Some notes on trade in the uneven development of capitalism

So some of my key takeaways from the class are that trade is important, but perhaps oversimplified in the discourse (Gerber, Samuelson), but we also don’t want to overestimate how much trade happens, because the bulk of economic activity is within borders, and does not cross borders (Freeman), and then there is the thing that has really stuck with me on how convergence might just be a pipe dream (Pritchett) which happens because the powerful countries set the rules of the game for their benefit, which is incredibly hypocritical because the now developed countries used various forms of protection on their way up, and these are what the powerful are saying not to use (Chang, Jomo). As a side note, I have had read Chang before, but not the book on trade and I really liked his work going in. I’m glad that I read Marx on free trade, because I was unaware of the speech, and in a way, it frames Marx as an acceleration of a sort, wanting to bring forth free trade in that it hastens the global revolution. We can question the man’s teleological views in retrospect, since we have this spread of “free” trade but now in the most globalized world since Keynes was lamenting the fall of the last globalization in 1914, it feels like the global proletarian revolution is far away, even if it feels closer than ever in my lifetime. Like we got one chance and it only caught on in one country and we forgot just how adaptable capitalism was to the shift of geopolitical power relations. The other thing that is big for me that I must keep reminding myself is that capitalism and trade are not just things that exist in a vacuum. They are relationships of production, as Harvey reminds us Marx calls “Value in Motion”, and as relationships they involve people making choices (and as economic science reminds us these people making those choices are fully aware value maximizers) and we have to give these individual people the respect that they may be constrained by the current economic system, they all have agency – capitalism is not a thing but a person driven process. This comes up for me in Harvey talking about his concept of “accumulation by dispossession,” creating crises and coming along and picking up the pieces. He quotes Mellon as supposedly saying that the crises “return capital to their rightful owner”.

For me, a lot of the reading in this class reinforces my own priors that a lot of economic activity is driven by power relationships, and power is often financial power. I don’t know if you had the chance to see it, but there was a panel discussion recently with Larry Summers, Greg Mankiw, and Emmanuel Saez. They’re discussing the big new inequality book that was released and Summers is talking down to Saez who was claiming that wealth begat political power. Summers was asking for one example of where a wealth tax would limit that political power and Saez, to his discredit could not find one example off the top of his head – and there I was watching like I was watching a football match and someone missed an easy goal, in disbelief. To me it is self-evident that wealth and political power go hand in hand. In the American context there is a study recently by a pair from Princeton and Northwestern who examine stated political preferences at income levels and how the people in congress vote and you see that if congress votes for the preferences of the middle class, it is almost wholly incidental, and the wealthy’s preferences are almost an exact map over the actual votes. The crazy thing to me was that this was Larry Summers, a person who in his public service career helped shut down the CFTC from regulating derivatives around the turn of the century and then after the crisis hit that was formed in part from his decision not to regulate derivatives spent a good bit of the administration’s political capital in bailing out the banks. Now you tell me, Larry Summers, how wealth influences political power. I suppose it is like that saying that fish don’t think about water because that is the surroundings.

But this is important because it telescopes from the state level to the level of international relations. As I wrote in the answer to the second question, there is a power structure in place because of the time element. The economic ground is not played on by equally matched competitors (and that’s using a zero-sum framework), but there are teams that through training or history have more skills. Even worse, the teams that are better and have the more skills also are the ones that pick the game and employ the referees. If we were inventing the rules of the game today and everyone was starting from the same place, maybe a world of free trade might be the best way to start. But that ignores the very strong issue of path dependency. It is not just that the drawing of borders creates their own issues, as we have seen with a century of decolonization and the turmoil that has caused. But there is also the built infrastructure. I think this was in the development class, but there was an example of how linkages in terms of railroads and even the placement of cities were made such that they were built for the best use of the colonizers (I think Lenin hits on this a bit too), so that for example, the   Democratic Republic of the Congo, which is the 11th largest country in the world in terms of land area is ruled from a city that is relatively geographically distant from the bulk of the land area,      Kinshasa being the capitol and largest city, on a river near the western Atlantic coast. The country was developed to make all goods able to flow that way towards the city and thus onto the European nation that ruled them from even further abroad. The DRC could have been a linchpin in the development of continent, but instead was used as just another place where resources were extracted. Looking at that path of development, it gives credence to ideas of dependency and unequal exchange, where developing country economists looked at the path of development and noticed the same things I’m writing about here, with Raul Prebisch noting: “Given the existing international division of labor, in which the developed center countries produced manufactured goods for export to the periphery and the less-developed peripheral countries produced primary products for export to the center, all benefits of trade would accrue to the center and none to the periphery”. They saw the relationship as purely extractive, and even worse in that by opening their goods to the world market, we saw what they described as declining terms of trade. This is when because of the relative abundance of goods that are on the market, they decrease in price. When developing country goods decrease in price then the country just has to export more and more so that they can get that useful foreign currency so that they can buy capital goods and create an industry of their own, and this is problematic because as writers like Prebisch saw, the things that were produced were lower value commodities that could be replicated by other nations – an example here is RAM memory. It started out as a good thing to manufacture because there were high returns on it but as more countries tried to specialize in making computer memory chips, the same sort of problem returned  such that more and more things had to be produced to make the same amount of foreign capital in return.

What we see is some sort of conveyor belt – or is it a treadmill? The idea is that capitalism spread itself out, and by its existence it created this new form of circulation but whole countries exist now in this subordinated class position through accidents of history, living at an equilibrium where there are a lot of underutilized assets, there is not much internal savings, and there is a class of people who are relatively well-off but the structure of society is not incentivizing  moving the whole country up the value ladder, as Baran describes this dependency.  Between then and now, there have been some examples of countries that have moved up the ladder. Korea and Japan and now China worked their way up through manufacturing and heavy state control of various forms. This seems to be the key for development through trade: don’t open your borders to free trade until you are ready for it. Some protection is good, and we don’t do enough. We can see pitfalls in that by protecting too long you create industries that are hothouse flowers that cannot compete on their own in the world market, where with the example of the Indonesian Aircraft Industry, you can misallocate resources. So, it is being smart and being lucky. This comes back around to the idea that the rules of the game are tilted against developing countries. We talk about the amazing Chinese story, but they have also been strongly controlled by the one-party state, a party that subverted many of the WTO recommendations right up to and even after being granted most favored nation status. One way to develop is to break the rules.

The question still lingers in if we can count these countries that have achieved growth as developed countries. I forget which of our authors made this point, but what happens once we start making all sorts of ad hoc taxonomies is that the demarcation points start to lose all meaning. Do we create a middle category and put them there? How much do we learn about the process of development by creating a certain set of criteria and then looking to see if a country fits the criteria or not? The problem with economics at a global scale is that there are only 200 countries and that’s really a small enough n it is hard to find patterns to generalize from. Each case goes through history as a special case with their own histories and contexts it’s easy to throw up your hands and say you have to talk about general cases, or even worse like the unbridled free trade enthusiast you just take one set of rules and say it applies everywhere and always at all time no matter what.

The ultimate question is how you make sure the world system exists and operates in an equitable and just manner, and here is where I must throw up my hands again. I’ll tie this together by looking at product cycle theory that Gerber introduces. The idea starts close to the source of economic power and once it is established as a thing then it can move away and then there is heavy production until a new idea comes along and then it is disseminated in the same way (Gerber 76). I see this as a flow here to there but as it is generalized there is no one place that is the center and there is no one place that is the periphery. It makes me go back to David Harvey on the crises of capitalism, where there are multiple points of contradiction. The thing is that the contradiction is never resolved for Harvey. Instead it is moved around. So as long as there is capitalism there will still be this flow from the center to the outside and then back around again. I think we will just see it move geographically as China or Korea becomes the center, then we can see Ethiopia be the workshop to the world. What we will continue to see even if there is absolute development so that all countries reach a level of development that is comparable to the western level of development today, there will still be relatively large gulfs between the most developed countries and those who worked on catching up. And all of this is dependent on not hitting ceilings on resource constraints or some sort of ecological catastrophe before that point is reached. As a natural pessimist, I am waiting for the end of the world in my lifetime before we will ever see the end of capitalism. In the short term though, I see Rodrik’s trilemma as being incredibly powerful as an explanatory device for the limits on the reach of the integrated world system – and these limits come back to the uneven development and perceived inequity in the capitalist relations. No one wants to share, and everyone believes their endowments come by some sort of divine right.   

