The Growing Crisis of Capitalism

[Guest eureka]

I don't think those European countries had negative growth for that period, Toro: in fact, I am sure that they did not. Some European countries had real growth rates that rivalled the US, which, in reality, has been a low growth economy for a long time now.

It always intrests me to see that GDP growth rates are touted as some absolute indicator of one country's superior policies over another.

The US has had a growing population consistently. Most of the European countries who are held up as "Socialist failres" have virtually stagnant populations. How much of the difference in GDP is accounted for by that. I have a vague recollection from an early economics course that it was once reckoned that a 3% GDP increase was required to sustain a 1% population growth.

That may be simplistic but it has an alement of fact in it.

[Riverwind]

But its very important to understand that one of the reasons why the dollar is the global reserve currency - an estimated 65% of global reserves are in dollars - is because of the structure of the US economy.

I tried to find the table I was looking at in the Economist that listed the foriegn exchange reserves by country. It was clear from that table that close to 80% of the reserves were held by a small number of countries like China and Japan that have been buying US dollars in a effort to keep their exports 'cheap'. Their choice of the US dollar as a reserve currency has nothing to do with their opinion of the structure of the US economy and everything to do with the size of the US economy.

I have been collecting bits and pieces of the information over the years and I am coming to the conclusion that the ability to extract capital from other countries is the primary reason why certain economies 'succeed' and others fail. If you go back in time to the Greek, Persian and Roman empires the advances in technology and standard of living were entirely driven by the wealth brought in by conquest of their neighbors. The industrial revolution owes as much to the wealth of the Americas as to capitalism itself (although you can argue that England's free market system allowed it make more efficient use of the capital from the new world).

In more recent times, China success despite the largely dysfunctional political system is a result of foreign investment driven by multinationals looking for a piece of the Chinese market. If foreign nationals wanted cheap labour they could have gone anywhere and in many cases they could have gone to countries with better legal/political systems, however, they choose China because of the European obsession with the 'China Market' which goes back to the time of Marco Polo.

I would also suggest that Japan's rise to power was a result of is ability to generate huge trade surpluses with the west and not because of its 'unrestricted free market economy'.

In short, capitialism is a useful tool and is an efficient mechanism to organize a society with, however, I disgree with your assertion that the 'US Model' of capitalism is superior to all others since I feel there are other factors that explain the better growth rates that we see in the US. If we want to compare capitalist systems we need to use much broader criteria than economic growth.

[August1991]

Toro, how much of US growth can be attributed to an extremely lax montetary policy (i.e. high gov't spending/low interest rates)? The US is a unique country because the US dollar's status as a reserve currency has allowed the US gov't to get away with policies that no other nation would be able to get away with.

It would be false to describe the US Fed as following a loose monetary policy. Inflation has been upper most in the mind of Greenspan in the past decade or so. That is, the Fed is primarily concerned about keeping inflation low and invariable.

The reserve currency issue is relatively minor although I notice the Left sems to have latched on to it recently with regard to the pricing of oil.

The phenomenal current account deficits of the US are largely attributable to the phenomenal desire of foreigners to hold privately issued financial paper denominated in US dollars. The issuers of that paper can promise good rates of return because the US economy will safely generate them - as opposed to almost any other economy in the world (excepting places like Canada, the UK and Australia).

Sparhawk, I mean no harm by saying this since I enjoy reading your posts but I notice that you approach these questions too often with a desire to prove a pre-conceived conclusion: that is a bad way to investigate a question.

It always intrests me to see that GDP growth rates are touted as some absolute indicator of one country's superior policies over another.

I agree completely eureka. I notice that Toro above suggested that Europe was "poor" because workers have seven-seek vacations. Well, tell me, in the grand scheme of things, do people say at the end of their lives that they wish they had spent more time in the office?

Keynes argued that in times economic slowdown, government should use fiscal and monetary policy to lift the economy, and tighten policy when growth is strong to avoid inflation. This is exactly what the Bush administration did.

