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Understanding Unemployment

By ISMAEL HOSSEIN-ZADEH | CounterPunch | December 16, 2011

“A study of the struggle waged by the English working class reveals that, in order to oppose their workers, the employers either bring in workers from abroad or else transfer manufacture to countries where there is a cheap labor force. Given this state of affairs, if the working class wishes to continue its struggle with some chance of success, the national organisations must become international.”

–Karl Marx

To borrow a metaphor from the medical sciences, an effective cure requires a sound diagnosis. Yet, in the face of the current plague of unemployment the Keynesian economists issue all kinds of passionate prescriptions to remedy the problem of joblessness without paying necessary attention to its root causes.

According to these economists, the origins of the ongoing high rates of unemployment (and of the underlying economic crisis in general) can be traced back to Ronald Reagan: his election to the presidency in 1980 and the subsequent rise of Neoliberalism brought forth an economic doctrine that has gradually led to the reversal of the Keynesian demand-management strategies of economic stimulation. So, for most Keynesian/liberal economists and politicians, Reagan is the pivotal figure and 1980 is the watershed year:

“Before 1980, economic policy was designed to achieve full employment, and the economy was characterized by a system in which wages grew with productivity. This configuration created a virtuous circle of growth. Rising wages meant robust aggregate demand, which contributed to full employment. Full employment in turn provided an incentive to invest, which raised productivity, thereby supporting higher wages.

“After 1980, with the advent of the new [Neoliberal] growth model, the commitment to full employment was abandoned as inflationary, with the result that the link between productivity growth and wages was severed. In place of wage growth as the engine of demand growth, the new model substituted borrowing and asset price inflation. Adherents of the neo-liberal orthodoxy made controlling inflation their primary policy concern, and set about attacking unions, the minimum wage, and other worker protections” [1].

While this account of US economic policies and developments of the past several decades is shared by most Keynesians and other critics of Neoliberalism, it suffers from a number of weaknesses.

First, the claim that the abandonment of Keynesian policies in favor of Neoliberal ones began with the 1980 arrival of Ronald Reagan in the White House is factually false. Indisputable evidence shows that the date on the Keynesian prescriptions of economic stimulation expired at least a dozen years earlier. Keynesian policies of economic expansion through demand management had run out of steam (i.e., reached their systemic limits) by the late 1960s and early 1970s; they did not come to a sudden, screeching halt the moment Reagan sat at the helm.

The questioning and the gradual abandonment of the Keynesian strategies took place not simply because of purely ideological proclivities or personal preferences of Ronald Reagan and other “right-wing” Republicans, as many Keynesians argue, but because of actual structural changes in economic or market conditions, both nationally and internationally. As discussed in my previous essay on this subject [2], Keynesian-type policies were pursued in response to the Great Depression and in the immediate aftermath of WW II as long as political forces and economic conditions of the time rendered those policies effective, or profitable. Those favorable conditions included nearly unlimited demand for US manufactures, both at home and abroad, and the lack of competition for both US capital and labor, which allowed US workers to demand decent wages and benefits while at the same time enjoying higher rates of employment.

By the late 1960s and early 1970s, however, both US capital and labor were no longer unrivaled in global markets. Furthermore, during the long cycle of the immediate post-war expansion US producers had invested so much in fixed/constant capital, or capacity building, that by the late 1960s their profit rates had begun to decline as the capital-labor ratio and other “sunk costs” of their operations had become too high. More than anything else, it was these profound changes in the actual conditions of production that precipitated the gradual rejection of the Keynesian economics.

Second, not only is the Keynesians’ narrative of the actual developments that led to the demise of Keynesian policies and the rise of Neoliberalism inaccurate, but also their theory or explanation of the ongoing problem of unemployment (and of the economic crisis in general) is woefully deficient. By blaming the unemployment on Neoliberalism, or “Neoliberal capitalism,” as some Keynesians argue [3], instead of capitalism per se, proponents of Keynesian economics tend to lose sight of the structural or systemic causes of unemployment: the secular and/or systemic tendency of capitalist production to constantly replace labor with machine, and to thereby create a sizable pool of the unemployed, or a “reserve army of labor,” as Karl Marx put it. This means, of course, the higher the degree of industrialization and automation, the higher the potential of the reserve army of labor to expand. Marx described this tendency of capitalism to constantly create high levels of unemployment (or low levels of wages) as an essential condition for profitable production in the following words:

“The greater the social wealth, the functioning capital, the extent and energy of its growth… the greater is the industrial army…. The relative mass of the industrial reserve army increases therefore with the potential energy of wealth. But the greater this reserve army in proportion to the active labor army, the greater is the mass of a consolidated surplus population… This is the absolute general law of capitalist accumulation. Like all other laws it is modified in its working by many circumstances” [4].

