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31 Oct 09

20 Oct 09

Woman's touch helps hedge funds retain their value | Business | guardian.co.uk

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24 Sep 09

After capitalism « Prospect Magazine

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14 Sep 09

Why capitalism fails - The Boston Globe

article on minsky - v clear & easy

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But if Minsky was as right as he seems to have been, the news is not exactly encouraging. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he
argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.
While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky was closer to the counterculture than to mainstream economics.
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- In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists came to call “bastard Keynesianism.”
- Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.
- he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.
- Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”
- As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.
- Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.
- Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing use of leverage within the financial system.
- A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.”
- To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve - what he liked to call the “Big Bank” - step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of the Depression - it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.
- Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.
  Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government - or what he liked to call “Big Government” - should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage.
- “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”

02 Sep 09

Business.view: Capital markets with a conscience | The Economist

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12 May 09

In depth coverage of The Future of Capitalism from the Financial Times

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07 May 09

Cover story: 'After capitalism' by Geoff Mulgan | Prospect Magazine April 2009 issue 157

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Yet the lesson of capitalism itself is that nothing is permanent—“all that is solid melts into air” as Marx put it. Within capitalism there are as many forces that undermine it as there are forces that carry it forward.
The French historian Fernand Braudel offered perhaps the best description of capitalism when he wrote of it as a series of layers built on top of the everyday market economy of onions and wood, plumbing and cooking.
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- But restless capitalism has continued to give grounds for believing that it might destroy itself. A generation ago the American social scientist Daniel Bell, wrote of the “cultural contradictions of capitalism,” arguing that capitalism would erode the traditional norms on which it rests—willingness to work hard, to pass on legacies to children, to avoid excessive hedonism. Japan in the 1990s was a good case in point—its slacker teenagers rejecting their parents’ work ethic that had driven the economic miracle.
- To find insights into how the current crisis might connect to these longer-term trends we need to look not to Marx, Keynes or Hayek but to the work of Carlota Perez, a Venezuelan economist whose writings are attracting growing attention.
- Perez is a scholar of the long-term patterns of technological change. In Perez’s account economic cycles begin with the emergence of new technologies and infrastructures that promise great wealth; these then fuel frenzies of speculative investment, with dramatic rises in stock and other prices. During these phases finance is in the ascendant and laissez faire policies become the norm. The booms are then followed by dramatic crashes, whether in 1797, 1847, 1893, 1929 or 2008. After these crashes, and periods of turmoil, the potential of the new technologies and infrastructures is eventually realised, but only once new institutions come into being which are better aligned with the characteristics of the new economy. Once that has happened, economies then go through surges of growth as well as social progress, like the belle époque or the postwar miracle.
- Before the great depression the elements of a new economy and a new society were already available—and encouraged the speculative bubbles of the 1920s. But they were neither understood by the people in power, nor were they embedded in institutions. Then, during the 1930s, the economy transformed, in Perez’s words, from one based on “steel, heavy electrical equipment, great engineering works and heavy chemistry… into a mass production system catering to consumers and the massive defence markets. Radical demand management and income redistribution innovations had to be made, of which the directly economic role of the state is perhaps the most important.” What resulted was the rise of mass consumerism, and an economy supported by new infrastructures for electricity, roads and telecommunications. During the 1930s it wasn’t clear which institutional innovations would be most successful (fascism, communism and corporatism were all contenders), but after the second world war a new model of state regulated capitalism emerged characterised by suburbs and motorways, welfare states and macroeconomic management, which underpinned postwar growth.
- een in this light the great depression was both a disaster and an accelerator of reform. It helped to usher in new economic and welfare policies in countries like New Zealand and Sweden that later became the mainstream across the developed world. In the US it led to banking reform, the New Deal and the GI Bill of Rights. In Britain depression, as much as war, led to the creation of the welfare state and the NHS.
- One implication of Perez’s work, and of Joseph Schumpeter’s before her, is that some of the old has to be swept away before the new can find its most successful forms. Propping up failing industries is in this light a risky policy. Perez suggests that we may be on the verge of another great period of institutional innovation and experiment that will lead to new compromises between the claims of capital and the claims of society and of nature. In retrospect these periodic accommodations are as integral to capitalism as financial crises—indeed it’s only through crisis and institutional reform that capitalism adapts to a changing environment and rediscovers the moral compass that is so vital for markets to work well. The late 19th century accommodation came in response to fear of revolution and gave us state pensions, universal schooling, trade unions and universal suffrage, putting paid to the ideals of 19th-century liberalism. A second accommodation came 50 years later out of depression and war, and made variants of social and Christian democracy the norm in every rich country, pushing up states’ share of GDP and introducing visible hands to guide the markets’ invisible one.