Works Consulted:

Gerber, James. International Economics. Pearson, 2014.

 Myint, H., “The ‘Classical Theory’ of International Trade and the Underdeveloped Countries,” Economic Journal, 68(270), 317-337, June 1958.

Prasch, R. 1996. “Reassessing the theory of comparative advantage,” Review of Political Economy 8(1).

Samuelson, Paul, “International Trade and the Equalization of Factor Prices,” Economic Journal, 58(230), 163-184, 1948.

Deraniyagala, S., and Fine, Ben, “New Trade Theory Versus Old Trade Policy: A Continuing Enigma,” Cambridge Journal of Economics, 25, 809-825, 2001.


Freeman, Richard, “Trade Wars: The Exaggerated Impact of Trade in Economic Debate,” NBER working paper 10000, 2003.

Pritchett, Lant, “Forget Convergence: Divergence Past, Present, and Future,” Finance and Development, 33(2), 1996.

Chang, Ha-Joon, “Once Industrialized, Preach Free Trade”, South Bulletin 40, July 30, 2002.

Jomo, K. S., “Globalisation for Whom? A World for All.” 

Marx, K. and F. Engels. “Bourgeois and Proletarians.”
Marx, K. “On the Question of Free Trade.”
Marx, K. “German Ideology: The Rise of Manufacturing.”
Brewer, A.  “Luxemburg, Hobson, Hilferding, Bukharin, Lenin.”
Lenin, V. I. “The Export of Capital.”
Lenin, V. I. “Imperialism as a Special Stage of Capitalism”

Brewer, A.  “Baran”
Brewer, A.  “Dependency Theories”
Brewer, A.  “Emmanuel and Unequal Exchange”

Wade, Robert Hunter, “What Strategies are Viable for Developing Countries Today? The World Trade Organization and the Shrinking of ‘Development Space,” Review of International Political Economy, 10(4), 621-644, 2003.
Rodrik, D. 2002. “Feasible Globalizations,” NBER 9129
Milberg, W. 2004. “The changing structure of trade linked to global production systems: what are the policy implications?”

Harvey, D. “New Imperialism.”
Patnaik. 2004. “New Imperialism”

“GDP” https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) Accessed 10.27.2019




“Robinson Crusoe” https://en.wikipedia.org/wiki/Robinson_Crusoe https://en.wikipedia.org/wiki/Robinson_Crusoe Accessed 10.27.2019

“South Sudan” https://en.wikipedia.org/wiki/South_Sudan Accessed 10.26.2019

Two Sides to Free Trade

For my trade final, my professor framed an interesting set of questions, making up look at the two sides to the issue. It was fun to write, but I should not have set the pro-free trade position up as such a straw man.

Question 1: Let’s start, like any good economist, with an assumption. Assume that you have managed to pass this class and upon completion of other requirements you have graduated from school and found a job at an international financial institution that promotes free trade. You are given the task of writing a short piece that demonstrates the benefits of free trade to be used in convincing a developing country government to promote trade liberalization. Use the theoretical frameworks and models we have discussed in the class to demonstrate the benefits of free trade and how their country would gain from trade. Feel free to use graphs where needed. Make sure your arguments are clear, concise, and convincing.

Question 2: Let’s also assume that college took a toll on you and in the process you have developed a severe multiple-personality disorder problem. Hence, although by day you work at an international financial institution that promotes trade liberalization, at nights you turn into a blogger that writes critiques of free trade policies. Now, based on our lecture notes, textbook and other reading material you had, write a thorough critique of the theoretical arguments you have developed in your answer to the previous question. In your critique, make sure you discuss the potential problems with the model, its assumptions and its implications for developing countries. Again, make sure your arguments are clear, concise, and convincing.

Question 1: Memo from the IMF 

To: Salva Kiir Mayardit, President, South Sudan.

Mister President, let me tell you about the wonders of free trade. Absolute free trade is the path that will lead your people to the edge of greatness and develop your country in the best manner.

When we talk about economics, one of the best things to do is make a model. The world is an incredibly complicated organism, with billions of people making thousands of decisions every day, and a good many of those operate in the economic sphere, as workers or as investors or as consumers or savers. “The Economy” writ large is all around us. One could argue that most of our decisions are economics decisions in some way. So instead of talking about this highly complex organization, we can instead look at once person in isolation as a model of how all people work. 

The model that many economists use in looking at a society in isolation is Robinson Crusoe. What they will focus on the fact that we have a man who is trapped on an island who is looking to recreate society as he knew it on an island in isolation. All he has is his wits and the flotsam and jetsam from the ship he was sailing on that wrecked.  He lives his life in isolation, making shelter and procuring his own food. He lives in a state of complete self-reliance. He might not be the best shelter builder in the world, but he is the best shelter builder available. This goes with every act he does. Might not be the best fisherman or farmer or bookkeeper (He’s English so of course he keeps dedicated records of everything), but he is the best of all these that he has access too.

We could leave Mister Crusoe there, and alone in that state of self-reliance if that was the end of the story. We wouldn’t be mentioning him here if that was the end of the story. What happens is that Crusoe finds someone else on the island. Where he thought he was all alone he was solely responsible for his own upkeep, this was a situation we could define as autarchy, which the national equivalent of Crusoe in our first case. But if there is someone else on the island, they do not have to work independently. Instead, they can focus on the things that they are better at. Let us say that there are only two things to eat on the island. There are fish in the cove and coconuts on the trees. In our example, the new person on the island is better at getting coconuts and Crusoe is better at fishing. If this is the case, then both people could work independently, spending their time alone and not maximizing their output. There are other options now.

The first option is that one of the men could sneak into the other’s camp and kill them. Or they could just rob them and leave them alive, but it would involve some sort of expropriation that is fundamentally gross to those of us who strongly believe in the idea of private property. Not only is this not a sustainable long term strategy if one of them kills the other, but even petty theft would mean that the people would have to turn from productive industry to spending limited time and resources on some sort of guards for the resources they made; building secure storage and crafting weapons, losing sleep making sure that they and they property were safe. This sort of mutual distrust is a sure way to make sure that neither party is happy, and that the optimum amount of goods goes unproduced.

So, what then, you may ask, is the solution? I am glad you asked, because the only answer is trade liberalization. In our model, we do not want Crusoe and his new neighbor working separately. They benefit if they instead use their unique talents. We imagined that Crusoe was better at fishing and the other person was better at obtaining coconuts. Instead of them working separately, what they can do instead is specialize. If Crusoe specializes in only fishing and the other person just collects coconuts, then the overall effect is that the island has both more coconuts and fish to consume than if everyone worked by themselves. What is needed is some arrangement between the two parties so that they can easily see this mutually beneficial solution to their problem of underconsumption through lack of production.

Here is where we want to pull back from the earlier example and look at nations instead of an isolated island. The concept that we saw on the island holds- there is a mutual benefit to all who are included in an open trade agreement. This result is especially true now, as we see some of the most powerful countries in the world make a case against free trade, led mostly by the misguided ideas that all the countries of the world are stealing the wealth of the United States. For someone who like to brag about the size of his brain and the quality of his education at Penn, he is making an elementary error about free world trade? The mistake the president is making is one that is opposed by the vast majority of economists. Up to 97% of economists support free trade (Prasch 37), which is as close to a consensus as you can get in scientific discourse, especially one as prone to tribalism and disagreements as economics. As a continued example of how self-evident the idea of gains from free trade is, all you need to do is go to the nearest economics textbook you might have at hand and there will be a whole chapter that walks through something similar to the example I just walked through. That chapter will be right up front because of how foundational the results of the idea of the gain from trade are.

