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Archive for December, 2008

This headline is striking for its elegance: “Revise regulation, the theory of market equilibrium is wrong”. Obviously this speaks directly to a major criticism of neoclassical theory by heterodox economists. An article in the Real World Economics Review (formerly PAER) identifies methodological equilibration as one of three axioms intrinsic in neoclassical theory. Soros’ criticism strikes a chord with me.
Now, like any eager economics student, I was first entranced by equilibrium in micro when we drew our supply and demand curves and saw where they crossed- the equilibrium point. I’m naturally attracted to lines that cross at a point. Even better when intermediate macro taught me that in the AS-AD model, the point of intersection was self-reinforcing. Move away from it, and you just go right back; it’s so elegant proving it to yourself.

But, things like the financial crisis throw the notion of equlibrium off kilter:

We are in the midst of the worst financial crisis since the 1930s. The salient feature of the crisis is that it was not caused by some external shock like OPEC raising the price of oil. It was generated by the financial system itself. This fact – a defect inherent in the system – contradicts the generally accepted theory that financial markets tend toward equilibrium and deviations from the equilibrium occur either in a random manner or are caused by some sudden external event to which markets have difficulty in adjusting. The current approach to market regulation has been based on this theory, but the severity and amplitude of the crisis proves convincingly that there is something fundamentally wrong with it.

Even better, Soros explains that when you go away formt he intersection, neat little arrows don’t lead you back:

I have developed an alternative theory which holds that financial markets do not reflect the underlying conditions accurately. They provide a picture that is always biased or distorted in some way or another. More importantly, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect.

I call this two-way circular connection between market prices and the underlying reality “reflexivity.” I contend that financial markets are always reflexive and on occasion they can veer quite far away from the so-called equilibrium. In other words, financial markets are prone to producing bubbles.

What then to do about it? Regulate. This is not the heterodox solution, but no one expects Soros  to call for the nationalization of the financial system, although he oes acknowledge that regulation within the current system is limited by lack of information, another good assumption to start with. It’s encouraging to see another prominent voice approach the financial system with correct premises.




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The Real Price Of Gold

A powerful and poetic story from National Geographic about the “21st Century Gold Rush“.

No single element has tantalized and tormented the human imagination more than the shimmering metal known by the chemical symbol Au. For thousands of years the desire to possess gold has driven people to extremes, fueling wars and conquests, girding empires and currencies, leveling mountains and forests. Gold is not vital to human existence; it has, in fact, relatively few practical uses. Yet its chief virtues—its unusual density and malleability along with its imperishable shine—have made it one of the world’s most coveted commodities, a transcendent symbol of beauty, wealth, and immortality.

The price of gold has soared by 235 percent in the ast 8 years, but global supplies are dwindling.

Now the world’s richest deposits are fast being depleted, and new discoveries are rare. Gone are the hundred-mile-long gold reefs in South Africa or cherry-size nuggets in California. Most of the gold left to mine exists as traces buried in remote and fragile corners of the globe. It’s an invitation to destruction. But there is no shortage of miners, big and small, who are willing to accept.

And, what came as a surprise to me, was who is (or isn’t) the top consumer of gold in the world.

Nowhere is the gold obsession more culturally entrenched than it is in India. Per capita income in this country of a billion people is $2,700, but it has been the world’s runaway leader in gold demand for several decades. In 2007, India consumed 773.6 tons of gold, about 20 percent of the world gold market and more than double that purchased by either of its closest followers, China (363.3 tons) and the U.S. (278.1 tons).

The article goes on to document the wars, violence, crime, and degradation (human and ecological) wraught by the continuing gold frenzy.  Armies of migrant workers labor tirelessly extracting the gold from precarious environments while armies and countries often profit off these trades amidst civil and regional wars.

Juxtaposed to these images of “artisanal” gold mining is industrial gold mining, which accounts for 3/4 of today’s gold extraction.