- Even before the crisis there were many counter tendencies, all trying to re-establish capital as a servant of the real economy and to force greater transparency.
- The many moves in this direction include the still tentative attempts to make pension fund investments more accountable for their social and environmental effects (for example through big US funds like CalPERS or Calvert); the arguments that stock exchanges should police the transparency and integrity of their investors; the plans to outlaw offshore tax havens; the slow but steady rise of a social investment industry (which now accounts for a tenth of invested assets in the US); and the growth of genuine venture capital that takes risks on new ideas and technologies (sadly, most of the British industry wouldn’t meet that definition). We are also again hearing arguments for publicly owned banks to finance housing, infrastructure or innovation, for Tobin taxes and higher capital gains tax for short-term investments. When Britain’s government tires of owning banks it may even decide that they would survive better as mutuals than plcs.
- ven money itself may be rethought. The privileges that accompany the ability to create money will come in future with more responsibilities, but we may also see more enthusiasm for alternative currencies that are more embedded, like the local currencies in Germany or timebanks.
- Consumption is the second place where the signs of change are unmistakable. In the high debt countries (including the US and Britain) there will simply have to be less of it, and more saving.
- But there are already strong movements to restrain the excesses of mass consumerism: slow food, the voluntary simplicity movement and the many measures to arrest rising obesity, are all symptoms of a swing towards seeing consumerism less as a harmless boon and more as a villain. The mayor of Sao Paolo, Gilberto Kassab, banned all billboards in 2006. David Cameron has railed against toxic capitalism corrupting young children, as well as toying with the idea of personal carbon accounts to limit high carbon lifestyles. Reinforcing these trends are shifts in the balance of the economy away from products and services, towards a “support economy” based on relationships and care (from nurseries and therapy to weekly organic food deliveries). Networked technologies help this trend, and on the edge of the market there is a growing subculture of clubs that bring together consumers to buy their own producers (Ebbsfleet United is an example here in Britain: a football club now owned by some 20,000 fans, brought together on the web, that won the FA Trophy last year).
- Mirroring these changes are shifts in how things are made, as capitalism moves away from the destruction of nature to something closer to balance with it. Visit the BMW factories in Germany and you can see a new model of capitalism which attempts to reuse all the materials that go to make up a car. These production systems are pointers to a different ideal of manufacturing which will be celebrated in the Shanghai 2010 Expo where the world’s fastest growing economy will present a low-carbon vision of capitalism very different from the version that China has embraced over the last two decades.
- Knowledge too is dividing between capitalist models and cooperative alternatives. A decade ago, every government’s industrial policies put a premium on the creation and protection of intellectual property. Universities were forced to commercialise their ideas, on the grounds that without financial incentives there would be no way to galvanise biotechnology or the next generation of artificial intelligence. Yet against expectations different models have thrived as well. A high proportion of the software used in the internet is open source. The creative commons approach is gaining ground in culture as an alternative to traditional copyright and Wikipedia has become an unlikely symbol of post-capitalism.
- The third place we should look for changes is the world of work.
- Cooperatives like the Mondragon group (which has over 100,000 employees and has doubled in size each decade) and employee-owned firms like John Lewis, have thrived. In other sectors, too, there has been a long-term trend towards more people wanting work to be an end as well as a means, a source of fulfilment as well as earnings. The decisive issue here, however, is whether capitalism can find a new accommodation with the family. Capitalism is being brought ever more intensively into family life, and many of the areas of greatest prospective employment growth are on the periphery of the family, in health and care. But everywhere there are also signs of a tense divide between work and family as a rising proportion of employees, especially women, have to simultaneously care for young infants and ageing parents. Volumes of evidence now confirm the vital role that families play in nurturing the skills and attitudes of future citizens, yet we are still far short of a new architecture of rights and flexibilities.
- Governments may also be drawn further into financial services. So far the financial services industry has been remarkably slow to offer products better fitted to contemporary needs—like variable mortgages that can be put on hold for periods out of work. But some governments (such as Denmark and Singapore) have created personal budget accounts for citizens, and it’s not hard to imagine some offering services where people can borrow money for a period of retraining, parental leave or unemployment, and then repay through the tax system over 20 or 30 years, or through a charge on homes, with much lower transaction costs than the banks.
- Personal welfare accounts; personal budgets in health; personal carbon allowances. All may turn out to be distinctive parts of the architecture of a reformed state that pools risks while also personalising its services. All may be part of new deals that combine new rights with greater obligations to save, to pay for health and education, and to share the costs that will come from greater flexibility at work.
- The last great accommodations were about the state, and states are being pulled back into much more active roles as the recession bites. But some of the most important guarantees of security lie beyond the direct reach of government. In the US the proportion of people who say that they have no one to talk to about important issues has risen from 10 per cent to 25 per cent in 20 years. Contemporary biology and social science has confirmed just how much we are social animals—dependent on others for our happiness, our self-respect, our worth and even our life. There is no inherent contradiction between capitalism and community. But we have learned that these connections are not automatic: they have to be cultivated and rewarded, and societies that invest large proportions of their surpluses on advertising to persuade people that individual consumption is the best route to happiness end up paying a high price.