The fundamental laws of demand and supply of labor under capitalism are therefore heavily influenced, Marx argued, by the market’s ability to regularly produce a reserve army of labor, or a “surplus population.” The reserve army of labor, whose size is determined largely by the imperatives of capitalist profitability, is therefore as important to capitalist production as is the active (or actually employed) army of labor. Just as the regular and timely adjustment of the level of water behind a dam is crucial to a smooth or stable use of water, so is an “appropriate” size of a pool of the unemployed critical to the profitability of capitalist production. “The industrial reserve army,” Marx wrote,

“during periods of stagnation … weighs down the active army of workers; during the period of over-production and feverish activity, it puts a curb on their pretensions. The relative surplus population is therefore the background against which the law of the demand and supply of labour does its work. It confines the field of action of this law to the limits absolutely convenient to capital’s drive to exploit and dominate the workers” [5].

It is clear that the Marxian theory of the reserve army of labor, which shows how unemployment arises and why it is necessary to capitalism, provides a much better understanding of the current plague of unemployment than the Keynesian view, which blames it on “Neoliberal” capitalism—and which is essentially tantamount to explaining something by itself.

In the era of globalization of production and employment, the reserve army of labor has drastically expanded beyond national borders. According to a recent report by the International Labor Organization (ILO), between 1980 and 2007 the global labor force rose from 1.9 billion to 3.1 billion, a growth rate of 63 percent. Historical transition to capitalism in many less-developed parts of the world, which has led to the so-called de-peasantization, or proletarianization and urbanization, especially in countries such as China and India, is obviously a major source of the enlargement of the worldwide labor force, and its availability to global capital. The ILO report further shows that, worldwide, the ratio of the active (or employed) to reserve (or unemployed) army of labor is less than 50%, that is, more than half of the global labor force is unemployed [6].

It is this huge and readily available pool of the unemployed, along with the ease of production anywhere in the world—not some abstract or evil intentions of “right-wing Republicans and wicked Neoliberals,” as Keynesians argue—that has forced the working class, especially in the US and other advanced capitalist countries, into submission: going along with the brutal austerity schemes of wage and benefit cuts, of layoffs and union busting, of part-time and contingency employment, and the like. Ruthless Neoliberal policies of the past several decades, by both Republican and Democratic parties, are more a product of the structural changes in the global capitalist production than their cause. This is not to say that economic policies do not matter; but that such policies should not be attributed simply to capricious decision, malicious intentions or conspiratorial schemes.

It might be argued: “who cares what caused the unemployment? The fact is that it is a huge problem for millions; and why not simply replicate the Keynesian-type stimulus policies that were adopted in the immediate aftermath of the Great Depression and World War II?” Indeed, this seems to be the view of most of the Keynesian economists and liberal policy makers.

While prima facie this sounds like a reasonable suggestion, it suffers from the problem of issuing useless or ineffectual prescriptions based on inaccurate or flawed diagnoses. Not surprising, repeated Keynesian calls of the recent years for embarking on Keynesian-type stimulus packages in order to help end the recession and alleviate unemployment continue to sound hollow. For, under the changed conditions of production from national to global level, and in the absence of overwhelming political pressure from workers and other grassroots, there are simply no refills for Dr. Keynes’s prescriptions, which were issued on a national (not international or global) level, and under radically different socio-economic conditions—the solution now needs to be global.

Theoretically, the Keynesian strategy of a “virtuous circle” of high employment, high wages and economic growth is rather simple: massive government spending in the face of a serious economic downturn would raise employment and wages, inject a strong purchasing power into the economy and create a strong demand, which would then spur producers to expand and hire, thereby further raising employment, wages, demand, supply. . . . Many well-known Keynesians (such as Paul Krugman, Dean Baker, Thomas Palley, Robert Reich, and Randall Wray, for example) have in recent years repeatedly put forth this strategy of economic stimulation—only to see them fall on deaf ears.

Why?

