znet/weisbrot on deflation - critique?

Craven, Jim jcraven at clark.edu
Sun Jul 13 16:06:35 MDT 2003


Anyutka wrote:

Sorry, Jim, but your analysis is based not on a critique of capitalism, but
on one of central banking.

My analysis, rushed by my own admission, was not a critique of central
banking per se. For openers, as I noted in my own words, it was to show how,
even in bourgeois theory, unexpected and sustained deflation could produce
some severe dislocations in the macro economy which, when coupled with
morphogenetic as well as the traditional morphostatic or purported
self-equilibrating, negative-feedback effects of neoclassicism and
increasing interdependence globally and domestically, could produce some
widespread waves of further dislocations.

Specifically:

I could go on, and notice I am looking only from the standpoint of
contradictions in bourgeois economic theory, when we bring in a
full-blown Marxist analysis, departing from the linear and unidirectional
"chains of causality" and ultimate "independent/dependent"
variables of bullshit neoclassicism, it gets even worse--or better from
the standpoint of destabilizing the whole system.

Got to run, more later, this is just for openers.

 Jim C.

Response: (Jim C.)

Neoclassicism, as Samir Amin noted in his Accumulation on a World Scale is a
theoretical edifice riddled with and based upon, summarily asserted (and
contrived) "axioms" of "universal" human behavior (irrespective of class,
gender, age, education, race and ethnicity etc) that form core postulates of
contrived syllogisms based upon an overall
hypothetico-deductivist/philopsophical-positivist epistemology that
constructs tautological "proofs" in support of the prime tautology and
"rationale" for capitalism: "everything tend to the best in the best of all
worlds."

Human beings are assumed to be universally: "maximizers" (a later retreat to
"satisficers") of total profits and utility and minimizers of costs, pain
and risks; perfectly rational (later a retreat to bounded rational) or able
to consider and weigh costs versus benefits; competitive; atomistic
(unaffected by peer-pressure or group allegiances); perfectly informed about
all input and output prices and able to calculate realtive prices (later a
retreat to "sufficiently informed"); selfish; egoistic; calculating
(actually able/inclined to calculate real values and relative prices etc);
able to form expectations about the future based on the past and present;
etc.

These core and summarily asserted--without much empirical support if any and
without empirical support thought to be needed--"axioms", "postulates",
"laws" etc, including "ultimate" independent and dependent variables along
with assumed independence of supply and demand curves, are critical to the
math purporting to show a system propelled by "exogenous shocks" to
successive states of disequilibria returning to new and relatively
predictable states of equilibria and potential general equilibria via the
endogenous and self-correcting/equilibrating process of the so-called "free
markets" of capitalism.

Let's take the issue of the real interest rate for openers. In all my years
of teaching economics, all my students came into my classes as already
savers, workers, consumers, borrowers, tenants, landlords, producers, small
business people etc. But I would say that prior to taking my classes, over
99.9% of them had no idea about real interest rates, real rents, real wages,
relative prices, terms of trade or any of those concepts. They were
basically calculating and making their decisions on the basis of nominal
values. Yes, it is true, that with the real interest rate being the nominal
interest rate minus the expected inflation rate, holding on to given nominal
interest rates while the inflation rates are negative and increasingly
negative causes real interest rates to rise. But the banks are in the
business of lending and other activities to absorb and rollover previously
realized surplus value and since many borrowers for purposes of consumption
do so on the basis of nominal interest rates, banks and other financials are
forced to lower nominal interest rates to push more borrowings of money like
a dope dealer pushes dope at the old grade school ("congratulations, you are
pre-approved...") so the tendencies toward higher real interest rates are
partially offset during deflation.

Secondly, lenders, do know about real interest rates and how to calculate or
estimate them, and when forming loan agreements they typically have in mind
a given or minimum-acceptable or target real interest rate so that based
upon EXPECTED future inflation rates they calculate a given nominal interest
rate which, when coupled with an actual that equals expected inflation rate
yields the target real interest rates. If actual inflation rates exceed
expected so that some components of overall inflation rates are unexpected,
then they partially lose as lenders but potentially gain as borrowers. When
you consider the context of a White House run by a criminal psycopath and
pathological liar derermined to do whatever is necessary to get re-elected
including the classic "pushing-on-a-string" hyper-expansionary monetary
policies and fiscal policies to nominally reduce unemployment sufficient to
get re-elected, coupled with a Fed riddled with libertarian ideologues
willing to abandon their own sacreds when ordered to do so, the lenders,
along with all those speculators in various types of futures, have good
reasons to worry about future prospects about real interest rates (remember
virtually all lenders are also borrowers) at least in the short-term. In
short, deep down, they don't believe some of their own rhetoric and in their
own messiahs often. Prospects of future recoveries unrestrained by the
so-called "automatic stabilizers of aggregate-demand-restraining rising
taxes and/or declining government transfers, and or recoveries fed by
wreckless monetary policies (from their point of view) may and often do
cause lenders to increase their minimumm acceptable or target real interest
rates as well as nominal interest rates necessary to capture them in the
face of increasing unertainty about the future; thus, even in the context of
deflation, nominal as well as real interest rates may rise and/or fall
depending upon the diagnoses and prognoses via-a-vis the essential causes,
dynamics and trajectories of deflation and its likely effects on the
macroeconomy.

