Archive for May, 2012

The End of Capitalism?

May 27, 2012

This was written as a commentary on a NY Times Article (the quoted portion) but goes much further.

““So many times, I went to the bank and said, ‘What did I do wrong?’ ” said Mr. Moreno, who recently had to lay off almost all of his employees, including a childhood friend. “But they just said they wanted their money back.”
Experts say that what happened to Mr. Moreno is happening to small companies all over Spain, as many of the regional savings banks that such businesses once relied on are being eliminated or swallowed up, in a series of steps intended to deal with the hundreds of billions of dollars in bad loans from the real estate meltdown.
Whether the strategy is working remains an open question. Moody’s recently downgraded more than a dozen Spanish banks, including the two largest, and on Friday, a major bank warned that it would need an additional $23.9 billion in aid, far beyond what the government estimated when it seized the bank this month.
But experts say there is little doubt that the loss of credit is hurting smaller businesses, contributing to Spain’s troubles by raising unemployment and cutting tax revenues, making it harder to bring its budget deficit down to manageable levels. The credit loss hits particularly hard in Spain, where more than 60 percent of the economy, and 80 percent of the jobs, come from small and medium-size companies. More than 500,000 small businesses have shut down in the last few years. “

As Spain goes now, so perhaps go we in the future.

This is all part of a global system of financialization, where money and how it’s managed and applied becomes more important than any of the other subsystems we use in modern society to organize ourselves. Money is seen as more important than the production of goods and services, and managing money is more important than managing production, and people who do this are therefore more important than others who keep society going.

Something like this, where one subsystem of the whole came to be considered more important than the others, resulted in destruction of past social systems that were once considered the best. It happened to earlier systems of organization, feudalism for example, it happened to communism, and this may be the process which will in turn destroy capitalism, the idea that only capital matters among the several subsystems that are a part of our society.

So what brought this on? I was thinking about an exchange between son Patrick and myself regarding Romney’s record. I thought about Bain Capital and what they did to gain money (I won’t call it earned; they were exploiters, not earners) and their role in the economy.

Consider a company. They may be half-a-century old, organized in the late 1900’s. An entrepreneur may have started small when he realized that he couldn’t buy widgets of the type he wanted, so he began to make them and sell them. After a time, he hired others, taught them to do what he’d done, and began managing. His business grew; perhaps widgets went out of fashion and he began making something else. At some point he came to realize that to expand further, he needed money now. Enter capital. Borrow, pay back principal plus interest from increased economic activity. Hire more workers. Make more money. Repeat as necessary.

But there has now been a change. That early entrepreneur knew all the people who worked for him. He talked to them, they talked to him. He understood that management can only manage if there are assets, including people. As the company grew, this changed. Perhaps the workers unionized. Now the manager only talked to union reps. It was all very dehumanizing; workers could be laid off for any reason. Their work had built the company, as that first manager knew; but now they were assets only. Investors came in and put money into the company in return for part ownership. Stock was bought and sold by people who knew nothing about the company and didn’t really care so long as investments were profitable. If they lost confidence in the investment, they sold.

For Romney and Bain Capital, this was an opportunity. They acquired control of the company. They could then lay off people, sell off assets of the company, take the profits, leave. If they laid off a worker who had been at the company 30 years, from the age of 20 perhaps, too bad. Only capital mattered, only finance, only profit. The 50-year-old worker, too old to find another career but too young to retire…that was his problem.

What does an employer owe to a worker?  If you agree to employ someone for a day, or for a week, and pay them an agreed upon sum, then the agreement can end at that time.  The agreement is not exploitative on either side.

But what if you employ someone for 20 or 30 years?  Such employment is always exploitative, because the employer plans on making a profit from the labor of the employee.  There is a tradeoff in salary and benefits for this; but at the same time, over long periods of a relationship, of more.  The employer has now taken most of an employee’s productive life, frequently the best and most productive part of it.  What responsibility does the employer have to the employee now?  

Under unrestrained capitalism, under financialization, the employer recognizes no responsibility at all. People aren’t people now, they’re only corporate assets, to be discarded when they’re presumed to be less profitable.

How could Bain profit? They might, for example, lay off the design section. Design is only necessary if you’re planning to manufacture new products. If you’re going to gut the business, you don’t need designers. Or you could begin importing goods and close down production entirely. The company now is a hollow shell, no longer manufacturing, only buying, marking up, and selling at a higher profit with the same old brand name. And profits soared, and Bain could now sell out at a profit and move on. And pocket millions.

Capitalism, and financialization. All good; all driven by greed. Perhaps a greedy union had even contributed to all this by demanding more and thereby weakening the company (prices of products were forced up and the products became less competitive) so that it became a target for Bain. Investor greed caused them to sell off in search of more profitable investments. The target company might even have been somewhat profitable before Bain acquired it; but in search of money, and driven by greed, Bain and the others like Bain bought in and through capital management gutted the company.