While in theory (and on the face of it), the “virtuous circle” proposition is a relatively simple and fairly reasonable strategy, it suffers from a number of problems. To begin with, it seems to assume that employers and their government policy makers are genuinely interested in bringing about full employment, but somehow do not know how to achieve this objective. Full employment production, however, may not necessarily be the ideal, or profit-maximizing, level of production; which means it may not be a real objective of employers. As explained above, a sizable pool of the unemployed is as essential to capitalist profitability as is the number of workers needed to be actually employed. In its drive to keep the labor cost as low as possible, by keeping the working class as docile as possible, capitalism tends to prefer high unemployment and low wages to low unemployment and high wages. This explains why, for example, in reaction to the ongoing high levels of unemployment in the United States, the Obama administration (and the US government in general) has been making a lot of hollow, echoing noise about “jobs programs” without seriously embarking on a genuine plan of job creation a la FDR.

Secondly, the Keynesian argument that a “virtuous circle” of high employment, high wages, strong demand and economic growth is relatively easily achievable only if it were not due to the opposition of employers, or “bad” policies of Neoliberalism, seems to be based on the assumption that employers/producers are oblivious to their own self-interest. In other words, the argument presumes that it is not in the interests of employers to drive the wages too low as this would be tantamount to undermining consumer demand for what they produce. If only they were mindful of the benefits of the proverbial “Ford wages” to their sales, the argument goes, could they help both themselves and their workers, and bring about economic growth and prosperity for all. The well-known liberal professor (and former Labor Secretary under President Clinton) Robert Reich’s view on this issue is typical of the Keynesian argument:

“For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling. . . . That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages. . . . The basic bargain is over. . . . Corporate profits are up right now largely because pay is down and companies aren’t hiring. But this is a losing game even for corporations over the long term. Without enough American consumers, their profitable days are numbered. After all, there’s a limit to how much profit they can get out of cutting American payrolls. . . .” [7].

There are two major problems with this argument. The first problem is that it assumes (implicitly) that US producers depend on domestic workers not only for employment but also for sale of their products—as if it were a closed economy. In reality, however, US producers are increasingly becoming less and less dependent on domestic labor for either employment or sales as they steadily expand their export/sales markets abroad. Transnational capital’s consumer and labor markets are now spread across the globe. As Professor Alan Nasser recently pointed out (in a CounterPunch article), “On both the supply [employment] side and the demand side, the US worker/consumer is perceived as incrementally inessential” [8].

President Obama and his top economic advisers have been specially keen, indeed aggressive, on expanding US export markets to make up for the loss of domestic purchasing power. For example, in a speech (on his National Export Initiative) to the annual conference of the Import-Export Bank (March 11, 2010) the president pointed out: “The world’s fastest-growing markets are outside our borders. We need to compete for those customers because other nations are competing for them.” Mr. Obama’s chairman of the Council on Jobs and Competitiveness, Jeffrey Immelt, likewise states: “Today we go to Brazil, we go to China, we go to India, because that’s where the customers are” [9].

The second problem with Professor Reich’s (and his Keynesian co-thinkers’) argument of “high wages as the engines of virtuous cycles” of growth and expansion is that wages and benefits are micro- or enterprise-level categories that are decided on by individual employers and corporate managers, not by some macro or national level planners (as in a centrally-planned economy) of aggregate demand. In other words, individual producers (large or small) view wages and benefits first, and foremost, as a major cost of production that needs to be minimized as much as possible; and only secondarily, if ever, as part of the national aggregate demand that may (in roundabout ways) contribute to the sale of their products. This is another example of how Marx’s theory of capitalist exploitation and wage-determination (as a subsistence-based historical category) is superior to the Keynesian view that, in a manner of wishful thinking, hopes that producers would be wise and generous enough to pay “sufficient” wages in order to sell their products!

Keynesian economists passionately talk about “virtuous cycles” of high employment, high wages and high growth as if there are no limits to such expanding, upward spiraling cycle. It is well established, however, both theoretically and empirically, that such virtuous cycles are bound to be temporary because as they expand they also sow the seeds of contraction. A discussion of economic cycles and the underlying theories of capitalist crisis is beyond the purview of this essay. Suffice it to point out that, contrary to the arguments of Keynesian economists, an expanding cycle of accumulation and high levels of employment may not necessarily be accompanied by rising wages. If it does, it would be temporary because, sooner or later, the rising wages would cut into profitability imperatives, which would then trigger the employers’ reaction to curtail wages and benefits—by either curtailing or outsourcing production and/or employment.