We economists put so much stock in the idea that there are gains from trade that we see Adam Smith as the father of the discipline because he wrote the Wealth of Nations, where he made the argument that where previous people saw the development of the economy in terms of growing a pile of stuff. That’s a crude description, but what he wrote against is called “mercantilism,” a theory of economic growth that emphasizes imports and devalues exports so that the treasury can build up reserves to fight wars. Smith saw that the titular wealth was not in the hoard but in the capacity. This capacity was grown through trade. This trade is a voluntary exchange that like what we saw on the island, leaves everyone better off (Gerber 41). The mercantilist ideal, one that has been adopted by Mister Trump, is that we should not trade and accumulate, like dragons on our pile of gold. This is a zero-sum world where there are clear winners and losers. In the world of the economists, in the world of free trade, there do not have to be winners and losers. As we saw on the island, through cooperation and specialization, we all can win in the game of the economy. 

I am writing to ask you to join in the economy in a world of free trade not entirely through some sense of benevolence, I must confess. We at the IMF do want to see all developing countries meet their goals and grow and to take the yoke of underdevelopment and throw it off and enjoy the promise of capitalism in that it can grow your economy and your people will not have to suffer from want and deprivation as you join the world as producers and consumers. However, welcoming South Sudan into the world economy isn’t just about what is good for South Sudan. What we at the IMF know is that aside from overall mutual gains from trade, one of Smith’s other major insights is that everyone benefits the larger the market is. That way, everyone can become more and more specialized and the economy on a global scale can benefit the most – but this specialization is bounded by the size of the market (Gerber 41). By entering in free trade with the world not only does South Sudan win, but everyone else in the world market benefits through the growth of the world market. It is a win win win all around no matter what some officeholders say.

At this point, it is common to start having some doubts. There is no way that free trade is that much of a magical bullet. My country has unique situations that may eliminate them from consideration like riots or revolutions or different political systems. There is even a chance that there is nothing in which my country is the best at doing. The good news is that these things do not matter. If overall gains from trade is chapter one in the elementary book of trade, then two related concepts are in chapter two. The first of these concepts is the idea of opportunity costs. An opportunity cost in economics is the price of the next best thing you give up doing something else. Let’s say for example that our native in the island example instead of being the best at coconut gathering and Crusoe was the best at fishing, is instead the best at both tasks. On any one day, the island native and gather two fish or two coconuts. In this framework, to gather up coconuts, the native must give up the opportunity of catching two fish. In this example, Crusoe can only gather half a coconut or catch one fish a day. Though the native is better at both tasks, the larger island economy is better off if Crusoe specializes in the gathering of fish because his opportunity cost of  catching one fish is only half a coconut – fish are relatively cheaper in coconut terms for Crusoe than for the native. This arrangement is known as comparative advantage, the second important concept (Gerber 51).

Under comparative advantage, we can see that if the two economic actors split their day we would have a production of one fish and one coconut from the native and half a fish and a quarter of a coconut from Crusoe, totaling 1.5 fish and 1.25 coconuts for 2.75 food units, where under specialization for the comparative advantage the economy has 2 coconuts and 1 fish, for 3.0 food units. By specialization, we have winners on the island economy as we do in the larger global economy. 

I do hope, Mister President, that I have laid out the case for integration into the larger world economy in an environment of free trade. By specializing on your country’s comparative advantage and focusing on that good in trade, you will be able to receive the goods of the world at your doorstep. Otherwise, if you don’t open your borders you will go it alone. You do not need to listen to me though. Joining the world economy and embracing the liberal ideal is not some new idea. You can ask over a billion Indians who have seen the repudiation of the so-called “Hindu Rate of Growth” as economic liberalization in India was initiated in 1991 by Prime Minister P. V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, or the billion of Chinese who have benefited from the removal of the “Iron Rice Bowl” and saw their country embrace free markets through becoming a workshop to the world. That can be you in South Sudan, as your people reap the rewards of joining the world economy under the umbrella of capitalistic free trade. 

Question 2: “Free Trade, Chains Included” by Edgar Mihelic on his Blog

Good afternoon everyone. I know it has been a while since I posted and I said that it would be something of a weekly thing, but you know how things go. Work gets hectic and life gets in the way. What made me need to write was coming across this memo from the IMF to the President of South Sudan. I don’t know how much you know about South Sudan. It is the “newest” country in the world, only gaining full recognition in 2011 but preceding and post-ceding (don’t think that’s really a word) that the country has been in turmoil since colonial times, fighting against the northern more Muslim-dominated north, a government that also committed the genocides in Darfur that briefly held the west’s attention. I went to that fine source of information Wikipedia to make sure I wasn’t leading my readers astray, and much of what I remembered was right. It’s a land-locked country, it does sit on a branch of the Nile which would be helpful if the river was navigable to the Mediterranean but there are big dams blocking the way because of that fun development goal of damming the world’s great rivers for hydroelectric and irrigation reasons while closing the rivers to trade and drowning villages and towns that relied on the river to give life to them. Anyways, I was looking at the wiki site and I saw this sentence: “This region has been negatively affected by war for all but 10 of the years since 1956, resulting in serious neglect, lack of infrastructure development, and major destruction and displacement. More than 2 million people have died, and more than 4 million are internally displaced persons or became refugees as a result of the civil war and its impact.” (“South Sudan”). I don’t know if there is a technical term for what’s going on down there, but I would not want to live there.

I knew enough about South Sudan to know that there are issues with that place. What the IMF memo I read (linked above if you want context for what I’m talking about) really hits on are some of the most elementary arguments for free trade. Not only does it just have this blanket argument for free trade, it seems ignorant of some of the larger issues. One of the things I joke about is you often hear people talking about how a specific policy “is not a golden bullet” or this intervention is good “but no panacea” is that you never hear the flip side – nothing is just called a panacea on its own, and it if was you would have a bit of pause. But this memo comes right to the border of calling Free Trade some sort of panacea. I suppose they didn’t because it sounds weird to just use that word alone with the negative.

And here’s the thing – I come to praise Free Trade and not to bury it. If you’ve read my work, you know how much I love Marx. You know how much the last page of the Manifesto means to me. The phrase I focus is proletarians of all lands, or workers of the world depending on your translation. (Proletarier aller Länder vereinigt Euch! If you go with the original German.) You can’t have worldwide proletarian revolution without moving towards a generalized capitalist world (a position endorsed by the man himself in his own speech on free trade “In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade” (“On the Question of Free Trade”). Add to that you really can’t keep down forever, though lord knows we westerns have tried both through colonialism and the neo-colonialism thing in terms of our institutions and the rules we set that are at the benefit of the us at the expense of the them.

I am also in favor because the points the author of the IMF memo makes are true. Yes, Smith was right in pointing out that there are gains from trade. Yes, both comparative and absolute advantage are real things (I’m less certain about opportunity costs in the real world though, they only make sense to me in these toy models with simplistic assumptions, but that is a discussion for another day. The problem the author has is that he stops there. “Look, Mister President, there are gains from trade and if you join the world economy you can reap those gains and by so entering the economy under free trade you make the whole world better!” Reading something like that makes my eyes roll a bit because they are true, but they are incomplete. A lot of people believe in these fairy tales that are based off toy models from the first couple of econ classes in part because that is all the economics they had and in part because they want it to be true. These are the same people who will point to a graph of the labor market and versus wages in a partial equilibrium analysis and draw a horizontal line at some minimum wage point and pretend that this model represents the labor market and if the line is above the equilibrium wage then the minimum wage leads to job losses and if it is below the clearing point then the minimum wage is not needed because the market is already taking care of the people in the labor market. So yes, the story is true, but there is more. As I like to say, “It’s more complicated than that.” I mean, if these people didn’t believe their own words, you might think that all their output is some sort of straw man set up so that others can come around and poke holes in their argument. 

