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Dear professor, Your books “Economics in a Time of Wolves” and “How the rich got rich and why the poor get poorer” are indeed inspirational and represent really reliable guide through the combination of economic theories and economic reality and media interpretation of the actual economic reality in the world that additionally create confusion. Your book is a confirmation of Kestlers’ words that new knowledge is created by connection of previously unconnected facts. After this short introduction we would like to ask you to help our readers to understand in short the core of the economic crisis which the modern world is going through. As one of the reasons of current economic crisis you see as a result of unbalance between and financial economy, and when financial economy gradually stops earning money through financing of healthy projects in real economy, and increasingly began to earn money on itself. We recognize in that big banks, Wall Street and financial derivates with whom they trade and blow up the financial balloon till bursting. How to control the financial sector and use it for the benefit of curing world economy?
The Chinese are supposed to have a curse saying «may you live in interesting times». This is what we are living through at the moment. Several factors are contributing to this. One important factor is the underlying technological trend. In school we learn about the Stone Age (Neolithic) and the Bronze Age, but we also have such periods in the modern age. During the 20th century capitalism, communist planned economy, and Nazism / Fascism were all built on industrialisation and standardised mass production, what the experts call “Fordism”. But because we were all so focused on the political differences between these three systems, we generally failed to see the strong similarities in the economic structures of the three systems. All three tended to produce the same kind of standardised mass produced products, and they all created considerable increases in living standards.
By the mid-1970s, the possibilities of the Fordist mass production model were largely exhausted. With the Fordist production system also came a Fordist wage regime. This wage regime meant that productivity increases in the economy were automatically transferred to workers as higher incomes. If – for example – productivity increased one year by 4 per cent, wages would go up by 4 per cent. In this way the share of the economic pie between workers and capital was kept stable. The break-down of this Fordist wage regime, which in the United States started in the mid-1970s, was the beginning of the crisis in the West. (Figure 1).
The reason was a conscious weakening of labour union power combined with freer trade both with countries more technologically advanced than the United States, like Japan, and with poorer countries. For this reason, the smaller share of the pie went to the common man and the economies of the West are now, to differing degrees, facing a shortage of demand.
The entry of Asia into the globalised world is another underlying factor. Never has a nation advanced technologically so fast without increasing wages as China did for a long time. This created huge trade imbalances. However, it is interesting to note that such imbalances had been foreseen by John Maynard Keynes during the 1943 Bretton Woods conference, and he also suggested a remedy. Keynes suggested an international tax on trade imbalances of more than 10 per cent, i.e. that a country’s export surplus (exports minus imports) beyond 10 per cent of exports would be subject to an international tax. It is somewhat ironical that this proposal – aimed at avoiding “irresponsible” trade policy – was vetoed by the United States, the very country that during the last decades would have benefitted hugely from this international legislation. Indeed, policy measures exist to cure mots present ills, but are not used,largely because economics as a subject has been reduced to mathematized neoliberal ideology. Because of this ideology the world outside Asia is presently unnecessarily getting poorer.
On top of the global trade balances came the imbalance your question points to: the imbalance between the financial economy and the real economy (Figure 2).
In good times the financial sector serves like “a bridge in time”, the financial sector provides funds for houses or factories that last for decades, or – to use another metaphor – the financial economy functions as scaffolding for the real economy.
The 1932 Glass-Steagall Act controlled the US financial sector very well. The recent crisis is a direct result of this legislation being abandoned in 1999. Having lived there for many years, I consider myself a friend of the United States, so it is sad to observe that the political power of Wall Street is such that no president can be elected without its support. Presently the United States has “the best democracy money can buy”. The only consolation is that the United States has been in similar situations before – power being in the hands of “predatory capitalism” which extracts rather than creates wealth – both in the 1890s and the 1930s, and the “good forces” (production capitalism rather than financialcapitalism) won on both occasions. The best US economist to study in order to understand this problem is Thorstein Veblen (1857-1929).
