Financial crisis – 3 big truths – Consumption, Investment, Labor
November 23, 2008
Been talking with Don Hill for past few weeks, and these themes emerged in those, so posting them here for your inspection. The financial crisis reveals some unspoken truths about the fundamental nature of our current global economy.
1. Consumption. Our system of capital accumulation is based on ever increasing consumption – consumerism. The more consumers consume, the more firms produce, and that results in economic growth. Give consumers cheap credit and they will willingly consume themselves into oblivion.
But this unfettered consumption is not physically (ecologically) sustainable at a global level, and cheap credit is the source of economic bubble, that invariably burst periodically. If 6.2 billion people start consuming like Americans, human ecological footprint and GHGs would increase 20 fold, forcing dramatic and disastrous climate changes. So any solution to the global financial crisis must get us off this path of consumerism.
2. Investment. Much wealth around the world is invested in real estate or financial instruments. Even material wealth of gold, oil, and commodities is securitized and traded on financial markets. These markets are fundamentally speculative. Wealth is created and destroyed daily based on forecasts and future expectations. There is no invisible hand or “rational actor” guiding speculation. The elaborate professional investment guidance infrastructure (accounting statements, analysts, rating agencies) are ways of cleaning up the speculation, in an impossibly opaque system. Financial values are only weakly linked to the production economy. Ordinary individual cannot build a life on speculation or gambling, without enduring enormous stresses and risks.
Investment speculations are based on notion of earnings – surplus of revenues over costs. Many costs are externalized, so “earnings” are a problematic notion. Labor wages and environmental costs are probably the most problematic.
3. Labor (and wages). In information (and knowledge) work settings, the old notions of labor (physical work measured in pieces produced or time worked) simply fall apart. Labor of a software programmer, consultant, bank officer, government clerk, hotel receptionist is only partly physical – and actual more intellectual, emotional, and social process. Paying for 8 hours of physical presence in an office does not guarantee quality and not even quantity of labor derived. So historic wage systems are ill-suited to rewarding information/knowledge work. Efforts to incentivize workers with stock options are crude and have many intended consequences. Need to better understand what “work” means today, how to measure it, how to incentivize workers.
What sort of solutions would we need for this global financial crisis to address these challenges?
November 24, 2008 at 4:41 am
Paul:
There is very little doubt that it will take a major change in cultural attitudes for these three factors to remain in balance. Gresham’s Law – that bad money always drives out the good – remains standing to this day, and is indeed the first intellectual assertion of the pervasiveness of greed. Gresham’s Law will ensure that the system, sooner or later, will go out of whack.
Fortunately, we have lessons from history to guide us. As always, Galbraith has a good eye for such facts:
“The Greeks, notably the Athenians, seem to have resisted debasement out of a rather clear understanding that this was a short-run and self-defeating expedient and that honesty was, at a minimum, good commercial policy. After the division of the Roman Empire and the reassertion of Greek influence at Constantinople the bezant was for several centuries the world symbol of sound money, everywhere as acceptable as the gold it contained.”
So there you have it. The Athenian Greeks – innovators of the concepts of the republic and democracy, creators of possibly the most astonishing art the world has ever seen, had found an answer. But only for a short time, before Gresham’s Law struck again.
Closer to today, the Tibetan Buddhists have a similar ability to stay away from Gresham’s Law, although their skill and stamina appears to be flagging.
Maybe Prem is right. It may not be possible to eliminate greed, but perhaps we can sidestep it.
Because if we don’t or can’t, then it will be very difficult to avoid the most successful model and method – the command economy.
November 24, 2008 at 1:45 pm
Greed as a source o consumption needs to be better theorized. We need to understand relationships between greed and consumption , and consumption and satisfaction. Greed makes people accumulate but they don’t necessarily consume what they accumulate. And satisfaction is not directly related to consumption. Some forms of consumption are known to be toxic (over eating leading to obesity or smoking leading to cancer).
So this black box of greed that is used as a justification for all economic ills needs some deeper analysis.
November 24, 2008 at 4:00 pm
Paul:
I agree that greed, as used the way I did and I think the way that Gresham’s Law postulates, can refer only to the financial system. The consumption and labor systems would be driven by their own set of parameters, not all of which would overlap with the financial/ investment system.
The problem as I see it is that there is no decoupling between these different systems. For example, if the investment system is driven by the monetarists, as has been the case since the early 80s, then credit will expand and consumption will get influenced by the availability of cheap credit.
Similarly, a stock market price driven paradigm would encourage investment in companies and sectors which perform best on those parameters. This would lead to a ripple effect on the labor system – outsourcing is one consequence that comes to mind.
Perhaps one way of approaching sustainability could be to examine the extent to which decoupling could take place so that the greed element, which affects mainly investment, is to some extent mitigated.
Inevitably, this would mean regulation.