What I want to do is go back to that island. Economists love that island. Here’s the very first thing you should know about Crusoe was that he was a slave trader and was the owner of a slave plantation. The reason he was on the ship that crashed was that he was going to get more slaves. So, he was not a good guy from modern standards. The tale is told through his eyes and he is the hero, so that when “Friday” is rescued – not as a native but as an escaped prisoner. Crusoe brings civilization onto this man. Joyce called Defoe’s creation of Crusoe “the true prototype of the British colonist. ... The whole Anglo-Saxon spirit in Crusoe: the manly independence, the unconscious cruelty, the persistence, the slow yet efficient intelligence, the sexual apathy, the calculating taciturnity” (“Crusoe”). I’ll give Joyce more credit for a turn of phrase than I can muster, that unconscious cruelty that is the history of the developed world over the developing world. As Crusoe is to Friday is the English and the Americans to the rest of the world, oppression even when we think we’re doing the best for the natives of any sort. 

I want to come back to the idea that the story is told by Crusoe through his eyes.  Friday does not get to tell his story, or if he does it is through the tongue of Defoe in his language. I’m sure if I googled, I could find Friday’s story in a post-colonial context written by some West Indian author. If I’m wrong, I hope that this sentence wills that work of art into existence. But the whole thing makes me think of the colonial aspect of the profession of economics. If you look at the winners of the biggest prize in the profession, they are almost all western-educated, white men. It’s kind of appalling because it becomes a self-replicating cycle. You lose out on the voices of people doing economics from countries that are not the Crusoe countries but instead are Fridays, telling their stories in the colonial tongue. 

I mention this because I want to weave together a couple of threads now. The first is the assumptions behind the free trade absolutists, then questions of time and power, and then look at other voices. 

The first part is that the assumptions behind the simple Ricardian view of absolute and comparative advantage work with a very constrained set of assumptions. For example, the only real input is labor, and if the economy changes, then the workers in one industry will just easily move to the other industry. (Oddly, there is no assumption that the workers will themselves move to the other countries.). Once you start to relax these assumptions and start to move towards the real world in your approximations you start to see the beginnings of inequalities and power dynamics. This has not been ignored by mainstream trade economists, as we have a working model called the Heckscher-Ohlin model that allows for different factor endowments, different skill levels of labor, and it shows that there can be some internal strife in terms of adjustments between industries (Gerber 68), and Paul Samuelson extended this to show how trade balances power within countries, as the abundant factor of labor or capital sees a gain in wealth with trade (Gerber 70). These results that show that things are more complicated in a free trade environment than their cheerleaders will admit to are in the same elementary 101 textbook that is spoken of in the IMF memo, but perhaps they are more near the back of the book, in those chapters added because the publisher wanted to say they covered those topics but in real life are never fully reached in the course of an ordinary sixteen week semester. I think if we look at the survey that claims 97% of economists support free trade, and dug deeper, we would find many caveats in there, those “Yes, but…” statements that litter the discourse within the science but for some reason are less common in public-facing statements by the policymakers who adopt economic reasoning for their claims and policies.

The second part is that like in the story of the Crusoe, like that of the actual world, there are complexities that are ignored in the simplistic model. Crusoe had the items of the ship that were left behind when it wrecked, so he has some factor endowment in terms of capital goods (the tools) that set him up. It is typical a white guy who ends up somewhere where he has a lot of power and then assumes it was through his own goodness that he has that power and not the accumulation of skills built up by all the ghosts preceding them. Then there is the question of time and power. Friday came after Crusoe had made his set-up, and by then he was well established while Friday was an escaped prisoner. Crusoe not only shapes Friday in his language and his way of life but converts him to Christianity – finding Jesus somehow on a sunburned rock. And this is where Joyce comes in above and it makes me think of Ha-Joon Chang’s work on kicking away the ladder. Like developed countries that have already developed and thus want the rest of the world to join in their system with their rules, Crusoe does the same for Friday. He doesn’t ask, as far as I know, for the opinion of Friday or what he wants. He doesn’t seek out his expertise. Instead all his actions toward the man are to aid in his own reproduction. In the IMF memo there is a sense of selfishness in terms of a bigger market allowing greater specialization following Smith, but the IMF or other global institutions are not selfless bodies. They exist to enforce the rules of Washington or Robinson Crusoe as they see fit. If they do happen to benefit the country that is the focus of the free trade policy that is good, but the question is if they do. We can look at the work of people who have studied the idea of convergence, like Lant Pritchett. They study the historical evidence and see that once a country has grown, they continue to grow. There is an idea that the developing countries will someday catch up to the developed world, but if the developing world continues in their absolute growth, the absolute and relative differences between the developing countries will continue to grow. So, if you look at the IMF memo and the loudly proclaim large countries like China or India benefiting from the world system, you have to remember that in absolute monetary terms of output, India is between Germany and the UK, both with many fewer people. And even China, with decades of substantial growth has only recently approached parity with the US, the largest country in terms of absolute output. That sounds good until you see that China has four times the number of people of the United States so that their per capita GDP is only going to be about a quarter of that in the US, and that is after more than a quarter century of “Miracle” growth rates (“GDP”). Then if you compare the two countries side by side, China is five times the size of India, bringing to the front unresolved questions like “Is democracy bad for development?”.  

What we have then is this superstructure of power and history that have created some sort of spectrum of the world, with different identifying criteria between the First and Third world, or developing and developed country, or colonizer and colonized that map onto the world some sort of established class structure. This class structure exists because of how time has played out. Capitalism started in England and then it spread but those guys had their first mover advantage and did what they could to spread their way of life across the globe, acting as a sort of self-imposed high-level aristocracy / parasite over countries on five continents. And then the rest of Europe got in the game and we are still living through the process of untangling from that burden the English imposed on themselves and over the resto of the world. Strife in South Sudan is partly there because the colonial powers drew borders on a map and did not care about how those borders were drawn or what ethnic groups or language families were contained in there or about the whole scope of prior history. The English, like Robinson Crusoe, seemed to think of themselves as coming across some sort of Tabula Rasa each time they discovered some place new that didn’t speak their tongue. It became an assumption that the newly subordinated countries would follow the ways of capitalism. And the crazy thing is that they did! There’s a line in the first chapter of the manifesto where capitalism once introduced throws away all other forms of production. I’ve likened that movement to something like a virus or cancer, but capitalism and free trade are not things of themselves, but really ideas of how to order production so capitalism needs to be in the minds of people to spread. Lenin talks about this imperialism being rooted in the development of monopolies, and the need to export capital to grow the market for the consumption of commodities. The question then is where does it stop?

There is a finite limit to the world now. You can bring in most every country into the sphere of the WTO, have them work at their best advantage in the global division of labor, and then what? Are we seeing now in the populist movement what happens when capitalism hits the ceiling? Capitalism needs growth, and perhaps this is something the end of history theorists missed. Without extensive growth there would need to have intensive growth, and instead of seeing that in the countries where people still live lives of struggle, we see that in the already developed countries where there are now any number of examples of conspicuous consumption even from the middle classes that would have made Keynes blanch when we was writing 80 years ago that we has pretty much met our material means so we would be moving towards 15-hour work weeks.     