Anyutka writes:

Only in a monetarily, centrally-planned economy (which central banking
creates) in which the medium of exchange is declared to be such by a
government with a printing press and is bereft of commodity backing and
therefore enters the economy as debt, is deflation a threat. Under free
market capitalism (which by definition requires commodity-backed money,
which is based on an asset, not debt) deflation is a boon - it clears out
malinvestments, thereby freeing capital for productive pursuits beneficial
to all.

Response (Jim C): In some ways, Anyutka is describing the U.S. economy
itself (minus the free-market capitalism which is more of a slogan than an
accurate description of the reality). Further, the U.S. has essentially a
fiat currency (even when officially still on the "gold standard") and as
Marx noted, for money to do what money does (medium of exchange, unit of
account, store of "value", standard of deferred payments) forms of money
must be not only recognized and accepted, portable, durable and divisible,
money must be a commodity in its own right and sought/held for its own
sake--but there is no necessary requirement (at least in the short-run) that
it be commodity "backed" in the sense of a gold standard or something seen
to be universally recognized and convertible to shore-up any lack of
confidence in or willingness to hold "coin of the realm." Further, there is
a demonstrated tendency in capitalism that those capitalists who
"malinvestments" get threatened or cleaned out with the high colonic enemas
of the troughs of the business cycle, typically resist and try to turn their
"malinvestments" into once-again-profitable investments through various
deals with the state and attacks against the working class. This notion of
"freeing capital for productive pursuits beneficial to all" sounds like
something out of a libertarian primer on the wonders of "free market"
capitalism and rather curious for someone seeking a "critique of capitalism"
and not just central banking.

Anyutka writes:

As prices fall due to increased productivity and efficient capital
allocation, the value of money grows.  (As a consequence, so do domestic
savings - the only investment capital of which any nation can truly be
assured.)

Response Jim C: Throughout the history of capitalism, capitalists have been
as willing--if not more so--to take the gains from any increased
productivities as direct increases surplus value as to use them to be able
to profitably lower prices. Throughout some of the deepest recessions, since
the so-called "Great Depression", we have seen disinflations but rarely
outright deflation. Rising inventories, vicious seller vs seller
competitions may force some price reductions (for those commodities whose
overall price elasticities of demand are relatively and significantly price
elastic) but general price reductions generally occur only in the most
extreme circumstances and are generally thought to be the effect--and
harbinger--of deeper systemic crises.


Anyutka writes:

This is especially important for the working class, who pay the greatest
price in a fiat system which can only work - temporarily and inefficiently -
under a regime of perpetual inflation, i.e. theft. Funny how nobody gets
this right - people cheer when the value of their homes rise, but are
supposed to be threatened when the value of their money does the same?  The
only ones truly under the gun from deflation are the govt and their bankster
allies - all scam artists, villains, and rogues living well off the labor of
others. -A.


Response Jim C: Most homeowners I have met are very aware that some of the
same forces that may be increasing their equity in their homes are also
operating to increase the costs of maintaining those homes to be able to
capture or realize some of their projected--and highly illusory--equity.
Remember, equity is the estimated difference between estimated market price
of a home minus what is owed on the home. But what price thehome will
actually clear at is highly speculative and even illusory. Where homeowners
used to think rising equity with time of home ownership was a given, certain
regional markets with significantly falling home prices have driven home the
point that projected equity is no longer a given. Further, as I noted, most
folks not trained in economics at some level think in nominal not real terms
in their everyday calculations. I have asked working students at the
beginning of my classes to calculate real wages, real interest rates, real
rents, real profits, relative prices etc and few if any could do so.

Next, I do agree with the point about underconsumptionism being the or only
factor in potential deflation. As Marx and others noted and proved,
capitalism, by virtue of its inner and defining imperatives and "logic" of
accumulation, generates periodic realization crises between the generation
of potential surplus value in the productive processes of capitalism versus
realization or actually capturing potential surplus value through effective
aggregate demand, marketing and other processes of capitalism on the demand
realization side.

More later.

Jim C




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