs but merely
gambles. Short selling, I have always thought, is a particularly
insidious thing to do. It involves investing, briefly, in a company’s
shares, with the precise purpose and hope that those shares will fall.
Morally, it is like making friends with someone precisely so you can
get to know them better and stab them in the back even more effectively
once you’ve won their confidence. It completely subverts the
normal pattern of human solidarity and empathy.

But short selling is far from the worst of it. Whole groups of people
known as “financial engineers” got to work on creating ever more
rarified forms of financial arrangements, of which Credit Default Swaps
(CDS’s) were some of the worst. Buying a CDS is like buying a bet on
someone else’s misfortune. It is completely removed from the normal
world of using money to support a project you actually believe in. It’s
like going to Atlantic City– but instead of going with a fistful of
quarters you’re joining with hundreds of other speculators
putting bets of hundreds of millions of bucks on eventualities
that may occur elsewhere in the financial markets. People became almost
literally addicted to it: to the risk, the big stakes, and the
possibility of truly enormous pay-offs.

In 1933, after the depth of the post-1929 financial and economic crisis
became clear, Congress passed the Glass-Steagall Act, which established
a wall of separation between the banks and the “investment” (= often,
speculation) houses that were allowed to do much more risky things. But
the banks had to act in a much safer manner. They were subject to much
more stringent oversight and regulation by the new regulatory body that
the Act created, the FDIC. That had two main consequences: People with
deposits in the banks up to $100,000 were assured that their deposits
were safe, and you had a banking system that could continue to function
even if there was chaos, uncertainty, or a serious downswing elsewhere
in the financial markets.

In the go-go 1990s, the big American banks saw the hyper-profits that
were being made by some of the  investment houses, and they
wanted part of the action.  They lobbied hard to end the
“separation” provision of Glass-Steagall. Citigroup (which had been a
very rogue player back in the Crash of 1929, under its earlier name of
National City Bank) was one of the leading actors in that campaign. And
in 1999 it succeeded. Glass-Steagall was repealed through the
Gramm-Leach-Bliley Act of that year, which was duly signed into law by
Bill Clinton. Gramm, as in the very rightwing Republican Sen. Phil
Gramm. Leach as in the moderate Republican Congressman Jim Leach… who
turned up most recently as one of Barack Obama’s key, “bipartisan”
economic advisers.

So from then on, the banks were able to play in the financial casino as
much as they wanted. Which many of them did. With the effects that we
have now seen. Namely, that since it is still the case that nobody
knows what the eventual losses in the financial casino have been, the
banks that have been involved in it have all been dragged down to the
bottom and are unable to perform their normal, natural function of
providing loans to the productive sectors of the economy that might
need them.

That’s why the economy is stuck deep in the doldrums right now. It’s
not just a matter of consumer confidence or the need to get more
consumer spending, which is what the nightly TV news tries to tell us.
It is that we have a banking system that is broken, run by people who
have (a)  betrayed the public trust placed in them and also
(b) fatally mismanaged their own institutions, allowing the riskiness
of their various “investments” (= bets) to gallop away
completely out of their control or even, in many cases, anybody’s
ability to quantify and assess.

So here’s my question. Given that these bankers-turned-gamblers have
behaved in such an extremely damaging way, why on earth are the Bush
administration and the Obama administration-in-waiting both relying so
heavily on further
government bailouts of these banking/gambling businesses
to save the broader economy?

It completely defies logic.

If Bush or Obama want to stimulate the economy, why not do it through
visionary programs of public works that are directly administered by
the government? Why on earth try to do it by using the banks, once
again, as a “pass-through”, making huge additional sums of money
available to them with the idea that the banks will then suddenly
provide more credit to consumers?

Consumers (= citizens) don’t actually, in the main, need more credit.
What they need are  jobs with decent wages and benefits– jobs
that also contribute to the wellbeing of the entire society of which
they are a part. They (we) certainly don’t need more credit-card debt.

…

This Thanksgiving, I am very thankful that we elected a real symbol of
change from the tragic recent past, to be our new president.

But I am very concerned indeed that in many respects, including his
approach to the economy, Obama doesn’t represent anything like the
degree of change that we need.

We need to restore the safeguards around our basic banking system that
the Glass-Steagall Act provided. We need to outlaw, or at least much
more tightly regulate, the risky kinds of casino “investing” that have
brought the entire US financial system to the brink of disaster. We
need direct government investment in a program of people-based public
works. We need to see  government at all levels using its
leadership and resources to restore the idea and practice of
community to our society.

Instead of which, as of now, we see Bush and Paulson shoveling
unimaginably large amounts of money into the banks before they rush out
of Washington– those same banks that have been so ill-managed up until
now; yet we see Bush and Paulson making no requests that any of the
leaders of those banks resign, or even turn in any portion of the quite
undeserved bonuses they have given themselves in recent years… Why on
earth should the taxpayers be suppsed to support that??

And now we see Obama also surrounding himself with the same kind of
banking types who led the anti-Glass-Steagall movement of the 1990s.
 I’m not reassured by any of the people he has named to his
economic team so far, including Timothy Geithner for Treasury
Secretary. Geithner has been working hand-in-glove with Paulson
throughout the crisis of recent months. Like Paulson, he has been
extremely generous to, and uncritical of, the banks and their CEOs. He
seems like a typical example of “regulatory capture,”
the phenomenon whereby regulators get “captured” by the very
people they are supposed to be regulating. Willem Buiter has
an even better term for this phenomenon. He refers to “cognitive
regulatory capture”, a ort of Stockholm Syndrome of Wall Street and
Washington whereby the regulators actually come to share the entire
worldview, perspective, and outlook of those they are supposed to
regulate. And certainly, the vast majority of voices in the MSM have
also fallen victim to a similar form of cognitive capture…

So it might be a long haul to change the terms of the national
discussion on the economy. One good way to start is to remember that
the “eco” in the word there is about “oikos”, the home and the sense of
a caring community.

————


Some other resources on
these themes:

• This
  post, and others from B of Moon of Alabama.
• This
  post and others from Calculated Risk.
• This
  post from Jerome a Paris, on European Tribune.
• This
  post and others from Willem Buiter’s Maverecon.
• This
  piece by Stephen Pearlstein of the WaPo (someone who
  occasionally deviates from the pro-casino biases that dominate most of
  the MSM.)