This means that not only may growth and expansion not be precipitates or accompanied by high wages, as Keynesian economists claim, but (on the contrary) by low wages, or low cost of labor. More often than not, capitalism flourishes on the poverty, compliance and, therefore, low cost of labor. Marx characterized capitalism’s ability to create a big pool of the unemployed, or “relative surplus population,” in order to create a largely poor and meek working class as “immiseration” of the labor force, a built-in mechanism that is essential to the “general law” of capitalist accumulation:

“In proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.… The law which always holds the relative surplus population in equilibrium with the extent and energy of accumulation rivets the worker to capital more firmly than the wedges of Hephaestus held Prometheus to the rock. It makes an accumulation of misery a necessary condition, corresponding to the accumulation of wealth. Accumulation at one pole is, therefore, at the same time accumulation of misery, the torment of labour, slavery, ignorance, brutalization and moral degradation at the opposite pole, i.e. on the side of the class that produces its own product as capital” [10].

A major flaw of the Keynesian reform or restructuring package is that it consists of a set of populist proposals that are devoid of politics, that is, of political mechanisms that would be necessary to carry them out. They rest largely on the hope that, in an independent or disinterested fashion, the state can control and manage capitalism in the interest of all. This is, however, no more than wishful thinking, since in reality it is the powerful capitalist interests that elect and control the government, not the other way around.

In response to criticisms of this kind, Keynesians are quick to invoke the experience of the “golden years” (1948-1968) of the US economy in support of their arguments. It is true that during that long cycle of expansion high employment, high wages, high demand and high growth reinforced each other in the fashion of a virtuous cycle. But the constellation or convergence of a set of propitious socioeconomic conditions (political pressure from workers and other grassroots, fear of revolution and radical change, unrivaled US labor and capital, unlimited demand for US goods and service, both on a national and international levels, and more) that precipitated and nurtured that long cycle of expansion were unique historical circumstances of the time. Empirical observations or conjunctural developments under certain/specific circumstances ought not to be facilely extrapolated, generalized, and elevated to the level of a general theory, or a universal/timeless pattern of actual developments. Such an intellectual exercise would be tantamount to empiricism through and through—not scientific or realistic inquiry into a theoretical understanding of the actual socioeconomic developments of the day.

To sum up, the Marxian theory of unemployment, based on his theory of the reserve army of labor, provides a much better explanation of the protracted high levels of unemployment than the Keynesian view that attributes the plague of unemployment to the “misguided” or “bad” policies of Neoliberalism. Likewise, the Marxian theory of subsistence or near-poverty wages, also based on his theory of the reserve army of labor, provides a more satisfactory understanding of how or why such poverty levels of wages, as well as a generalized or nationwide predominance of misery, can go hand-in-hand with “healthy” or high levels of corporate profits than the Keynesian perceptions, which view a high level of wages as a necessary condition for a “virtuous” or expansionary economic cycle. Perhaps more importantly, the Marxian view that meaningful, lasting economic safety-net programs can be carried out only through overwhelming pressure from the masses—and only on a coordinated global level—provides a more logical and promising solution to the problem of economic hardship for the overwhelming majority of the world population than the neat, purely intellectual, and apolitical Keynesian stimulus packages on a national level, which are based on the hope or illusion that the government can control and manage capitalism “in the interest of all.” No matter how long or loud or passionately our good-hearted Keynesians beg for jobs and other New Deal-type reform programs, their pleas for the implementation of such programs are bound to be ignored by the government of big business. Only by mobilizing the masses of workers and other grassroots and fighting, instead of begging, for an equitable share of what is truly the product of their labor, the wealth of nations, can the working majority achieve economic security and human dignity.

References

[1] Thomas I. Palley, “America’s Exhausted Paradigm,” http://newamerica.net/files/Thomas_Palley_America%27s_Exhausted_Paradigm.pdf 

[2] Ismael Hossein-zadeh, “Keynesian Myths and Illusions,” http://www.counterpunch.org/2011/11/04/keynesian-myths-and-illusions/

[3] David M. Kotz, “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism,” Review of Radical Political Economics, Vol. 41, No. 3 (2009), pp. 305-317.

[4] Capital, Vol. 1 (Moscow, no date), pp. 592-93.

[5] Capital, vol. 1 (London: Penguin, 1976), P. 792.