But the greater tragedy played out as this happened across the economy. All those laid off people; no longer producing, earning, spending; now they’re collecting unemployment. The economy began to collapse. People couldn’t pay mortgages, couldn’t finance new cars.

And it’s happening world wide. Spain, and in the US.

Are we seeing the collapse of capitalism as a system for organizing ourselves economically?


A (Minor) Criticism of Paul Krugman

May 23, 2012

I wrote this as a comment on an interview with Paul Krugman.  I tend to agree with almost all he says, but I think he concentrates too much on the financial aspect of economics and not enough on production and the relationship that this has on international trade.  And I think that international trade, and whether it’s balanced or whether it is in the positive (more sales than purchases) or negative state, is the key to a nation’s prosperity.  With a positive balance of trade, all of a nation’s excess labor is put to production; with negative trade balances, the nation moves toward unemployment.  It’s a fact that nations possess excess labor; it takes only a relative small number of people, with machines and efficient fabrication and production of commodities, to produce all the goods and services a nation needs.  If the excess is forced into this production of domestic necessities, competition forces prices to fall, so overall there’s no benefit for the domestic economy.  More people, but less domestic wealth.
Here’s my reply to the Krugman interview: 

Good discussion, and it’s probably a good book. But I think I need to argue with Mr Krugman about some of what he’s said. He’s only got a Nobel and writes textbooks for economics classes; what does he know?  😉
I’ve thought, and have written a couple of times, that we in the USA are actually in a state of economic depression and have been for years. Recession and depression are, as Krugman says, essentially the same except for degree and duration. I’ve concluded that we entered a depression before the recent Great Recession but managed to make it seem less severe by borrowing and spending. Deficit spending by government, supported by borrowing, has been continuous. Even during the Clinton presidency, when the economy ran a ‘surplus’, borrowing increased; some of that went into the space program, a lot of it went to payouts to people through social support programs, some went to the military for weaponry and two wars. There were also a number of natural disasters that soaked up money. All of this was paid for with money that the nation didn’t have.
The non-government-based economy during this time was shrinking. A lot of industries went overseas; mining of such commodities as copper and iron went to South America and other places. Oil production nearly ceased here; what oil was left was too expensive to extract. Asia began to supply steel as well as manufactured products. American production workers lost their jobs. This loss of jobs wasn’t solely the result of Recession, but was a much longer process as finance became the dominant consideration in business. Finance doesn’t care where the products come from; production, and workers, was marginalized. Workers lost jobs, and except for government spending to prop up the economy, that economy would have shrunk much more.
Economic activity that produces products that can be traded internationally is sustainable. Economic activity based on continuous borrowing is not. It’s as simple as that.
If you’re selling internationally, money comes into the nation as well as going out. If you’re borrowing, money comes in, international goods come in, and money for those flows out; but nations who profit from selling us oil and copper and steel and manufactured goods can turn their profits around, buy US Treasury bonds, and then collect interest. Double whammy; even more money is now flowing out, the debt is rising constantly, the interest money to service that debt keeps getting larger, and so the whole house of cards begins to shake. We can no longer avoid facing the danger.
That much the people who favor reduction of the debt get right.
But a nation in depression or severe long-term recession can’t afford to stop paying out money. They can’t afford to stop borrowing. Lenders stop lending at some point. Nations, even the US, may be forced to default…or print money without the economic activity to back that money.
We’re the default backer of world trade, because the dollar is the international currency. If the US hits that wall, world trade collapses. In time, a new currency or basket of currencies can take the place of the dollar. But in the short term, the yuan and the yen and the euro and the pound all have problems of their own. There is no easy short term solution.
The bailout had to happen in some form, as did the Fed’s quantitative easing. But the bleeding sore remains under the bandaid: there aren’t enough good jobs to support the middle class, only very profitable jobs for the financials at the top and very poor jobs for those at the bottom. That latter class is growing, but it cannot possibly generate the economic surplus to fund the consumer economy. That lower class can’t afford to buy a house, or a new car, or a new TV; they have to keep the old ones. Many of them also had their own debt crises from credit cards; in effect, credit card companies provided their own ‘quantitative easiing’. People spend this year’s discretionary income last year or the year before. They’re still paying that off.
So the borrowing must continue for a while. But this time, to end the depression/recession, it must go to the real job creators in the form of middle class jobs to people who will buy things and pay taxes. People who are rebuilding infrastructure, roads and bridges and buildings and solar systems and power distribution nets; those are the ones who will really create jobs by creating demand for products. And most of those products need to be made here in the USA.
Do that, and the depression/recession will truly end.