Where does that leave us then? The Marxist critics point towards economic reasons for the power imbalances, but in a way the first world institutions replicate them, and the man Friday countries in the developing countries are either set to join with the world or suffer through exclusion because the powerful countries set the rules. One thing we have been seeing is the subjugation of the state. Dani Rodrik, who might be as far left as allowed in terms of still being a mainstream economist, writes of this trilemma we face in that we cannot have deep economic integration, democratic politics, and the nation state as we know it. He points towards some looser federalism at the highest level of organization, but I feel that reality is surpassing theory in that the corporate form is bypassing the state in terms of an organizing principle of economic power. You don’t just have to look at how successful corporations are at avoiding corporate taxes in both subverting the rules of the state and in helping shape the drawing of the rules, but you can look at the work of someone like Milberg who points to the changing shape of value chains in their international structure that points to a twenty-first century model of how power will be structured as the vertically integrated monopoly in terms of production has gone away in favor of multiple arms-length relationships that keep each value creation step separate, creating the need for a Lenin of this century too to analyze the power relationships present in both the corporate and state forms and how they interact. 

Anyways, I know I kind of took us all for a journey here, but I will sum it all up here. Free trade is good, overall, but we need to take into consideration the fact that the world did not come into being yesterday and today we are trying to set up the rules of the game between sets of peers of equal power. The weight of history is carried heavily upon us, and we need to be cognizant of those difficulties and humble in our approaches because in the real world, everything is more complicated than our models, and in our reality there is no such thing as “Happily Ever After”. 

Who I Am, What I Want to Be: A First Approach to a Statement of Purpose

Good Morning. Or Afternoon. Perhaps evening. I do not know when you will be reading this, but I hope you are in a good mood. That will make you favorably evaluate me as a potential candidate in your program. There is an asynchronous component to the writing process. Right now, it is a Sunday afternoon in the Chicago suburbs for me, but your right now will be somewhere else, and a different time.

My task today is to introduce myself, and let you know more about who I am and once you see that you can judge my complete application packet and hopefully decide to let me into your program.  My hope is that when you read this you will say to yourself, “We must have this young man in our program! We should move heaven and Earth to make that happen!”

The task is hard, but not insurmountable. Hundreds of qualified applicants will be submitting packets this academic year. They are some of the smartest students in their home departments. They took the right classes, got good grades, and did well on the standardized test. They are, perhaps right now, preparing a similar document as I am with similar hopes.

I am better than they are.

Which is of course a very strong claim. Some may have higher test scores than I do, or flawless GPAs. No matter.

Maybe I need to back up a bit.  I remember the afternoon of September 15, 2008. Over the weekend, there had been some negotiations but instead Lehman Brothers filed for the biggest bankruptcy in history. At the time, I did not have a good concept of what any of that meant. I had just started a job at a car dealership. Over the weekend, I was in training and the sales trainer kept looking at his little netbook and walking out of the room distracted. On Monday, we had an all-staff meeting where the owner said that we had faced economic problems before, and the dealership would persevere. Our job was to make sure we got “More than our fair share”. On the phone that evening, I was talking to my Mom on the phone as I walked my dog. She was asking me how I was going to be and I confidently parroted the owner’s words.

Turns out that confidence was not warranted. Foot traffic to the dealership dropped. We salespeople were working our way through the dealership’s database, calling anyone who had ever been in the place, asking them about their current situation. It was demoralizing for a new job. I was supposed to be on site for 50 hours a week, and I was maybe talking to three or four people a week. There was a lot of free time, not good when the majority of your compensation package was supposed to be derived from commissions on your sales. I finished training and in October, I only sold three cars. Then in November, I did not sell any as it looked like the disruptions of September were going to turn into a longer lasting problem. I was let go in early December.

December of 2008 was not a good time to find myself without a job.

Perhaps I should back up more. What was I doing in late 2008 trying to sell cars? The world is a funny thing, no? Well, it was part of a larger journey of mine. I have focused on various things in my academic and professional career. Academically, the main goal broadly has been a desire to figure out how the world works. I started as a chemistry major in undergrad in a very literal take on figuring out how the world worked. However, that did not sit right with me. The problem with chemistry and the underlying physics is that the problems at the time felt solved. There was a standard model of the particles that worked well and the investments in physics were in filling in those gaps. In chemistry, there was some interesting things going on with nano-tech.   The real interesting things were in biologics, but that path led to working for drug companies and I had visions of just doing titrations for the rest of my life and that did not sound appealing.

So I switched to English, reading texts and criticism and working on my own creative works. I saw English as a way to leverage philosophy into an understanding of society, making the creation and dissemination of a text a social act – art as psychology and sociology and a unit of analysis in its own right. I liked that so much I sought out graduate schools in the study of English, at that time finding myself at Kansas State. I loved the atmosphere at Kansas State – the town and the people in the department who were my professors and peers. What I did not find was a good path forward in the discipline. Even when I first entered, there were warnings that few who entered would have a chance at the traditional end goal of a tenure track position. The stats were bleak then, and they have only gotten worse. Only one of our cohort followed through, and now he is at University of Texas at San Antonio. And he won! I decided early that I was not going to apply for PhD programs, as Kansas State was a master’s terminal program. Yet here we are.

What I did really like was the teaching component. Though I was lucky enough as an undergraduate to be a TA for the chemistry department, supervising my own lab and grading problem sets, being a graduate level TA in the English department gave me a lot more autonomy to work through the assigned papers in a journey where I was not an adversarial force at the front of the room, but as a partner in an educational journey where we worked on writing as a process and learned from each other as we discussed the broad subject matter that was the argument the students were writing about. It was a challenge, the lectures didn’t work all the time, but it was the most fulfilling day to day job I ever had, I decided if I learned anything from Kansas State in terms of a career path, it was that that academic track might not be for me but I was an effective teacher and I enjoyed teaching, I leveraged that to a position at a private school in Chicago. The problem was that one of their alumni got the English job I had applied for but the Chemistry teaching position was open and I was offered that. I burned out teaching that subject at that level in only a year. I wanted to stay in teaching but felt I needed a break, so I got a sales job. As we saw above, it was at the entirely wrong time.

I was unemployed for two years. I used that time to look for a job and to try to rethink just what had gone wrong, but I also used it to pursue the question about how the world works. This is when I started reading economics seriously. Like chemistry, economics for my teens and most of my 20s felt like a solved problem. Management of the economy had worked. In my conscious life, there had only been one recession of any import, and that was centered around 9/11, an outside shock that of course had macroeconomic implications. I know now that there was another one in the first Bush years, but that was not on my radar when I was a little kid. I had grown up in what was called the “Great Moderation” and everything had worked, right up to the point that it stopped working, and as a victim of that crash, I had plenty of time to try to figure out what had gone wrong.

This started my autodidact journey. I read contemporary sources about what was going on, reading the news and focusing on the financial pages more than I had ever done. I fell into the blogs, reading everything I could find from Mark Thoma’s Economist’s View to Zero Hedge. I subscribed to the Economist for a bit, but that was too light on actual economics. I tried to read the classics of the discipline, working my way through books like “The Road to Serfdom” and sometimes abandoning texts like “Capitalism, Socialism, and Democracy” or “The Great Transformation,” the ghosts of Schumpeter and Polanyi looking at me as I eye their texts in my bookshelf right now with bookmarks for me to remind me of my place whenever I take up the reading once again. I read at least thirty books specifically about the financial crisis of 2008. All that reading and participating in the comment section of the blogs and eventually in conversations on Twitter showed me that at every level Economics was a discipline under contention. The Great Moderation gave policy makers the cover that they knew what was going on. One of my favorite lines ever in retrospect is Ben Bernanke saying to Milton Friedman in 2002: “. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.” Of course, we know that it did kind of happen again, thankfully they were able to arrest the worst possibility, but from where I was from 2008 to 2010, that was not very compelling. I tracked the data releases religiously, especially the unemployment rate and the component of the unemployed who had been unemployed more than six months. There were many of us, and not all found their way back into the rolls of the employed. To this day even with low unemployment, that labor force participation rate for prime age workers is below where it was in 2008, and that peak was below where it was in 2000.