31 Mar 09

Open the Future: One Model for a New World Economy

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Resilience economics continues to uphold the elements of previous economic models that offer continued value: freedom and openness from capitalism at its best; equality and a safety net from socialism's intent. But it's not just another form of "mixed economy" or "social democracy." The focus is on something entirely new: decentralized diversity as a way of managing the unexpected.
Decentralized diversity (what we sometimes call the "polyculture" model) means setting the rules so that no one institution or approach to solving a problem/meeting a need ever becomes overwhelmingly dominant. This comes at a cost to efficiency, but efficiency only works when there are no bumps in the road. Redundancy works out better in times of chaos and uncertainty -- backups and alternatives and slack in the system able to counter momentary failures.
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- It generates less wealth than traditional capitalism would, at least when it was working well, but is far less prone to wild swings, and has an inherent safety net (what designers call "graceful failure") to cushion downturns.
- Lastly, the resilience economy has adopted a much more active approach to looking ahead. Not predicting, not even planning -- no "five year plans" here. It's usually referred to as "scanning," and the focus is less on visions of the future than on early identification of emerging uncertainties. Resilience economists are today's foresight specialists.
- What does this all look like for everyday people? For most of us, it's actually not far off from how we lived a generation ago. We still shop for goods, although the brands are more numerous and there are far fewer "big players" -- and those that emerge tend not to last long. People still go to work, although more and more of us engage in micro-production of goods and intellectual content. And people still lose their jobs and suffer personal economic problems... but, again, there's far less risk of economic catastrophe, and some societies are even starting to experiment with a "guaranteed basic income" system.

09 Mar 09

Capitalism Beyond the Crisis - The New York Review of Books

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I would separate out three questions from the many that can be raised. First, do we really need some kind of "new capitalism" rather than an economic system that is not monolithic, draws on a variety of institutions chosen pragmatically, and is based on social values that we can defend ethically?
The second question concerns the kind of economics that is needed today, especially in light of the present economic crisis. How do we assess what is taught and championed among academic economists as a guide to economic policy—including the revival of Keynesian thought in recent months as the crisis has grown fierce? More particularly, what does the present economic crisis tell us about the institutions and priorities to look for? Third, in addition to working our way toward a better assessment of what long-term changes are needed, we have to think—and think fast—about how to get out of the present crisis with as little damage as possible
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- All affluent countries in the world—those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others—have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.
- an economy can operate effectively only on the basis of trust among different parties. When business activities, including those of banks and other financial institutions, generate the confidence that they can and will do the things they pledge, then relations among lenders and borrowers can go smoothly in a mutually supportive way.
- When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.^[1]
- The most immediate failure of the market mechanism lies in the things that the market leaves undone.
- The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments. A subprime lender who misleads a borrower into taking unwise risks can now pass off the financial assets to third parties—who are remote from the original transaction. Accountability has been badly undermined, and the need for supervision and regulation has become much stronger.
- The insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation that, as Adam Smith argued, tends to grip many human beings in their breathless search for profits.
  