The money which is created by the financial sector appears as assets in the accounting of the banks, but as liabilities (debt) in the real economy. So when the financial sector “prints” money it simultaneously prints debt, and financial crises occur – as Hyman Minsky succinctly puts it – when the financial sector creates more liquidity than the productive sector can absorb in a profitable way. What the world needs now is massive “green” investments in new energy sources and other cleaner products. We see some of this, particularly in Germany, but by no means enough, particularly not in the United States.
In my opinion the mountains of unpayable debts that have been created must be cancelled. The type of crisis presently observed in Southern Europe is extremely familiar to those of us who have worked with Latin America since the 1970s. They result from political compromises that spend more money than what the government has, and they are typically products of political peace being bought at the expense of inflation. The Italian and Greek “irresponsibility” are a result of political peace having been bought at the price of inflation. Italy’s bloody years in the 1970s, with extremism to the right and to the left, were solved like similar problems were solved in Latin America, through inflationary political compromises. These agreements always had a safety valve in debt default and devaluations. The irresponsible part is today played by the EU which plugged the safety valve, and refuse the necessary default and devaluation.Southern Europe is not allowed to take the medicine that always has solved such problems before, the last time in Argentina just over 10 years ago: default and devaluation. Argentinians paid a very high price for their late devaluation: real wages fell by 40 per cent from top to bottom.
The only way to get out of the present situation in Europe is through organised debt default. The theory and principles of this have been known since the time of Hammurabi (1.750 BC), but presently the banks and Mario Draghi – Europe’s “elected economic dictator” until March 31, 2019 – refuse to see it this way. But the longer they wait, the larger the losses will be. If there is one thing history teaches us it is that debt that cannot be paid will not be paid.
You have correctly observed that countries, such are those in Eastern Europe in the beginning of nineties with the crash of the industry, have had majoreconomic decline andimpoverishment. But,rightnow hasn’t there beena certain degree ofde-industrializationof the European Unionand the United States? Although I am not an economist, it seems to me that the basic reason for the economic crisis in the western world is that industrial manufacturing has been transferred from the western industrial centers to China and Far East. Dear professor, we feel free to ask you to comment of that, and for your stand about the actual crisis and de-industrialization.
This is a very important question. Essentially the world faces the choice between either moving economic activities between countries or movingpeople between countries. The heyday of Fordism – from 1945 to 1975 – was also the period when it was understood both in the East and in the West that industrialisation had to be spread to the whole world, including Latin America and Africa. Economic activities were moved, not people.
Lookingfor a solution toglobal economic problems we will quotean Americaneconomist IanFletcherwho, in aninterviewfor our magazineGeopolitika,advocated therevival of"rational protectionism." What is your opinion, toa priori reject such a proposalor unpopular"protectionism" could beuseful?
My view is that – like during the crisis of the 1930s – the solution to the basic problem is to introduce what Ian Fletcher calls “rational protectionism”. The alternative is a “winner-takes-it-all” world where huge areas will be left largely poor and unpopulated. This goes against the neoliberal triumphalism which has dominated the world since the 1989 Fall of the Berlin Wall, but it is completely consistent with world history for the last 500 years. Unfortunately the vested interests of the financial sector and the ideological bias of neo-classical economics are likely to delay this solution. In other words, the crisis has to get much worse before it is generally understood how destructive the ruling ideology actually is. Therefore, sadly, things are likely to get a lot worse before they get better.
The root of the trade and industrialisation problem lies in David Ricardo’s trade theory (1817) which reduced international trade to the bartering (exchange) of qualitatively identical labour hours. Until then, all nations understood that a manufacturing sector was key to producing wealth. The West continued to industrialize, largely influenced by the theories of Friedrich List. Ricardo’s bluff was intended to convince the colonies that they could get rich by supplying raw materials to the mother countries. Between 1945 and 1975 – a period of “transnational mercantilism” – it was understood that industrialism had to be spread, and this led to the fastest growth period in world history. With the triumphalism fallowing the Fall of the Berlin Wall, this understanding was lost. Presently the West – ironically – has fallen victim to its own Ricardian propaganda and is losing out against Asia.