Aside from paying attention to the stat releases, I also was able to redirect myself. I tried to get back into teaching unsuccessfully, and I took that as a sign to do something else. I heard about a retraining program for unemployed professionals through the City of Chicago, and getting into that helped the redirection. I took classes on medical coding and billing, being certified. At the same time, I interned with the city and with CSS, and organization that serves the developmentally disabled. It was there that I blossomed. I went from a billing coordinator to the Director of Finance as I took business classes. BY getting my MBA, I was trying to be practical; approaching the topic I had come to love but in a way that helped my own personal bottom line as my previous educational approaches had not really been directly beneficial to that point. I still work at CSS, though I have made a couple of parallel moves. I like it because I can use the skills I have developed and through the application of the things I know and can do I help the agency run and make sure that the people who do the direct service component have the support and resources that they need to help the individuals we serve have their best life possible.

It did not really scratch the itch intellectually. The MBA is a practical degree, in terms of learning more than anything the questions that need to be asked and who you might ask to find out the answers. The problem with the MBA is its breadth, as you do touch on some things but you move on to the next thing. It was good for what I needed, but I wanted to go back to school. I applied to Roosevelt because they are the heterodox school in Chicago. From my experience being on the down side of the financial crisis, I was open to the idea that the orthodox schools did not have the answer on how to stabilize an unstable economy. Thus, I am sympathetic to alternate readings of the economic system ranging from a Robinson-influenced Keynesianism to a Marxist class-based reading to a Functional Finance / MMT version of the macro-economy. I also know that to run with alternative theories you need to know readings that are more orthodox because those are the grounds you will be critiqued on in the profession at large.

A thing that does separate me is academically, I did not do the thing I see as advice – go to school and double major in math and econ then do an RA with the Fed and then apply. For better or worse, my education has been much broader. By having been in graduate school in English, Business, and Economics, I have a broad perspective. I have also become a better, more focused student as I have gained experience. Since 2010, the lowest grade I have is an A-. That minus sticks in my craw, but it was good motivation for the rest of my MBA and through the economics master’s program. I am invested not just in time, but financially as well. It is important that I get the grades but also that I learn everything that is out there from my peers and professors, but I do like having the achievements. It is so important to me that while I was in the economics program, I got in touch with the English department at Kansas State to figure out what I would need to do to finish my master’s degree. It has been long enough there was extra work in recertifying my old credits, but I am working on a thesis crossing over the disciplines, applying Hayek’s troubling of the socialist calculation debate to Asimov’s Foundation series – I am asking the question of what happens in the universe if Seldon plan is impossible. This experience has prepared me for deeper studies in economics. I can balance a full-time job, my elected position as a library trustee, and multiple priorities for school and be successful in all phases.

I am applying for doctoral studies in economics, but one thing I worry about is that I do not have a narrow research agenda outlined. I first got interested in fiscal and monetary policy in a crisis, but I avidly read at all levels from behavioralists to inequality to trade and development. I once joked that my program was in building up a coherent agent-based system from the ground up when economic actors break our micro-assumptions. I did start on a document that was an outline of things I did want to study, and I was at over forty lines when I stopped. I too work under constraints, that of time.
Absent a dedicated program, I want to talk a bit about my personal approach to economics. Marx famously wrote: “The philosophers have only interpreted the world, in various ways; the point is to change it.” I like that particular these, but there is the dialectic in there. I want to change the world, but there is a first step. Before you go about changing the world, there is a lot that must be understood – Marx himself never finished his personal project but for better or worse he was able to change the world through his life and works. We study the world as scientists, but we are not purely removed from the world, we are part of it. This interaction makes social sciences different from chemistry or physics, where you can observe, theorize, and make predictions. The medium of our is human beings. You can observe, theorize, and predict, but protons do not make decisions. Human beings do. This interaction gives lie to the idea of a purely positive economics. What you choose to look at and what you chose to leave out have huge influences on your conclusions. It is our job as scientists to recognize this and know that all economics is partially normative. Housework is not part of the GDP because of decisions made decades ago, and now we talk about welfare gains from homemakers joining the workforce. We have to be aware of these interactions in all that we do.

We also have to be humble about the limitations of the methods of the science. For years, I had a quote of David Harvey, the Marxist geographer, as the header for my personal blog and Facebook pages: “We are, in fact, surrounded with dangerously oversimplistic monocausal explanations.” This remains an anchor for me as I try to understand the dynamics of the economic system that we live in. As students we are often taught to think of linear causes to processes — a form of “first this, then that.” I like to boil Harvey down to the idea that “It’s more complicated than that!” My current header quote trods the same path, telling readers “There is only one true answer to any economic question: “It depends”,” from Dani Rodrik. These two quotes illustrate my personal take-away from over a decade of studying the economy that everything is complicated and conditional in a dynamic process.

Gains From Trade: Even the Toy Models Can Teach Us

Within a Ricardian framework there are several simplifications that we must take in mind as we discuss it. First is that labor is the only input, it is immobile within national borders, but it can move within industries and there is full employment. In terms of the markets, there are perfect competition and no trade frictions with the two economies only producing two outputs. Finally, the trading nations have the same technology and there are constant returns to scale.

If we take these assumptions as a given, we can look at the simple models and say that there are gains from trade as long as one of the countries has a lower opportunity cost in one of the goods than the other country (if they are the same there is no reason for trade). The toy models we work with show that a move down the production possibility frontier to specialize in the good that the nation has comparative advantage in makes everyone better off.

Even if you think within the constraints of the model, as unrealistic as they may be and think about how this operates in the real economy the logic still makes sense. There is an idea that there are only so many jobs and that for some reason the economy as it was in the US in say 1957 is the way that it should remain forever more. What it ignores is that US manufacturers have gotten better at some other things. If you think of the Trade between the US and China as comprising trade between airplanes and radios, “Making America Great Again” has the idea that we need to make more radios. What this ignores is that the tradeoff is much greater in the US because here we are much better at making airplanes, so the opportunity cost of making a radio is a much higher fraction of an airplane in the US than it is in China. This means that here we get to consume more radios than we would otherwise because we can specialize in the airplane market and trade those extra airplanes for radios.

Nice Country You Got. Shame if Someone Structurally Adjusted It: On the Bretton Woods Institutions

The story of the Bretton Woods conference is the story of Harry Dexter White, Keynes, and the representatives of fifty other counties holed up in a relatively inaccessible hotel in New Hampshire hammering out the details of the postwar economic order. This was a mirror of their political peers in Potsdam and Yalta who put together the postwar political order. Laying out an aggregable postwar order was crucial because it was not hard to look around and see what happened without multilateral institutions. After WWI, the League of Nations was fairly weak in part because though Wilson was the main driver behind the formation of the League of Nations, there was not buy in. The newly powerful US wanted to go their own way. So what happened economically was busts in the immediate postwar years with a sharp and now forgotten recession as the belligerent powers moved into a peacetime economy – then the roaring twenties in the US) though even that hid regional troubles as farms failed and there was a property bubble in Florida.  And then of course the fear of the spread of far-left parties in Europe with genocidal fascism as well as a rising Japan invading its regional neighbors (dispossessing English and French imperialists in the process) all led to the war that our actors were trying to resolve.

For me that context is important in thinking of the modern IMF and its sister institutions – which is an evolved version as an institution of those agreements – is open to criticism. I first became aware of these multinational, multilateral institutions in 1999 when there were protests for the WTO negotiations in Seattle. The media focused on people dressed up like sea turtles, but it was more broadly a protest against the path that globalization proceeded on. Now when I think of that era, I think of this picture of “International Monetary Fund (IMF) managing director Michel Camdessus (left) looks on as Indonesian President Suharto signs an agreement in Jakarta in this January 15, 1998 file photo. When the IMF last held its annual meeting in Asia, in Hong Kong in 1997, it was leading the rescue of the region`s wrecked economies.”

