Financial crisis and the organization of knowledge

It will come as no surprise to readers that I’m no fan of the work of Hernando de Soto. However, he’s on to something when he argues that, in the lead up to the financial crisis of 2009, a great deal of economic knowledge was destroyed.

Basically, de Soto starts from the presumption that “reliable economic knowledge” is crucial to the functioning of capitalism.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world’s widening markets could, in the words of France’s free-banking champion Charles Coquelin, “pick up the thousands of filaments that businesses are creating between themselves.”

The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

However, something fundamental changed in the last 20 years or so: North Americans and Europeans destroyed many of those facts.

The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don’t know and can’t prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

As a result, neither bankers nor the bank regulators, much less customers of bank loans or those who purchased simple and complex financial products, had the appropriate “economic facts” about the financial system.

If the destruction of knowledge played a role both in causing the crisis and in creating a weak recovery, we then have to ask what is in capitalism as it developed during the last 20 years allowed this to happen. In particular, what role did the complex interplay between the anarchy and policing of capitalist markets, between private and public knowledge, between creating and shifting risk play in the way knowledge was both organized and destroyed both before and during the financial crisis that begun in the fall of 2008.

What de Soto seems not to understand is that the same capitalist interests that govern the world economy create the conditions in which “arbitrary interests can trump facts and paper swirls out of control.”

SOS racisme

French football was already is disarray after the players’ strike and the first-round exit of the national team from World Cup 2010. Now, it is mired in allegations of racism.

French football was plunged into turmoil again when the national federation’s (FFF) technical director Francois Blaquart was suspended on Saturday amid a row over an alleged project to enforce racial quotas in youth academies. . .

On Thursday, French investigative website Mediapart (www.mediapart.fr), citing sources within the FFF, said [national technical director François] Blaquart proposed to enforce racial quotas to limit the number of players of black or Arab origin in youth academies.

On Saturday, Mediapart published a verbatim report of a meeting at which Blanc, Blaquart, under-21 coach Erick Mombaerts and under-20 coach Francis Smerecki, among others, had a debate over African players with dual nationality groomed in France eventually opting to play for their country of origin.

France under Sarkozy has never directly confronted the conditions leading up to the 2005 riots in the North African banlieues. And now it is facing facing a reemergence of far-right ideas, with National Front presidential candidate Marine Le Pen soaring in recent opinion polls.

This year, April in Paris is a feeling we won’t want to reprise.

United states of inequality: fact #18

The Stanford Center for the Study of Poverty and Inequality has collected 20 facts about inequality in the United States that “everyone should know.”

The eighteenth one, illustrated above, refers to job losses in the past four recessions (measured in terms of the percent decline in employment from peak month):

Employment fell by 3.1 million jobs during 2008. The job losses were more widespread and severe than during the previous two recessions in 1990-1991 and 2001 and in fact the fall in employment is comparable to that in the deeper recession of 1981-1982.

Since 2008 the jobs losses have increased, surpassing the gravity of the recession of 1981-82. Here’s what job losses looked like in September 2010 (compared to all postwar recessions):

Misadventures of “unemployed man”

source

Nobody wants to read the story of “unemployed man” but he won’t go away. In fact, in many ways his situation is getting worse.

Officially, there are about 13 and a half million unemployed people in the United States. If we add those people who are working part-time for economic reasons (8.4 million), workers who are marginally attached to the labor force (2.4 million), and discouraged workers (about a million), there are over 25 million unemployed and underemployed workers in the United States.

The time “unemployed man” has been without a job is also getting longer. More than 6 million people have been officially unemployed for 27 weeks or more. That’s 45 percent of the total.

The chances of being “unemployed man” are much higher if you’re young (24.5 percent if you’re between the ages of 16 and 19), Black (15.5 percent), or Hispanic (11.3 percent).

“Unemployed man” is also running out of jobless benefits. The total number of people claiming benefits in all programs in mid-March was 8 and a half million (here is the breakdown of benefits). That leaves about 5 million unemployed people who are not receiving benefits of any sort.

Clearly, the misadventures of “unemployed man” make for terrible bedtime reading. So, instead, the politicians and mainstream economists distract us by telling doom-and-gloom stories about soaring fiscal deficits and trying to convince us of the need to slash entitlement programs. But that won’t save us from the nightmare of millions of people who are without a full-time job, for longer and longer periods of time, and who are running out of jobless benefits at alarming rates.

Cartoon of the day

US is a low-tax country

The next time someone—a neoclassical economist, wealthy individual, or large corporation—complains that the U.S. tax burden is too high, just show them the facts above.

Whether measured in terms of total government revenues or total tax revenue as a share of GDP, U.S. taxes are low by international standards. The problem is not that taxes are too high but that those who can pay—wealthy individuals and large corporations—do not and those who should know better—neoclassical economists—do their bidding.

So you want to be a mainstream academic economist

When reality bites back

Brad DeLong [ht: cw]—he who grasps “reality with both hands”—now counts himself among those economists who, in the run-up to the current crises of capitalism, had “forgotten a fair amount that is relevant, and. . .been distracted by an enormous amount” that is not.

Apparently, what DeLong didn’t know is that reality would bite back.

I was shocked by how large a panic was produced by what seemed to me – and still does – relatively small losses (in terms of the size of the global economy) in subprime mortgages; by the weakness of risk controls at the major highly-leveraged banks; by how deep the decline in demand was; by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor-market supply and demand; and by how much core-country governments have been able to borrow to support demand without triggering any run-up in interest rates.

That puts him in good company with the rest of mainstream economists. For the most part, they still don’t get it. But DeLong, to give him credit, does fear for the future of the discipline.

It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

That’s it? That’s the best he can come up with? Admittedly, most of the people he’s now willing to let into the discipline have been at or outside the margins of mainstream departments of economics. But what about all the other economists who, since at least the middle of the nineteenth century, have contributed to our understanding of the uneven dynamics of capitalism—of capitalist crises, conspicuous consumption, uncertainty, financial fragility, globalization, the history of capitalism, and the like? I’m thinking of Marx, of course, but also Veblen, Hilferding, Mitchell, Kalecki, Robinson, Polanyi, Galbraith, Steindl, Baran, Sweezy, Clower, Leijonhufvud, and many others. They wouldn’t have been astonished by the scale of the catastrophe of the past three years nor were the people today who have read them and who draw from their work.

Once bitten, twice shy. That’s about as much reality it seems DeLong can take.

How time flies. . .

My, how time flies!

This is post number 1570 since I started this blog in the summer of 2009. I no longer blame it on the two former students who got me started. I don’t even blame the growing number of readers who, for whatever strange reasons, find something of interest here. It’s all the fault of this bizarre world, which keeps generating events and ideas to write about. . .

United states of inequality: fact #17

The Stanford Center for the Study of Poverty and Inequality has collected 20 facts about inequality in the United States that “everyone should know.”

The seventeenth one, illustrated above, refers to deregulation of the market for labor power:

The percentage of all wage and salary workers who are union members has declined from 24% in 1973 to 12.4% in 2008. The decline in the private sector was steeper than the decline in the public sector. At the same time as union membership declined, the real value of the minimum wage also fell by 25% in the 1980s, leading to a weakening influence of the minimum wage on the low-wage labor market. These two developments in combination may be understood as the foundation of the newly “deregulated” U.S. labor market.

The result of both developments (along with the adoption of new labor-saving technologies and the offshoring of many jobs) has been a stagnant real wage for the average worker. That, combined with rising productivity, has meant a rising rate of exploitation and higher profits for corporations.