we heard the phrase that such an initiative may well be good politically or socially, but #DoesItMakeEconomicSense?
President Jacob Zuma recently returned from Russia, a strange place to be for many when you’re in the middle of a crisis at home, as many a commentator here in South Africa has observed. Maybe he and Putin were swapping stories of a new series of Survivor. Putin certainly would have a lot to teach Zuma on that score.
But important as those tips may be for our embattled Zuma, Putin has much bigger fish to fry and for those of us more interested in social justice than the competing ambitions of Putin, Zuma and Obama, we may miss a more significant moment.
Guardian economics editor, Larry Elliot, has just declared that Putin’s decision to trade Russia’s energy supplies to China in Yuan and Roubles rather than the currency of world trade, the US dollar, marks the death of the free market new world order.
According to Elliot, trade liberalisation, welfare cuts, cheap credit, excessive borrowing and outsourcing jobs, have all exposed the depraved face of capitalism. Noting that every prescription of the new world order and its economic consensus has been overturned after barely 20 years, Elliot declares: “RIP new world order. Born Berlin 1989. Died with Lehman Brothers September 2008. Laid to rest eastern Ukraine August 2014.”
In Britain, the heartland of privatisation, Network Rail has just been quietly re-nationalised by stealth.
Where Does This Leave Economics Today?
Well now in 2014, we see the publication and runaway success of Thomas Piketty’s major work of economics, Capital in the 21st Century. Its concern is with pervasive, structural inequality. And not just as an aberration in capitalism, but as a long-term feature of capitalism. In this Piketty is turning his back on what economics, as a discipline, has been concerned about for more than 30 years – the behaviour of markets, mathematical modelling of investor choices, behaviour of credit, and so on.
It turns out that the 40-odd years of wealth convergence between the end of World War II and the 1980s was a blip in an otherwise long trend of nearly 200 years of capitalism. Many of us are now familiar with Piketty’s assessment that the rate of growth of private wealth exceeds the rate of growth of countries and so inequality must inevitably widen if left to its own devices. This inequality is exploding since the neo-liberal era post 1972.
But Piketty is no radical. So, rather than inequality portending social revolution, there is the possibility of offsetting its effects by state interventions, such as taxation.
Ironically, and this may explain the popularity of Piketty’s work amongst the New York glitterati, he is making economics respectable again.
Here in South Africa we have just had the spectre of African Bank Investment Limited (ABIL) lending to poor people, with no security at rates of up to 60% while being funded by selling bonds where they could get rates of 12%. ABIL’s business plan was financed by a borrowing-lending differential. They combined shareholder equity with selling bonds as a form of financing and then lent money to poor people at exorbitant rates. And when they went bust, the South African Reserve Bank bailed them out.
Interestingly enough, when this was followed by ratings agency, Moody’s, downgrading of all South Africa’s banks, it was greeted by a cacophony of business voices, financial journalists and embedded economists saying, “How dare they? They got it wrong? They don’t understand economics.”
When platinum workers went on a five-month strike for a minimum wage of R12,500, they were told that this was unaffordable and that they “didn’t understand economics”. Yet they won most of their demands after five months of defiance and the sky didn’t cave in.
Who Does Understand Economics?
Argentina, has once again defaulted on its debt in 2014. It did so before in 2002. “This is heresy,” the financial journalists say, “It cannot happen without the most dire of consequences!”
The threat of ratings agency downgrading or the likelihood of a debt default has been used for years as an argument for South Africa to pursue neo-liberal belt-tightening policies. Yet in 2002, Argentina followed through on J Paul Getty’s maxim: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
And so the threat of default meant that bondholders of Argentina’s debt queued up to accept at least a portion of the money owed to them. It was either that or nothing. Argentina got away with it.
Roll forward to 2014 and investment vehicles called “vulture funds” bought out some of the frustrated bondholders on the gamble that they could force Argentina through US courts to pay the original face value of the 2002 debt they held. The vulture funds won their legal case. The court ruled that Argentina could not pay those bondholders prepared to take a “hair-cut” if they did not pay the vulture funds at the levels that the face value of the bonds entitles them. So Argentina defaulted again.
So what’s the result in this saga of who blinks first? Well now, other speculators are offering to buy out the vulture funds. In the meantime, life goes on in Buenos Aires. The Springboks even played there recently.
So did the Argentineans not “understand economics”?
How Did We Get to the Age of the Economist As God?
What we call economics today was originally called “political economy” and was born in England in the aftermath of the industrial revolution, which had radically changed Britain.