[Industrial] Gold mining, however, generates more waste per ounce than any other metal, and the mines’ mind-bending disparities of scale show why: These gashes in the Earth are so massive they can be seen from space, yet the particles being mined in them are so microscopic that, in many cases, more than 200 could fit on the head of a pin.

The article is pretty lengthy, but the stories are fascinating.  From Peru to Indonesia, gold is leaving a not so sterling mark on much of this world.

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South Korean parliament members are fighting over a proposed free trade pact with the United States.  Members of the party opposing the deal were locked out of a discussion meeting today, leading to physical clashes and “at least one person bleeding from the face.”

The parliamentary battle over a contentious free trade deal in South Korea led to a confrontation on Thursday in which opposition lawmakers used a sledgehammer to knock down the doors of a blockaded room in which a committee was discussing the agreement.

What’s at stake?

The members of the opposition Democratic Party were trying to stop the trade agreement with the United States from advancing to the floor of parliament for a final vote. The governing party has been seeking to ratify the trade pact by year’s end, saying it would improve South Korea’s competitiveness and ties with the United States. Opponents say it will hurt South Korean farmers.

Across the pond…

The pact faces stiff opposition in United States Congress, where many fear it could disadvantage struggling American automakers.

UPDATE: More coverage and a video.

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Food Fights

Our biggest aspirational peer is apparently years ahead of us in locally grown, organic food. That’s right, pseudo-communist Cuba is a leader in urban gardens, which have substantially cut Cuba’s need to import food from the United States. What is interesting is that Cuba, not always seen as a standard-bearer of the free market, has done this with economically smart food policy:

“We have taken organic agriculture to a social level,” said Salcines.

Castro has decentralized farm decision-making and raised the prices that the state pays for agricultural products, which has increased milk production, for example, by almost 20 percent.

And, in September, the government began renting out unused state-owned lands to farmers and cooperatives, measures that met with approval of international aid groups.

“Decentralization and economic incentives. If those elements are expanded to the rest of the agricultural sector, the response will be the same,” said Welthungerhilfe’s Haep.

Meanwhile, it appears the free market US is headed for more of the same, as Tom Vilsack, former governor of Iowa, is being named Obama’s ag secretary. He comes from a state dominated by corn politics, which means that we are in for more of the same: corn subsidies, fertilizer subsidies, et al. that are geared towards large farms, not small farms and certainly not consumers. An organic consumers group is worried about the food safety implications of this move:

“Obama’s choice for Secretary of Agriculture points to the continuation of agribusiness as usual, the failed policies of chemical- and energy-intensive, genetically engineered industrial agriculture,” said Cummins. “Americans were promised ‘change,’ not just another shill for Monsanto and corporate agribusiness. Considering the challenges we collectively face as a nation, from climate change and rising energy costs to food insecurity, we need an administration that moves beyond ‘business as usual’ to fundamental change—before it’s too late,” concluded Cummins.

I’m not Joe free market, but it’s pretty obvious when non-free market policies are doing the opposite of achieveing social welfare. This is clearly one of those cases. If the government is going to subsidize aspects of agriculture, it should subsidize those aspects that benefit small farmers, consumers, and the environment. Meanwhile, Ezra Klein believes we need to change the USDA to a Dept of Food. Interesting stuff. At the end of the day, it’s sad that we are having a discussion about food policy and health care where Cuba seems to come out ahead in various aspects.

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lunch break

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From The Onion

$700 Billion Bailout Celebrated With Lavish $800 Billion Executive Party

Amid the bleak backdrop of imminent economic collapse, worried observers got some good news last October when executives from the nation’s top 10 failing companies celebrated the historic $700 billion government bailout with an ultra- extravagant $800 billion party aimed at restoring confidence and bolstering their resolve.

“I’m glad we were all humble enough to recognize that we couldn’t do this on our own,” said AIG CEO Edward Liddy, sitting in a hot tub filled with Cristal and seven dozen endangered-quail eggs. “Having come so close to disaster, it is crucial that I eat these 24-karat-gold-leaf-wrapped chocolate truffles to boost stockholder morale and show all the critics and naysayers that we are carrying on just as we always have.”