This picture for a lot of people really cements the idea of the IMF as a neocolonial project. Why neocolonial? Mainly because what the IMF had done in its second iteration was to become a source of funds for poor countries who had gotten into trouble somehow. Often a previous administration would over-borrow and ransack the state treasury, and then the next group of people would come in and say that they had no capacity to grow their country thanks to the previous fellows. The IMF would come in and offer help in terms of loans. The problem is that in the international financial system, a country can’t just say that the other fellows were just making themselves rich and we couldn’t be on the hook for what they did and the people who lent to them did so at their own risk, so we will just repudiate those loans and start with a clean slate. Nope. The new guys have to make whole what the other guys did, facing the debt burden. So, what the IMF does is come in and say we can help you out. But there are strings attached. You can get some of our money, but you need to open up your markets and privatize your state holdings. This is a problem because just maybe these one-size-fits-all recommendations are not actually effective in all contexts, and it just reinforces the neoliberal “Washington Consensus”. Then the next time there’s a problem the country the results are the same. The other big issue with the IMF is that it is nominally a democracy. The problem is that it operates on the one-dollar-one vote rule, giving rich countries much more power than smaller countries. At any times, this is a bad deal, since what it does is allows the rich countries to try to adjust the poor countries in their image. But it becomes an especially bad deal when you have people in power in the rich countries who are acting in bad faith. This locks out from the international order nations that might not agree with the Washington Consensus for whatever reason. It gives the powerful exorbitant and unearned control and sets us up for problems like we saw above. The US controls the payment system and trade disputes right up until it doesn’t. They’re trying to pressure Iran and Venezuela through control of the dollar payment system. Other countries can just say “never mind” and create parallel and isolated systems so that they don’t have to use SWIFT. The IMF at the very least has recently realized that their structural adjustments may have been overly onerous, but the story of the rest of the institutions has not been written yet.










Cited:

https://timesofmalta.com/articles/view/imf-back-on-stage-in-asia-role-less-certain.42467

A Movable Contradiction: David Harvey and Capitalism's Multiple Crisis Points

I must admit to a soft spot for David Harvey. He was one of the first capitalism-skeptics I came across after the crisis, so I read “The Enigma of Capital” (2010) and then “Seventeen Contradictions and the End of Capital” (2014) in hardcover and reviewed them favorably on Amazon. I even got him to follow me on Twitter somehow. I do not think he is the one who controls the account, but I am still going to use this space to brag about David Harvey following me on Twitter. I revisited Harvey in my readings recently, and it excited me. It also was a chance to watch his interviews, and then I found that there were a lot of David Harvey interviews on YouTube, so I watched several back-to-back and my wife came home to find me in a trance to his Kentish accent.

One thing about Harvey that I have found over the years is that he tries to be very precise in his language. This makes him prolix, a trait that I can identify with. For years, I had one of his quotes as the header for my personal blog and Facebook pages: “We are, in fact, surrounded with dangerously oversimplistic monocausal explanations.” This is was an anchor for me as I try to understand the dynamics of the economic system that we live in. As students we are often taught to think of linear causes to processes – a form of “first this, then that.” I like to boil Harvey down to the idea that “It’s more complicated than that!” My current header quote is “There is only one true answer to any economic question: "It depends",” from Dani Rodrik. These two quotes illustrate my personal take-away from over a decade of studying the economy that everything is complicated and conditional in a dynamic process. 

Photo by sergio souza from Pexels

Which is to say that Harvey’s conceptions of multiple points of failure for the capitalistic system really resonates with me. From his interviews and writings since the crisis, the big takeaway from Harvey is not that capitalism is broken. Of course, it is broken. The very concept of the business cycle, where there is growth and then suddenly not growth in spite of the same people in the world should show that it is broken, but we’ve been looking at the business cycle as a thing for over two centuries and those who question the very system that creates those cycles are people on the fringe of the discipline because there’s no Koch money in raising the red flag (or a Red Flag). Harvey points to these multiple points of failure. And here’s what really hits for me. Harvey emphasizes that at times any of these seventeen contradictions he identifies in his book on the contradictions can be a point of failure that will tip the economy over. What capital excels at is moving around the crisis points. One fails, gets resolved temporarily, but sooner or later the weakness at the other points will be exposed. This makes me think of the concerns I have had with some of the other view of crisis we have looked at over the course of the class, especially with Minsky. If the financial instability hypothesis holds, the question becomes where do we intervene to make sure that the Hedge form of debt structure is the one that predominates, and the economic system does not tip over into the Ponzi form? If you try to prevent leverage you prevent growth and the people with the megaphone will not like that, and it would be hard to get the voters to settle for a steady-state economy (though we might have to think about that as we come up to the planet’s limits on absorbing carbon pollution). Or, if you look at the structural explanations like Crotty does, you have to change the entire paradigm of the new financial architecture because the options you have to clean up the crisis is essentially handing money over for bad debt and overpriced assets because the only thing worse than bailouts is systemic failure. What Harvey’s enumeration of multiple contradictions shows is that even a judicious and thoughtful regulator under capitalism sets themselves too hard a task as the crisis points move, and what you would find yourself doing is playing regulatory whack-a-mole. As one crisis point was temporarily resolved, yet another shows its face.

What are these crisis points? Harvey identifies seven foundational contradictions, with an additional seven more “moving” contradictions along with three “dangerous” ones to make up the titular seventeen of them in his 2014 book. In an earlier talk from 2010, he identifies these contradictions at a high level based on the Marxian observation that “the circulation and accumulation of capital cannot abide limits,” and once these limits are reached, capital tries to subvert them (1). It is these points where the blockages arise, and the crises are produced. In this circulation, it cannot aim for a steady state. One of the foundational rules for capital in circulation is that it must find growth. And not just growth. It needs to grow three percent one year. The next year it needs to grow three percent on that prior year, to infinity.   This can be hard to conceptualize. However, I saw recently a good example. China’s growth in the last year slowed to about 6%. This was alarming to some commentators because it represented a slowdown in the recent expansion, and this might mean a more general global slowdown. But even six percent growth means that China added the equivalent of all of Australia’s output in the last year. Looking at exponential growth it is easy to follow onto Malthusian thinking and imagine that at some point we will hit some physical limit and see that perhaps Malthus was not wrong in his predictions, just too early. These ceilings and blockages are the limits to profitability that Harvey identifies: “Any slow-down or blockage in capital flow will create a crisis” (2). They do not have to be world-historical Malthusian traps, but can also be temporary and local.

One example that Harvey uses to illustrate as potential blockage points is the need to accumulate initial capital. Actors in the financial system need to be able to assemble the financial capabilities in order to invest funds at scale. This creates the need for a financial system at all instead of the convenient fiction that firms invest without any intermediaries. This system itself can be the point of crisis, as Harvey identifies: “Crises have frequently centered on the financial sector and associated state powers either because finance is over-regulated or not innovative enough […] or because it is too powerful and to uncontrollable for the good of the system” (3). This is one of the points of contention with the last crisis. As much as we focus on the financial system as the source of the crisis, and do what we can to regulate the banks and to make sure that the shadow banks are not selling derivatives that they do not have enough capital to invest, this is not the only point of potential crisis. 

While the governmental priority is looking at the financial system to fix the problems there, we can be brewing the next potential crisis not just at overreaction and over-regulation at within the financial system, but elsewhere in the economy. Harvey identifies the Labor market as a second place where we can find these structural contradictions that can lead to crisis.   If labor is too organized and too powerful, it slows down the circulation of capital in the economy and can lead to crisis. We saw this as a potential cause of slowdowns in the 70s, where strike waves were met with repression and opened the way for the neoliberal turn represented by Reagan and Thatcher that we saw in the discussion of Crotty’s structural identification. This reaction of course opened the crisis of 2007-8 where the financial system crashed the economy. So, we can see with just these two examples in Harvey how the crisis points can vary and fixing an issue at one point just creates new weaknesses.