At the heart of the political economy were social concerns about the problem of scarce resources and how to ensure general welfare for everyone given this constraint. Adam Smith’s famous injunction that “everyone pursuing their own selfish interests as the only guarantee for the development of all” came out of these circumstances. It is an irony of the first degree that today’s neo-liberal economists call themselves “Smithian” and widely quote Adam Smith, whereas he probably wouldn’t have recognised them.
But in its day there was no such thing as an “economic policy” let alone states concerned with broader public interests. Banks were private and hardly regulated and Britain’s Chancellor of the Exchequer still performed little more than its medieval role of collecting royal revenues.
The Bretton Woods agreement and the restructuring of Europe after World War II gave economists enormous clout for the first time. Economics departments in universities grew and most governments began to create ministries of economic affairs and national central banks became the norm. Of course Bretton Woods also set the US dollar as the equivalent of the old gold standard so exchange rates were largely fixed and finance markets largely national, so the need for a whole industry of “specialists” to predict market behaviour on behalf of clients was decidedly modest.
But economics was not only considered to be “the dismal science”. It was hardly considered to be a science at all. There was no Nobel Peace Prize in Economics until the late 1960s.
It was US President Nixon’s ending of the Bretton Woods Agreement by devaluing the dollar in 1972 that changed the world radically and ushered in the period of floating exchange rates. It was the US Securities and Exchange Commission’s decision to allow debt to be traded that opened the door to the Thatcherite revolution of the 1980s and recast the world as it is today.
And launched the Age of the “Economist as God”.
The Austrian economist, Friedrich Hayek, is widely credited as the intellectual architect of the neo-liberal approach: economic liberalisation, privatisation, deregulation and the dominance of markets. Yet Hayek wrote his major work in the 1920s and 1930s and was already in intellectual decline in the 1940s when he published his book, The Pure Theory of Capital, which turned out to be an abject failure. Fellow mainstream economist, Paul Samuelson, described the book as, “A pebble thrown in the pool of economic science that seemingly left nary a ripple.”
Hayek’s book, The Road to Serfdom, which appeared in 1944, was an embarrassment in academic circles. As far as his peers were concerned, Hayek didn’t understand “economics”. Even Milton Friedman objected to his work. However, Hayek’s ideas were resurrected when the Norwegian Nobel Prize committee awarded him the economics prize in 1972. He was also given political clout when Margaret Thatcher made The Road to Serfdom essential reading for her cabinet when she took power in 1979.
Since then economists have proliferated in proportion to the spread of the financialisation of economies. Growing alongside an increased domination of money capital and its mobility across borders and the proliferation of bonds, hedge funds and financial instruments, has been the need to have “financial experts” who can, ostensibly, make predictions about market behaviour.
Today with the growing interpenetration of banks and governments, we see the moving of embedded economists into the national Treasury and vice versa. With this we have seen the shift from economics as a rather limited tool of understanding social reality to economics as the final arbiter of reality. How often have we heard the smug phrase that such and such an initiative may well be good politically or socially, but does it make “economic sense”?
Now it’s all come a-cropper.
Dr Geoff Davies, a retired geophysicist at the Australian National University, has just published a book, Sack the Economists, which is making waves in that country. He echoes the widely held view that mainstream economists are getting away with murder. In a recent article summing up some of his key arguments, he writes:
“The mainstream economists â€’ the ones who dominate our public policy and universities â€’ claim the Global Financial Crisis of 2007 was so anomalous it could not have been foreseen. According to them, it came out of nowhere; they can’t be blamed when the world behaves in totally unexpected ways.
That excuse is an admission that mainstream economists have no idea how economies work. Isn’t it their job to understand the ups and downs of economies, especially the really big booms and crashes that cause so much damage?”
Come to think of it, when last have we had commentary in any of the South African media by any academic or so-called “neutral economist”?
Interestingly enough, even on the left this veneration of economists does the cause of social justice no good. All that they have done is seek out an economist willing to be their client instead of critiquing economics itself. COSATU has, for years, wheeled out some left-wing economist to talk about “industrial strategy”, “active labour markets” or why a weaker rand would be better than a stronger rand for workers, etc. In this it has played into the hands of both the Mbeki and Zuma governments. Both have been masters of setting up economic task teams to smooth over difficult political choices and instead talk national policy and get national consensus about what they deem to be “hard economic realities”.
The latest in this conveyer belt is the National Development Plan.
So its time to recall Marx’s criticism of the method of political economy – that it creates a fetish. Focussing on a physical exchange between things (commodities, prices, wages, profits, etc.) disguises the fact that this is a social relation between people, which is determined by relations of power.
The striking platinum workers of 2014 understood that. But then they didn’t study economics.