  Smith called the promoters of excessive risk in search of profits "prodigals and projectors"—which is quite a good description of issuers of subprime mortgages over the past few years.
- the cumulative downturn that we are observing right now, which is edging us closer to a depression, has clear Keynesian features; the reduced incomes of one group of persons has led to reduced purchases by them, in turn causing a further reduction in the income of others.
- One economist whose current relevance has been far less recognized is Keynes's rival Arthur Cecil Pigou
- Pigou focused particularly on the need to unfreeze the credit market when the economy is in the grip of excessive pessimism:
- Despite huge injections of fresh liquidity into the American and European economies, largely from the government, the banks and financial institutions have until now remained unwilling to unfreeze the credit market. Other businesses also continue to fail, partly in response to already diminished demand (the Keynesian "multiplier" process), but also in response to fear of even less demand in the future, in a climate of general gloom (the Pigovian process of infectious pessimism).
- The contrast between Pigou and Keynes is relevant for another reason as well. While Keynes was very involved with the question of how to increase aggregate income, he was relatively less engaged in analyzing problems of unequal distribution of wealth and of social welfare. In contrast, Pigou not only wrote the classic study of welfare economics, but he also pioneered the measurement of economic inequality as a major indicator for economic assessment and policy.
- Since the suffering of the most deprived people in each economy—and in the world—demands the most urgent attention, the role of supportive cooperation between business and government cannot stop only with mutually coordinated expansion of an economy. There is a critical need for paying special attention to the underdogs of society in planning a response to the current crisis, and in going beyond measures to produce general economic expansion. Families threatened with unemployment, with lack of medical care, and with social as well as economic deprivation have been hit particularly hard. The limitations of Keynesian economics to address their problems demand much greater recognition.
- (Pigou too contributed to this subject with his emphasis on the "external effects" of market transactions, where the gains and losses are not confined only to the direct buyers or sellers.) This is, of course, a long-term issue, but it is worth noting in addition that the bite of a downturn can be much fiercer when health care in particular is not guaranteed for all.
- For example, in the absence of a national health service, every lost job can produce a larger exclusion from essential health care, because of loss of income or loss of employment-related private health insurance. The US has a 7.6 percent rate of unemployment now, which is beginning to cause huge deprivation.
- Smith and Pigou have the reputation of being rather conservative economists, many of the deep insights about the importance of nonmarket institutions and nonprofit values came from them, rather than from Keynes and his followers.
- Since the Chinese dropped universal health insurance in 1979, Kerala—which continues to have it—has very substantially overtaken China in average life expectancy and in indicators such as infant mortality, despite having a much lower level of per capita income. So there are opportunities for poor countries as well.
- The present economic crises do not, I would argue, call for a "new capitalism," but they do demand a new understanding of older ideas, such as those of Smith and, nearer our time, of Pigou, many of which have been sadly neglected.

23 Feb 09

Paradox of Capitalism

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07 Feb 09

Noah Feldman says politics and religion are technologies | Video on TED.com

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04 Feb 09

The Piracy Paradox: Financial Page: The New Yorker

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22 Jan 09

Is Ethical Capitalism Possible?

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08 Jan 09

Op-Ed Contributors - The End of the Financial World as We Know It - NYTimes.com

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01 Dec 08

Dean Kamen's Water Purifier - Biography of Dean Kamen - Esquire

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A survey of Globalisation: Globalisation's new phase | A bigger world | The Economist

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17 Nov 08

An offer you can refuse | Inspire and innovate | guardian.co.uk

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09 Nov 08

Karl Marx: did he get it all right? - Times Online

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05 Nov 08

Wealth gap creating a social time bomb | World news | The Guardian

Growing inequality in US cities could lead to widespread social unrest and increased mortality, says a new United Nations report on the urban environment.
...
But the report also identified what it believes is the emergence of a new urban trend, with many

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29 Oct 08

The China fix | open Democracy News Analysis

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A special report on the world economy: : Market fatigue | The Economist

Woman's touch helps hedge funds retain their value | Business | guardian.co.uk

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Why capitalism fails - The Boston Globe

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