By James H. Nolt
After some intervening news, I finally return to the thread from a couple weeks ago in part because I recently started reading an excellent book with the same title as this blog. I was surprised to find that the authors, Norbert Häring and Niall Douglas, have several emphases that closely parallel my own. In particular they also highlight that mainstream economics has largely ignored private power since the discipline’s inception during the latter part of the 19th century.
Häring and Douglas even use the same three broad classifications of private power as I do: 1) financial or credit power, 2) pricing power over prices and wages, and 3) employer power over hiring and conditions of work. Like me, they speak of the key financial power as the power to advance or deny credit. Much of the detail they review is valuable, including scams and profitable operations possible using the various forms of private power. I strongly recommend their book.
However, there is one element of my own approach that is largely missing from their book, and indeed from most others that are critical of mainstream economics: the strategic method. It is not enough to describe private power if you do not explain how power is used strategically, such as I have been detailing in this blog. Häring and Douglas are quite good at showing the results of having, for example, financial power, but they are less systematic in describing how strategic games are played, as I have expounded in previous blogs.
The ancient Chinese strategist Sun Tzu wrote, “All warfare is based on deception.” This is also true of business and politics. Far too many analysts pay attention to what is easy to see, what is indeed often designed to be easy to see, the surface phenomena. In the movie The Wizard of Oz, the “great and powerful Oz” is ultimately revealed as a man behind a curtain, manipulating levers and projecting a terrifying display. Seldom do the social sciences pull back the curtain of deception to reveal the real exercise of power, especially private power. Textbook economics obfuscates private power the most with its myth of the market as the great and powerful invisible hand guiding all private transactions toward collective fairness, efficiency and stability.
The two main camps in textbook macroeconomics are liberal Keynesians and conservative market fundamentalists. The former believe that government fiscal policy (“tax and spend”) has been successful in stabilizing the business cycle since the Great Depression, and the latter believe that the market itself produces equilibrium and all problems and crises must be blamed on government interference. Both are wrong.
While it is true that most developed economies had less severe business cycles during several decades after World War II, this was not because of the success of Keynesian-inspired fiscal policy acting to stabilize demand. Conservative economists are right to criticize the failure of “Keynesianism” in this sense. Part of the reason it failed is that it was seldom consistently implemented. Real political systems were hardly ever able to coordinate their spending plans with the business cycle. Other priorities loom larger for politicians. Major expansions of government spending, such as President Johnson’s “Great Society” anti-poverty programs, were thus instituted not in the middle of a depression when spending was weak, but when the economy was in the midst of a prosperous boom. Likewise, when crises hit, spending is often cut instead of expanded as Keynesian demand management requires.
Yet it is true that major economies during the first several decades after World War II were more stable, that is, had less severe business cycles, than before or since. Some credit this to the success of macroeconomic demand management. But there is actually a different reason that has more to do with the structure of private power.
The enormous calamity of the Great Depression weakened financial institutions even more than manufacturing industries. Financial trading of all kinds shrank enormously. Many if not most industrial firms became self-financing as a result. In other words, they used their own retained earnings to finance capital expenditures and minimized borrowing. The bullish demand and quasi-planned economy during World War II further freed industrial firms from reliance on the financial sector. Many have noted that the finance business had a fairly sleepy period from the 1930s through the 1970s. Often this is attributed to government regulations, but it is also because of the relative independence of industrial firms compared with the period before and since.
As I have argued through this blog, the business cycle is largely a product of the expansion and contraction of credit, which occurs predominantly in the financial sector. As the role of finance grows, business cycles will become more active regardless of government regulation. Financial interests have many ways of avoiding or evading regulations in any case. In fact, profiting at the expense of regulations is called “regulatory arbitrage” among financiers. Eventually, when regulations become Swiss cheese, they are repealed as ineffective or non-functional. Financial power grew during the final decades of the 20th century not so much as a result of deregulation, but because powerful private investors regained confidence in the financial system and were deploying more and more of their capital in its machinations and less in the productive economy. The reemergence of financial power came first, government deregulation followed.
The impact of an increasingly financialized economy has been seen in more severe business cycles in all major countries since the last quarter of the 20th century. Often it was possible to ignore these developments and perceive instead “great moderation” made possible, supposedly, by successfully applying the universal laws of macroeconomic management and/or unleashing the brilliance of the market. These optimistic expectations were already dashed in many countries long before the Great Recession hit the U.S. and the world economy in 2007. Paul Krugman was one of the few to spot this global trend in his book, The Return of Depression Economics. Hyman Minsky was an even earlier prophet of financial instability. But most American economists, far from spotting this trend or anticipating it, were and remain oblivious.
Capitalist economies are fundamentally unmanageable because the expansion and contraction of credit advantages opposing parties, bears and bulls. Therefore no economic policy can satisfy a stable coalition of contending interests, which will always tug in opposite directions. Each of these interests is powerful enough to have a chance of reversing results, not just through governmental action, but also through exercising private powers, including credit manipulation. Liberal dreams of macroeconomic management by governmental fiscal and monetary policy foundered with postwar growth and reassertion of the financial sector. The middle of the 20th century was exceptional. Boom and bust is the capitalist norm.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.
[Photo courtesy of the Library of Congress]