I think it is fair to say that the Keynesian ideas you describe disappeared from the landscape around 1975.

Bush cut taxes and provoked a government deficit becauise his advisors told him that a government deficit makes no difference in economic terms but it may make higher government spending politically difficult in the future. True, Bush has increased government expenditure, Greenspan has chastised him, because of the "war on terror" which I guess Bush believes is a necessity.

----

IMV, the world economy has been doing well overall for the past 15 years because of 1) changes in technology (computers), 2) removal of various trade barriers (NAFTA, EU, WTO etc.) and 3) the removal of insecurity with the collapse of the Soviet Union.

The gravest threat facing the world is environmental destruction. The greatest problem in general is the appalling ignorance of economics and how our sophisticated relations have created such wealth.

Why does the public discussion of economic policy so often show the abysmal ignorance of teh paricipants?  Why do I so often want to cry at what public figures, the press, and television commentators say about economic affairs.

Robert Solow

[Toro]

I tried to find the table I was looking at in the Economist that listed the foriegn exchange reserves by country. It was clear from that table that close to 80% of the reserves were held by a small number of countries like China and Japan that have been buying US dollars in a effort to keep their exports 'cheap'. Their choice of the US dollar as a reserve currency has nothing to do with their opinion of the structure of the US economy and everything to do with the size of the US economy.

It is true that over the past five years, there has been a massive flow of US dollars into the central banks of Japan and China. However, even before this, the majority of central bank reserves were in dollars. DeGualle used to complain about this as far back as the 1960s saying that the use of the US dollar as a reserve currency subsidized the US economy, which is correct. In the 1990s and 1980s, except for brief periods of time, private investors, not central banks, comprised the majority of investments in US dollars. The reason why this has not been the case this decade is because of the unwinding of the stock bubble. primarily in tech stocks. Also, sparhawk, understand that this focus on exports is so important in China and Japan because the consumer is not strong enough, unlike America. The structure of those economies are far more imbalanced than the US.

There are three factors that determine the desireability of currencies as a reserve currencies - return, convertibility and confidence. If you look at all three of these factors, the US is dominant by far. Returns are higher in America than in Europe or Japan (the only three viable alternatives), the dollar is the most liquid and confidence is highest amongst investors in the US economy compared to Europe or Japan.

I have been collecting bits and pieces of the information over the years and I am coming to the conclusion that the ability to extract capital from other countries is the primary reason why certain economies 'succeed' and others fail. If you go back in time to the Greek, Persian and Roman empires the advances in technology and standard of living were entirely driven by the wealth brought in by conquest of their neighbors. The industrial revolution owes as much to the wealth of the Americas as to capitalism itself (although you can argue that England's free market system allowed it make more efficient use of the capital from the new world).

I have to disagree with the statement about technology and standard of living causing the entirity of wealth. One common theme amongst all of them is technology, either through war or trade. Think about it. All empires were once small, but grew to become empires. They could not conquer other countries without technology. Countries with little technology never became empires as they could not accumulate wealth. But technology is an absolute, definite requirement for economic growth. It is the application of technology which lowers costs and expands markets for consumers. This is as critical today as it was a thousand years ago. Today, we call this application of technology in the economy "productivity".

Simply because an empire was a military power does not mean it was an economic one, and vice-versa. The rise of England - which was a barren outpost in the corner of the world in 1500 - and the fall of Spain - which was a far more important nation in Europe - are fascinating tales. Gold from the Spanish conquests in Latin America essentially drained away from Spain to England because of Spain's inability to foster an economy that matched its naval power. In contrast, England became an economic power first, using that gold to build its navy and conquer the world.

I would disagree with your comment about the industrial revolution and America, at least to a point. The primary market for the industrial revolution, at least until the mid-1800s, was Britain itself and Europe. In fact, the use of different types of iron in the United States disrupted the British iron industry. Certainly, Britain and America were important trading partners, but Britain supported the South in the Civil War because the South didn't like paying high tariffs on industrial goods made in the northeast and would have imported more industrial goods from the UK had the South won.