We’re In An Economy-Sized Pickle!

Sorry to be a Cindy Cynic, but I think those of us who buy lots of stuff, including many things we don’t need, are the unsung heroes that kept the wheels of prosperity rolling for so long, and we deserve to be treated accordingly!

The Onion…the truths we never want to hear…

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Merry Potlatch

In these dire economic times, people are looking anywhere and everywhere for ideas on how to make sense of it all, or to just stay afloat amidst the deluge.  Courtesy of the NY Times, lessons for the Holidays from the Kwakwaka’wakw Indians and potlatch on gift-giving.

What can the Kwakwaka’wakw teach us in our hard times? Here, courtesy of some of their elders and the anthropologists who have studied the potlatch, are some lessons for dealing with the holiday crunch

Their simple advice includes: “simplify and economize,” “control your animosity,” “but a little showing off is just fine,” “turnabout is fair play,” “don’t forget your enemies,” “share the wealth,” and “ignore the scrooges.”

But as Marcel Mauss made clear in his monumental study of potlatch, the point is social solidarity, and it appears that that point hasn’t been forgotten.

Even in hard economic times, the potlatch has always been the structure that enables people in our society to work together

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Save a CEO

473

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Cereal and Pop Culture

The cereal business had one major drawback—there was little substantive difference between brands. To stand out from the crowd, manufacturers realized that they had to focus more on the outside of the box than on what was inside. Some tried decorating their products with adjectives, creating names like University Brand Daintily Crisped Flaked Corn. Others competed to appear the healthiest. Tryabita, for example, was infused with celery flavor because, well, it sounded healthy.

Praying for A Better Economy

Many ministers have for the moment jettisoned standard sermons on marriage and the Beatitudes to preach instead about the theological meaning of the downturn.

A recent spot check of some large Roman Catholic parishes and mainline Protestant churches around the nation indicated attendance increases there, too. But they were nowhere near as striking as those reported by congregations describing themselves as evangelical, a term generally applied to churches that stress the literal authority of Scripture and the importance of personal conversion, or being “born again.”

Stimulus From Below

If the economy continues to deteriorate, the poor won’t just be with us, they’ll be us. And they’ll be much harder to ignore.

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Joseph Stiglitz thinks so, echoing the famous words spoken by Richard Nixon back in 1971.

We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.

Of course, this is hyperbole, and Stiglitz has a vested interest in seeing the return of Keynes in economic policy.  He can hardly contain his sense of vindication…

For those of us who claimed some connection to the Keynesian tradition, this is a moment of triumph, after having been left in the wilderness, almost shunned, for more than three decades. At one level, what is happening now is a triumph of reason and evidence over ideology and interests.

Yes, it is true: Keynesians (or other more regulation-friendly economists) will likely see greater attention paid to them in the coming years (or decades) given the catastrophic mess we are seeing right now.  But I have a problem with Stiglitz’s either/or logic–for him it’s either neoliberalism or Keynesianism.  By setting up this false dichotomy, the ability to debate other alternatives in the economic and policy sphere are greatly diminished.  This tendency to project the either/or logic of pro- or anti-state intervention into economic debates has been duly noted by Richard Wolff and others.

Though I have to give credit to Stiglitz, since he does admit that the Keynesian ideology is itself not necessarily politically neutral.

Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests. Have those who pushed deregulation ten years ago learned their lesson? Or will they simply push for cosmetic reforms – the minimum required to justify the mega-trillion dollar bailouts? Has there been a change of heart, or only a change in strategy? After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!

This is a real risk: that any set of policies claiming to be the “economic solution” may in fact be a new niche or strategy for the same profit-fundamentalism that has driven the U.S. economy for several decades now.

So are we all Keynesians now?  I would say no.  Perhaps a disengagement from preformed ideologies is necessary for an unrestricted gauging of the problems and possible solutions.

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