That a gradual de-industrialisation – in favour of the service sector – is part of economic development was recognised already by William Petty (1623-1687) who based this theory on his observations of Holland during its Golden Age. However, the present deindustrialsation has either happened too early in national developments, as in the case if Serbia and so many other countries, or has been too rapid and massive, as in the case of the United States.
Is way out of the crisis to return to the good old Keynes solutions? In the US, a few years ago, prompted monetary spending, President Barack Obama has given hundreds of billions, as claimed in Washington, as an incentive to inject the economy. But why did not that result in spectacular economic recovery as it was after 1929? Where is all that money? In the banks, pockets of consumers ... Whose economy has benefited, the US, maybe even the Chinese?
The massive creation of liquidity (read “debt”) that the world has recently experienced has never happened before in world history, where normality has been some kind of gold standard. So the Keynesian solutions must be accompanied by some kind of debt relief, probably a blend of devaluations, defaults, and inflation where one can hope that the savings of the common man will be saved. That the initial proposal for Cyprus, also to confiscate the money of small savers, was actually supported by the EU, the IMF and the ECB (European Central Bank). This was an extremely ugly signal to send everyone in the EU, indicating that the whole process is getting out of hand; that the needed political control has been lost to the vested interests of bankers like Mario Draghi. Draghi’s idea of creating huge amounts of liquidity in a shrinking economy, while at the same time refusing to allow inflation, is at its very core an absurd negation of all economic gravity.
Dearprofessor, you giveanoverview of economictheoriesandeconomic great thinkers, facing their scientificandcreativeheritagewithpractice;David Ricardo, Adam Smith, Carl Marx , impressiveFriedrichList, von Hayek, Milton Friedman, Paul Krugman...Although themodern worldhasn’t got the patienceand the willto deal with thefundamentalknowledge, which economicthinkers you recommend,eithermodern orfromeconomic history, from which old bookswemightwipethe dust....
Economists should be evaluated in the context in which they write. If they e.g. recommend you carry an umbrella, you can disregard their advice if you find yourself in the middle of Sahara. Adam Smith wrote that England no longer needed protection, and he was right about that. Ricardo wanted to promote English industry by making labour cheaper. He therefore recommended that England stopped protection agriculture. These ideas only become “wrong” when employed in inappropriate contexts. Friedrich List is right in any country which finds itself bereft of manufacturing. Karl Marx was an economist who understood capitalism, correctly, as a system which revolutionises itself from within through new technologies. If we manage to separate the economic analysis of Marx from the policy conclusions of his successors, we find that the conservative Joseph Schumpeter took his basic idea of capitalism from Marx. My Marxists friends who have read volume 3 of Das Kapital tell me that financial crises are well understood there, as they were by social democrat Rudolf Hilferding.
The ideologies of Hayek and Friedman are difficult to understand outside the Cold War context, although Hayek – apart from his role as a Cold War propagandist – was also a serious economist who, for example, told whoever cares to read him that the present Euro arrangement was doomed to fail. Unfortunately I see Paul Krugman as an example of an economist who is willing to shed the assumptions of neo-classical economics only when things happen close to home. Early in his career, around 1980, he rediscovered the old truth that increasing returns activities (industry) create wealth and diminishing return activities (raw materials) create poverty, and even said that the classical development economists and Lenin were right. From a career point of view it is understandable why he abandoned this line of research – the dichotomy between increasing and diminishing return activities – but it was a great loss to the poor world when he continued writing about increasing returns only.
As a substitute to Adam Smith I would suggest his fellow Scotsman James Steuart (1713-1780), whose 1767 work on economics in many aspects – e.g in understanding technology – is much more profound than Smith’s later work. Steuart had studied in Germany and brought in continental economic themes complementing the English obsession with trade and barter and their disregard of production and technology.