There are other choke points as well. Nature can be one. If a particular resource is needed, but it becomes hard to obtain, then the whole system can fall out of balance. Here the obvious culprit is oil, and in the future it might be cobalt. Another is the creation of demand. If consumers feel satiated, an economic system that is based on continual growth will falter. Therefore, we need new cars and phones. Ford sold the Model T for decades until General Motors started introducing yearly product cycles. The creation of the new new thing helps drive capitalism, and if that fails, then the whole system can fail (6). Ultimately, Harvey emphasizes that there is no one single point of failure, no unified point of crisis like a falling rate of profit. The analyst’s job is to try to figure out what the contradiction point is that is inhibiting the flow of capital and stopping growth (7).   As Harvey points out, the crisis tendencies are never solved, they just get moved around. I likened crisis prevention to whack a mole earlier, and like in that game, the crises keep popping up with no pattern. Crisis comes, it spreads, and is treated in the ways the neoliberal governments know how to treat it, and it moves through time and space until the next crisis. It is never fully resolved. And it can’t be – “Compound growth forever is not possible” (11). We will meander from crisis to crisis until the final one hits. Or: we address these issues and move beyond capitalism towards a different form of “social coordination, exchange and control that can deliver an adequate style and standard of living for the 6.8 billion people living on planet earth” (12-13). Unfortunately, though this class and looking at previous crises and responses and theorizations about them, I’m afraid we will not be prepared for the next crisis. Or the one after that one. Or the one after that one. Causes and cures are hard to pin down.

Harvey, David. “The Enigma of Capital and the Crisis This Time” (2010) The Monthly Review

Structural Causes to the Financial Crisis and their Discontents

James Crotty has argued that the crisis of 2007-8 was cause by structural issues in the economy, mainly derived from the deregulation in financial markets that came into being during the Reagan and Thatcher years which were given rhetorical firepower and ideological backing from economics theorists like Milton Friedman and Eugene Fama.  In both “The Realism of Assumptions Does Matter: Why Keynes-Minsky Theory Must Replace Efficient Market Theory as the Guide to Financial Regulation Policy” (2011) and Crotty an earlier 2008 paper,  “Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture,” Crotty develops these arguments. In 2008, Crotty wrote “Central banks and other regulatory bodies will be forced to take whatever interventions are required to stop the financial and possible economic collapse – no matter how high the cost” (53). In the next sentence he says, “the dynamic of deregulation leading to financial booms that eventuate in crisis that lead to bailouts and thus to yet larger booms roll on.” Here we find the root of the argument that he makes in the papers. The ideology surrounding finance is such that architecture leads to people working in the margins, doing what they can to generate more cash for themselves. And then periodically it will blow up. The playbook then is not to use the crisis as an impetus to reform the system, but instead to shovel more money at the very system that just failed in order to paper over the real problems and to let the rot continue. 

Crotty calls this structural rot the “New Financial Architecture” or the “NFA”. Under the NFA, what we have is a system of banks and other financial institutions such as Hedge funds, special investment vehicles that operate under light regulation or no regulation at all. Crotty argues that this arrangement persists because of the theory of efficient markets. Economists and financial professionals have pushed the idea that the best regulatory intervention in the financial market is no regulation at all. A truly efficient market works out the kinks itself through the assumptions made in making the argument for the efficient market theory. Crotty argues that this ideology has led to greater and more destructive crises because of flaws inherent in the NFA. In the 2008 paper he argues that the efficient market hypothesis is itself flawed. The paradigm creates perverse incentives for actors in the financial sector; the root cause of the crash in mortgage backed securities were deliberately made to be opaque products; this built up unknown and excessive risk; and the risk-taking led to highly leveraged institutions that were unstable and prepared to crash (Crotty 2-4).

What we see under the NFA is a perfect illustration of people responding to incentives. Crotty speak in this paper of the foundations of the NFA being the “assertion that the realism of assumptions does not matter in evaluating the validity of the conclusions” (12). This set up feels extremely unscientific. It is an ex-post justification in service of capital. It is an argument by the criminals against policing. Were it not made by already-established voices in the service of making people richer, it would be questioned. Of course, all models are by necessity simplifications of reality – but this predominate paradigm of financial economics makes the assumptions first. In the real world leaning on false assumptions leads to crashes that could not have happened because the VAR model was working with faulty assumptions, and structural linkages bring everything down. It’s not a good system, but it seems to persist. As Crotty writes, “the methodological debate, therefore, is not about whether abstraction is necessary, but whether or not we should favor theories whose assumptions are not excessively and unnecessarily at odds with the reality we wish to theorize” (13).  Deregulation happens because of these motivated false assumptions lead to faulty models. This makes the entire system more fragile to shocks. 

By 2011, Crotty had a little more distance from the full-depth urgency of the crisis in progress. In his newer paper, he extends his argument from his earlier 2008 paper in more detail, looking the effect of the deregulation and consequences of mindlessly following the NFA in the financial system. Deregulation led to increases in complexity, size, volatility, and linkages of the global financial system. These facts increased size and depth of the crisis of 2007-8 when it hit. Crotty proposes that we need to move away from the “NFA” and towards a theory of regulation that is based on the thinking of Keynes and Minsky. Minsky and Keynes both had views that said unregulated markets are unstable and vulnerable to crashes. As in his prior paper, Crotty is critical of the efficient market based new financial architecture, continuing to argue the assumptions behind the efficient market theory do not reflect reality and should be abandoned. In this 2011 paper, he looks deeper at the “positivist” methodology as defined my Milton Friedman in 1953, where Friedman claims that realism of assumptions doesn’t matter, and even if they did the potential realism of the assumptions would not be able to be parsed out (7).  For Crotty, basing your entire financial architecture on these foundations is the fundamental basis for crisis formation. Instead, he argues, we should look back to Keynes, who argued that we need to look to reality for the basis of our theories and look to Minsky’s structural models of the economy in a growth phase and be prepared for the next crash. 
Crotty had moved on from the initial crisis in 2011, and the next part of his project is in building a new paradigm: “Rather than searching for an assumption set that can demonstrate that financial markets are efficient, economists should construct a set of realistic assumptions about financial markets and ask: what hypotheses about the behavior of financial markets can be derived from these assumptions? (10). And that’s what he does, building a set of ten key assumptions emphasizing “endogenous dynamic processes” (17), assumptions like “The future is unknowable” and “liquidity changes over time” (17). These are assumptions that we have seen as fundamental building blocks of what the financial economy does as it moves through time in a dynamic process. The real challenge, Crotty says, is to “understand how sensible agents make decisions under conditions of uncertainty or un-knowledge” (18-19), a huge change from the dominate paradigm which assumes perfect knowledge from economic actors. 

If the we a society persist so that the paradigm that dominates is the New Financial Architecture, then it makes it so that there are no strong regulations. This to me validates the Minskian and Keynesian view where it feels like crashes are inevitable, as Crotty argues. As we saw above, even a stable financial system contains the seeds of its own destruction and borrowers keep reaching for yield and overpaying for assets as they increase in price (Something that can of course never bee identified but in retrospect; bubbles always have happened in the past but the assets price increase in the current moment always represents a new paradigm).  Unfortunately, what seems to have happened is that the vast rulemaking apparatus that was supposed to go into effect with Dodd-Frank, itself watered down by the existence of a new class of legislators, will not be put in place. Instead we have tax cuts and continued increases in the American stock markets that justify the boom. I’m afraid the next crisis is sooner than any of us would like it to be, since fealty to the NFA in the financial economy has feedback effects to the real economy. Thinking the market is efficient not only poisons the financial markets, but it also means that people look at the labor market and see not the need for intervention, but workers who need to accept less in wages while those who crashed the economy get bailed out and the cycle starts again because we have no answers on how to fix it in the NFA. It has been eight years since the last missive, and Crotty’s books will go out of print as we go about our process of forgetting.