Another interesting case is Holland. Holland was an economic power that far exceeded its military strength because it was the most open, trade-oriented nation in the world in the 1700s.

In more recent times, China success despite the largely dysfunctional political system is a result of foreign investment driven by multinationals looking for a piece of the Chinese market. If foreign nationals wanted cheap labour they could have gone anywhere and in many cases they could have gone to countries with better legal/political systems, however, they choose China because of the European obsession with the 'China Market' which goes back to the time of Marco Polo.

I would also suggest that Japan's rise to power was a result of is ability to generate huge trade surpluses with the west and not because of its 'unrestricted free market economy'.

On China, that's partly correct. But this is not unusual in terms of economic development, and is no different than how Canada and the US developed. Developing countries import capital because, by definition, they are capital short. However, there are a lot of Chinese getting rich - or so my Chinese friends tell me- which isn't merely a function of them working in multinational corporations. And BTW, real disposable incomes in China rose 440% from 1980 to 2000 compared to about 60% in the US.

As for Japan, again, that is partly correct, and mainly responsible for the problems Japan is in today. The inability to create a dynamic consumer market is an outgrowth of this policy. Also, I have never argued for an "unrestricted free market economy." That's a fantasy, and those on the Left use this definition as a straw man for a silly argument - this thread for instance.

In short, capitialism is a useful tool and is an efficient mechanism to organize a society with, however, I disgree with your assertion that the 'US Model' of capitalism is superior to all others since I feel there are other factors that explain the better growth rates that we see in the US. If we want to compare capitalist systems we need to use much broader criteria than economic growth.

As I stated earlier, there are many factors which contribute to economic growth, of which I don't feel like going into at the moment. An economy based on the price system and private ownership of capital, i.e. capitalism, is no gaurantee a nation will get rich in today's world. But a lack of such an economy is a gaurantee it will not get rich.

[Riverwind]

As I stated earlier, there are many factors which contribute to economic growth, of which I don't feel like going into at the moment.  An economy based on the price system and private ownership of capital, i.e. capitalism, is no gaurantee a nation will get rich in today's world. But a lack of such an economy is a gaurantee it will not get rich.

I agree with that statement. However, there is a very broad field of alternatives between communism and unfettered capitalism. In many debates 'capitalism' is equated with the 'US Model' and that is the distinction that I was trying to make. In many ways, Canada and Europe are better places to live than the US because it has a different approach to capitalism. On the other hand, the US does seem to be the place where most technological innovation seems to originate which means they are obviously doing something right but it is difficult to seperate all the different factors that lead to success.

[Toro]

As I stated earlier, there are many factors which contribute to economic growth, of which I don't feel like going into at the moment.  An economy based on the price system and private ownership of capital, i.e. capitalism, is no gaurantee a nation will get rich in today's world. But a lack of such an economy is a gaurantee it will not get rich.

I agree with that statement. However, there is a very broad field of alternatives between communism and unfettered capitalism. In many debates 'capitalism' is equated with the 'US Model' and that is the distinction that I was trying to make. In many ways, Canada and Europe are better places to live than the US because it has a different approach to capitalism. On the other hand, the US does seem to be the place where most technological innovation seems to originate which means they are obviously doing something right but it is difficult to seperate all the different factors that lead to success.

And there is more to life than making money as well...

[B. Max]

That is system of low productivity and higher costs, and a lower standard of living.

No, what you are describing is capitalism everywhere but North America, Japan and western Europe.

<{POST_SNAPBACK}>

You are the one that connected a keynesian economy and i assume a worker paridise. However the basic premise of the mumbo jumbo of keynesian theories is that government should borrow and spend in times of economic down turn, and tax in economic good times to contol inflation. Both are rediculous and both are what got us into trouble in the 70's

[August1991]

Toro, I largely agree with you but I want to make a few points:

It is the application of technology which lowers costs and expands markets for consumers. This is as critical today as it was a thousand years ago. Today, we call this application of technology in the economy "productivity".