[6] International Labor Organization (ILO), The Global Employment Challenge (Geneva, 2008); as cited in “The Global Reserve Army of Labor and the New Imperialism” (by John Bellamy Foster, Robert W. McChesney and R. Jamil Jonna): http://www.globalresearch.ca/index.php?context=va&aid=27549 

[7] Robert Reich, “Restore the Basic Bargain” (November 28, 2011): http://robertreich.org/post/13469691304

[8] Alan Nasser, “The Political Economy of Redistribution: Outsourcing Jobs, Offshoring Markets,” http://www.counterpunch.org/2011/12/02/outsourcing-jobs-offshoring-markets/ 

[9] As cited by Alan Nasser, Ibid.

[10] Capital, vol. 1 (London: Penguin, 1976), p. 799.

~

Ismael Hossein-zadeh is Professor Emeritus of Economics, Drake University, Des Moines, Iowa. He is the author of The Political Economy of U.S. Militarism (Palgrave – Macmillan 2007) and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press.

December 17, 2011 Posted by aletho | Economics, Timeless or most popular | Leave a comment

Out of the Backyard: New Latin American and Caribbean Bloc Defies Washington

By Benjamin Dangl | Toward Freedom | 07 December 2011

Rain clouds ringed the lush hillsides and poor neighborhoods cradling Caracas, Venezuela as dozens of Latin American and Caribbean heads of state trickled out of the airport and into motorcades and hotel rooms. They were gathering for the foundational summit of the Community of Latin American and Caribbean States (CELAC), a new regional bloc aimed at self-determination outside the scope of Washington’s power.

Notably absent were the presidents of the US and Canada – they were not invited to participate. “It’s the death sentence for the Monroe Doctrine,” Nicaraguan President Daniel Ortega said of the creation of the CELAC, referring to a US policy developed in 1823 that has served as a pretext for Washington’s interventions in the region. Indeed, the CELAC has been put forth by many participating presidents as an organization to replace the US-dominated Organization of American States (OAS), empower Latin American and Caribbean unity, and create a more equal and just society on the region’s own terms.

The CELAC meeting comes a time when Washington’s presence in the region is waning. Following the nightmarish decades of the Cold War, in which Washington propped up dictators and waged wars on Latin American nations, a new era has opened up; in the past decade a wave of leftist presidents have taken office on socialist and anti-imperialist platforms.

The creation of the CELAC reflected this new reality, and is one of various recent developments aimed at unifying Latin America and the Caribbean as a progressive alternative to US domination. Other such regional blocs include the Union of South American Nations (UNASUR) which has successfully resolved diplomatic crises without pressure from Washington, the Bank of the South, which is aimed at providing alternatives to the International Monetary Fund and the World Bank, and the Bolivarian Alliance of Latin America (ALBA), which was created as an alternative to the Free Trade Area of the Americas, a deal which would have expanded the North American Free Trade Agreement throughout Latin America, but failed due to regional opposition.

The global economic crisis was on many of the leaders’ minds during the CELAC conference. “It seems it’s a terminal, structural crisis of capitalism,” Bolivian President Evo Morales said in a speech at the gathering. “I feel we’re meeting at a good moment to debate … the great unity of the countries of America, without the United States.”

The 33 nations comprising the CELAC make up some 600 million people, and together are the number one food exporter on the planet. The combined GDP of the bloc is around $6 trillion, and in a time of global economic woes, the region now has its lowest poverty rate in 20 years; the growth rate in 2010 was over 6% – more than twice that of the US. These numbers reflect the success of the region’s social programs and anti-poverty initiatives.

In an interview with Telesur, Evo Morales said the space opened by the CELAC provides a great opportunity to expand the commerce of Latin America and the Caribbean in a way that does not depend on the precarious markets of the US and Europe. In this respect he saw a central goal of the CELAC being to “implement politics of solidarity, with complementary instead of competitive commerce to resolve social problems…”

While the US is the leading trading partner for most Latin American and Caribbean countries, China is making enormous inroads as well, becoming the main trade ally of the economic powerhouses of Brazil and Chile. This shift was underlined by the fact that Chinese President Hu Jintao sent a letter of congratulations to the leaders forming the CELAC. The letter, which Chávez read out loud to the summit participants, congratulated the heads of state on creating the CELAC, and promised that Hu would work toward expanding relations with the region’s new organization.

The US, for its part, did not send a word of congratulations. Indeed, Washington’s official take on the CELAC meeting downplayed the new group’s significance and reinforced US commitment to the OAS. Commenting on the CELAC, US Department of State spokesman Mark Toner said, “There [are] many sub-regional organizations in the hemisphere, some of which we belong to. Others, such as this, we don’t. We continue, obviously, to work through the OAS as the preeminent multilateral organization speaking for the hemisphere.”

