Political Economy: March 2009 Archives

The May 2009 issue of The Atlantic features a 7,000-word article by Simon Johnson, former Chief Economist of the IMF. Johnson provides his own summary of how we have come to this, and draws interesting parallels between the US and other, developing, countries, who suffered from a sudden implosion of their financial sectors. He talks about the growth of America's financial sector into a business elite that dictates government policies across administrations and keeps getting bigger and bigger.

This business elite did not only bring the current crisis upon us, says Johnson, but it is also preventing the government from taking the necessary measures to get us out of it by fixing what's wrong. The solution he proposes is to temporarily nationalize all the ailing banks and financial institutions, chop them apart, heal them, and privatize them.

While Johnson's description of the excessive influence of America's financial industry is correct, he is mistaking the symptoms for the causes of America's current illness. The financial sector became as big as it is due to excess liquidity. Large amounts of artificially cheap money made the financial industry grow, and not the other way around. The reason for all this cheap money in America is China's habit of spending the proceeds from selling goods priced using an artificially low currency (RMB) to purchase US Treasury Bonds in order to ensure (artificially) low interest rates in the US. This arrangement, of course, was convenient for both China and the US, and each of them is equally responsible for it.
 

The above was written by Karl Marx in his report for the commission to examine the activities of the Bakuninists in 1872.

Most people are not aware of the fact that Marx was a big opponent of Statism, the idea that the state should have substantial centralized control over social and economic affairs.

Marx believed that the state and political authority should be abolished, but that before this is done, political power must first be taken over by the workers, and then used to abolish the economic conditions that gave birth to the state to begin with. On this point, Marx was at odds with other popular socialist (and anarchist) thinkers of the time - such as Proudhon and Bakunin - who believed that the state and political authority should be abolished first.

This difference comes from the fact that Marx and Engles believed that "state power is nothing more than the organisation with which the ruling classes, landlords and capitalists have provided themselves in order to protect their social prerogatives". So, while the anarchists saw the economic order as a result of the state and its power, Marx saw the "modern" (at the time) state as a system established to serve and protect the existing economic order by the owners of capital.

More on this in Martin Buber's Paths in Utopia, and Karl Marx's The Bakuninists at Work: An account of the Spanish revolt in the summer of 1873.

Now that Bush is gone and blaming America for all of the world's troubles is (slowly) falling out of fashion,  more and more pundits recognize China's role in creating the mess we're in.

More accurately, the current financial crisis is a result of shared "efforts" by China and the US. China provided artificially cheap products due to an undervalued currency, the US provided willing buyers, China used the profits from these sales to buy US Treasury Bonds, and the US in turn kept its interest rates low and continued to buy Chinese goods. The results of these "efforts" were exacerbated by traditions in both countries: In the US - spend like there's no tomorrow; in  China - save like today is as good as it gets.

The combination of cheap goods and cheap money (low interest rates) created excess capacity in corresponding sectors in both China and the US, and gave rise to an interesting social phenomenon -  mis-allocation of talent.