Technology is the catch-word for saying that we can do more with less and this increases labour productivity. The only way income per person can rise in the long run is if a person can produce more in the same amount of time. A ladder to climb trees and pick fruit is a simple and obvious example of technology.

It is true that over the past five years, there has been a massive flow of US dollars into the central banks of Japan and China. However, even before this, the majority of central bank reserves were in dollars. DeGualle used to complain about this as far back as the 1960s saying that the use of the US dollar as a reserve currency subsidized the US economy, which is correct. In the 1990s and 1980s, except for brief periods of time, private investors, not central banks, comprised the majority of investments in US dollars.

Don't confuse financial capital in the form of money issued by the US Fed, financial capital issued by the US government in the form of bonds and financial capital issued by private firms in the form of stocks, bonds and an endless variety of other instruments, including deposit statements.

The first form, US money, is what strictly constitutes a reserve and is an insignificant quantity of US financial capital abroad. (True, there is a nice little economic and perhaps even psychological boost for Americans that their currency is used in black markets the world over.) Most central bank reserves are comprised of deposits in New York and European banks - that is, financial capital issued by private firms, largely denominated in US dollars.

The significance of the US dollar as a reserve currency lies in the power of the US Fed. Everyone around the world watches what the Fed does because it matters.

I would not cite DeGaulle as an economic authority but his comment must be seen in light of Bretton Woods and the fixed exchange regime in place in the 1960s.

[August1991]

As I stated earlier, there are many factors which contribute to economic growth, of which I don't feel like going into at the moment.  An economy based on the price system and private ownership of capital, i.e. capitalism, is no gaurantee a nation will get rich in today's world. But a lack of such an economy is a gaurantee it will not get rich.

I agree with that statement. However, there is a very broad field of alternatives between communism and unfettered capitalism. In many debates 'capitalism' is equated with the 'US Model' and that is the distinction that I was trying to make. In many ways, Canada and Europe are better places to live than the US because it has a different approach to capitalism. On the other hand, the US does seem to be the place where most technological innovation seems to originate which means they are obviously doing something right but it is difficult to seperate all the different factors that lead to success.

<{POST_SNAPBACK}>

Sparhawk, I agree that a model other than "unfettered capitalism" is needed, and I even agree that the US model and its constitution have significant weaknesses. I'm not sure that I would look in the direction of communism for an alternative - the Soviet Union was a disaster.

Europe, although strongly criticised by Americans, is a viable alternative - but very corporatist. (Europe is like NYC - a great place for tourists and the rich.) About 10 years ago, Canada was rated highly as a good place to live. To each one's own.

I think what I am saying is that I am waiting for Leftists that understand modern economics, why markets are good, who reject typical socialist solutions to society's problem and then pointedly explain to the neo-cons why Governments alone can do Good. Believe me, the arguments are there.

Sparhawk, we had a discussion about this here in case you are interested.

[Toro]

I would not cite DeGaulle as an economic authority but his comment must be seen in light of Bretton Woods and the fixed exchange regime in place in the 1960s.

Yes, and its interesting that at the time, France was more of a steward of sound money than America was. In theory, every greenback was backed by gold. But Americans could not actually exchange the bills for gold. But foreigners could. So in the 60s, when America started to finance the Vietnam war through debt and the printing press, DeGaulle's very strong economics advisor - whose name I can't remember - foresaw the inflation that came in the 1970s. He advised DeGaulle to exchange French holdings of dollars for gold, which America refused since the dollar holdings of France exceeded (or nearly exceeded) the gold stored held the United States. This lead to a chain of events that eventually lead to the collapse of Bretton Woods.

Ironically, central banks have been dumping gold the past 15 years and replacing it primarily with dollar bonds since gold doesn't pay a rate of interest.