Many heads of state actually saw the CELAC meeting as the beginning of the end for the OAS in the region. This position, held most passionately by leaders from Ecuador, Bolivia, Venezuela, Nicaragua and Cuba, was best articulated by Venezuelan President, and host of the CELAC meeting, Hugo Chávez. “As the years pass, CELAC will leave behind the old OAS,” Chávez said at the summit. “OAS is far from the spirit of our peoples and integration in Latin America. CELAC is born with a new spirit; it is a platform for people’s economic, political and social development, which is very different from OAS.” He later told reporters, “There have been many coup d’états with total support from the OAS, and it won’t be this way with the CELAC.”

However, the presidents involved in the CELAC vary widely in political ideology and foreign policy, and there were differing opinions in regards to relations with the OAS. Some saw the CELAC as something that could work alongside the OAS. As Mexican chancellor Patricia Espinosa said, the OAS and the CELAC are “complementary forces of cooperation and dialogue.”

A test of the CELAC will be how it overcomes such differences and makes concrete steps toward developing regional integration, combating poverty, upholding human rights, protecting the environment and building peace, among other goals. The final agreements of the two day meeting touched upon expanding south to south business and trade deals, combating climate change and building better social programs across the region to impact marginalized communities. In addition, the CELAC participants backed the legalization of coca leaves (widely used as a medicine and for cultural purposes in the Andes), condemned the criminalization of immigrants and migrants, and criticized the US for its embargo against Cuba.

Various presidents at the CELAC spoke of how to approach these dominant issues. Nicaraguan President Daniel Ortega said the CELAC should “monitor and rate” the US anti-drug efforts. As long as the US continues its consumption of drugs, Ortega said, “All the money, regardless of by how much it’s multiplied, and all the blood, no matter how much is spilled” won’t end the drug trade.

Yet there are plenty of contradictions within the CELAC organization itself. The group is for democracy but includes the participation of Porfirio Lobo from Honduras, the president who replaced Manuel Zelaya in unfair elections following a 2009 military coup. The CELAC is for environmental protection, yet its largest participant, Brazil, is promoting an ecologically disastrous agricultural model of soy plantations, GMO crops and poisonous pesticides that are ruining the countryside and displacing small farmers. The group is for fairer trade networks and peace, yet various participating nations have already signed devastating trade deals with the US, and corrupt politicians at high levels of government across the region are deeply tied to the violence and profits of the transnational drug trade.

These are some of the serious challenges posed to Latin American and Caribbean unity and progress, but they do not cancel out the new bloc’s historical and political significance. The creation of the CELAC will likely prove to be a significant step toward the deepening of a struggle for independence and unity in the region, a struggle initiated nearly 200 years ago and largely led by Latin American liberator Simón Bolívar, whose legacy was regularly invoked at the CELAC conference.

In 1829, a year before his death, Bolívar famously said, “The United States appears destined by Providence to plague America with miseries in the name of Freedom.” Yet with the foundation of the CELAC under the clouds of Caracas, the march toward self-determination is still on.

***

Benjamin Dangl attended the CELAC conference, and is the author of Dancing with Dynamite: Social Movements and States in Latin America (AK Press, 2010).

December 7, 2011 Posted by aletho | Economics, Timeless or most popular | Leave a comment

Debt Slavery – Why It Destroyed Rome, Why It Will Destroy Us Unless It’s Stopped

By MICHAEL HUDSON | CounterPunch | December 2, 2011

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, also communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern rulers proclaimed clean slates for debtors to preserve economic balance

Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20 per cent (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned that “the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.”

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7^th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by cancelling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society – a conquest aimed at attaching interest-bearing debt claims for payment on as much of the economic surplus as possible.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s creditor oligarchy wins the Social War, enslaves the population and brings on a Dark Age

Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when publican creditor “knights”  arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside.

Creditors find a legalistic reason to support parliamentary democracy

When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.

Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” Richard Ehrenberg wrote in his Capital and Finance in the Age of the Renaissance (1928): “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy which has lasted to this day.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” (Charles Wilson, England’s Apprenticeship: 1603-1763: 1965.) The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt,” the least credit-worthy and worst armed country in Europe, fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance accommodates itself to democracy, but then pushes for oligarchy

While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 per cent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting planning away from elected public representatives to bankers

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. government; oligarchy vs. democracy

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that the economy will collapse if they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931. A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

December 2, 2011 Posted by aletho | Economics, Timeless or most popular | Leave a comment