In terms of the present crisis I think it is time to go back to Norwegian-American economist Thorstein Veblen (1857-1929) and to Englishman John A. Hobson (1858-1940). Hobson was the first to see the imminent risk of underconsumption (overproduction) that would hit capitalism, and which we now again see in the West. It took a long time before people listened to Hobson, and Keynes many years later had the decency of writing him a letter apologising for this. Hobson was also one who clearly saw the ills of imperialism. The United States and Europe could both need a John Hobson now.
How do you assign scorestoconditionyourhomeeconomicsin Norway;as seen fromour perspective,isgood. Norwegianoperator Telenorhas investedin Serbia, he bought oneof the greatestmobilephone companies. It is interesting thatyouexpress concern about thewealthacquiredby theNorwegianoil exports?
My criticism of Norway’s handling of the oil money is that too much has been hoarded in financial markets and too little invested in upgrading Norway’s technology base and infrastructure. I approve of Telenor’s investments in Serbia, only multinational companies can survive in this business. In an ideal world of symmetrical capitalism these investments would have been mirrored by corresponding Serbian investments in Norway, but unfortunately that is not the type of capitalism we have.
Manysuggestthat infuture yearsthe economicdevelopment will be seenin the area ofEurasia,in the forefront oftheBRICScountries, China, India, and Russia. How to explain that, having in mind that sucha large area, until recently, has beenseen as aplace ofunderdevelopedinfrastructure, demographic and social problems, potential forethnic conflict…
The BRIC countries – unfortunately with the possible exception of Russia – have been following the strategies that in the past used to be followed by the West. Both China and India have had industrialisation policies in place since the late 1940s, without interruption. These strategies clearly for a long time involved too much plan and too little market, but – as can be observed in Figure 3 – the gradual opening of China, India, and Brazil to free trade contrasts very favourably with the poor Russian record. Russia has climbed back after the disastrous 1990s, but with a very different income distribution and more social problems than before.
In short: China is doing what the West used to do, while the West has ended up believing in its own propaganda: It does not matter what a nations produces, be it potato chips or computer chips.
We do notknowhow much have you beenin a position tofollow thespace on Balkansand SoutheasternEurope,butwe would like to askyouto comment the economic situationin Serbia, where, after thepolitical changes2000thandtheremoval of SlobodanMilosevic, has beenconductedSaks’shocktherapy;privatization, deregulation, radical liberalization of imports, leading tothe samenegative effectsas well as in other countries where this neoliberal recipe was applied. It is interesting thatSerbiahad higherindustrial productionduring the sanctionsand isolation,thenafter, in thetimeof "democracyandfreemarkets."
Unfortunately the reply to this question is strongly related to question 7. Serbia, and the rest of Eastern Europe, were subject to the same shock therapy and deindustrialisation as Russia was, authored by the same gurus: Jeffrey Sachs and Anders Åslund.
People in the small Latin-American countries generally had a higher standard of living when they “did everything wrong” and protected their industries than they now have after following the recommendations of Sachs, the IMF and the World Bank. The same thing appears to be true in many nations in the Balkans and Southeast Europe. In some countries, like Latvia, around 20 per cent of the population has left the country in relatively few years. Sooner or later the huge mistakes made by these people and institutions – WB and IMF – will be recognised. I am not sure if it should be seen as a consolation that Western Europe and the United States now fall victims to the same decline in real wages.
Finally,dearprofessor,can youtell us about therelationships and connectionsbetweenNorwegian andSerbianpeople; as well as theexamplesof friendshipin the relationshipof our two peoples?
My generation still suffers from the lack of knowledge about Eastern and South-Eastern Europe brought about by the Cold War. I am sure younger generations and their travel will improve contacts. The relationship between Serbia and Norway fortunately was greatly improved by one single person, Ljubisa Rajic, who explained the Serbian reality in Norwegian newspapers. He deserves much honour, also for translating two of my books into Serbian.
Geopolitika No. 63, May 2013