At the Helm & on the Deck of the Great Depression II

Conservative v. liberal economic explanations for economic failure, the interests they express, and their policy implications

Friedman and Schwartz’s (A Monetary History of the United States, 1867-1960. 1963.) conservative monetarist thesis was that Fed policy caused the Great Depression by restraining Wall Street speculation. (See Bernake’s Fed speech).

This explanation for the Great Depression was formed in opposition to the Keynesian and Marxist explanations for the Great Depression. Keynesian and Marxist explanations faulted not the federal government (the job of which is to foster the conditions for capitalist accumulation, which at times means managing and even subordinating the competing interests of different sectors of capital) for the Great Depression. Instead Keynesian and Marxist economists faulted capitalism and its tendency toward inequality, social irrationality, and uncreative destruction. They showed that prior to the Great Depression, there had been overproduction—capital had too large a share of social income and workers too little; with all their excess riches, capitalists had invested in profit-seeking productive enterprises beyond lower-income consumers’ ability to consume, and in response to the disappointing returns to productive investments, capitalists had turned to finance and speculation to increase their accumulation. At that point, progressive economists explained, accumulation became radically disassociated from social rationality, and elite hoarding even took precedence over profit. The federal government had to step in to (temporarily) reign in capitalists in order to save capitalism.

Friedman’s paradigm switched the explanatory timeframe, blocking out how investment had outstripped consumption capacity in the 1920s, leading capitalists to use their riches to gamble to continue to build wealth. He blocked out how this Wall Street gambling activity had in turn led to the collapse of socially-rational productive activities while concentrating wealth further among the surviving capitalists.

Like liberal economists, Friedman was interested in accumulation; but unlike liberal economics, the policy implication of conservative economics is essentially that accumulation is the sole necessary and sufficient basis for a functioning economy. Keynsians argued, by contrast, that accumulation is a necessary but insufficient basis for a broadly functioning economy, pointing to the role of increasing inequality in starving the market, handicapping the working class, and so undermining the basis for long-term capitalist accumulation. Liberals and Marxists have maintained that the US (and the global) economy at the onset of the Great Depression was already in the process of crashing. Monetarist policy could not stop it. (Other than the cross-national association between the abandonment of globalization / the gold standard and reducing the length of the depression, there is little evidence that other forms of monetarist policy could have stopped the depression. Monetarism is just a counterfacutal theory.)

The assertion, in conservative economics, that accumulation automatically produces a functioning capitalist economy, is not even a necessary component to the theory. It’s superficial. The assertion is little more than a marketing ploy to attract liberals (who are also interested in maximizing accumulation) to the conservative program. Without the untenable conservative line that accumulation automatically produces a functioning capitalist economy (absolutely independent of workers’ and consumers’ conditions), it is ultimately beside the conservative economics point, whether a capitalist economy survives.

Friedman’s work was supported and promoted by capitalists in Austria, England, and the US. Their goal was the removal of checks and balances (regulation, taxation, socially-rational incentives) on their own powers (hence the promotion in conservative theory of a particular kind of liberty–liberty divorced from equality). Friedman’s explanatory scheme was designed to produce a political result—removing collective checks and balances on globally-dominant capitalists—by changing how citizens and decision-makers understood economic failure.

Following the implicit logic of conservative economics (and dispensing with the superficial and magical assertion that all a functioning economy needs is accumulation), we can see that Friedman and other conservative economists did not (and do not) care about a broadly-functioning economy. Consider: the interests behind the propagation of conservative economic theory do not change if capitalism fails. The survival of capitalism is a liberal concern. For conservatives, capitalism is only one mode of accumulation in an arsenal of strategies that includes other socially-irrational political-economies. The conservative goal is the concentrated dominance of a steep social hierarchy by any means necessary (Right, Ayn Rand?). The allure of conservatism is social stability. Its form of social stability is achieved by crippling the vast majority of humans.

Conservative economics has been determining policy, and continues to determine state policy toward economic failure

Friedman argued that by creating the disincentive for finance capital to speculate (by increasing the interest rate), the government restricted the amount of money available in the economy, and this caused the Depression. Friedman implied that speculation (gambling by capitalists, rather than investment in production) was always, everywhere a productive use of wealth that complemented productive investment. In this perspective, social rationality ceases to exist. Only the interests of the people who control capital matter.

Armed with Friedman’s theory that only government containment of capitalist entitlements prevents a healthy economy, economists and economic policy makers since the 1970s—when conservative economics became hegemonic (took over the universities and public policy globally)—have worked diligently to ensure the removal of socially-rational incentives, regulation, and taxation on the people who control capital.

The lessons that conservative economists say arise from the Great Depression and which dictate policy are as follows:
1) Taxpayers should prop up money supply. However, money supply should only be propped by giving financial capitalists more wealth and power. Financial capitalists should be given all latitude to operate as they see fit.
2) Interest rates should not be raised for any reason, whether to discourage speculation broadly or to discourage speculators from devaluing the currency.
3) Currency devaluation is not a problem.
4) The Fed should do whatever it takes to reduce the cost, to capitalists, of borrowing money, including reducing interest rates on government bonds and corporate debt.
5) Taxpayers should immediately and continuously bail out private banks, and government should print more money to give to banks. Banks should never be allowed to flounder or fail. Even if they are acting like bottomless pits, banks should not be nationalized. The entirety of the national wealth should be delivered to bank owners and managers, if must be.
6) Speculators should be allowed to speculate to their hearts’ content.
7) Taxpayers should prop up prices to whatever extent is needed to maintain capitalists’ wealth.

Take a look at these conservative conclusions. They were policy in the good times of the speculative bubbles, and they are policy in the ensuing economic decline, regardless of which capitalist party controls government. They constitute, very clearly, policy to redistribute as much wealth as possible to the top.

Once again in 2009 we find ourselves forced to recognize that the conservative formula does not automatically produce profit, the basis of capitalism. In fact, conservative policy allows the people who control capital to accumulate wealth and power without producing profit—without capitalism.

But in the vicious circle created by giving the most powerful people unchecked power, we have purged our society, and indeed much of the world, of respected political-economists who can even defend liberals’ capitalism, much less reduce the inequality that is strangling our collective and individual ability to adapt and innovate. That is why we are inexorably headed for a second Great Depression. A Great Depression is brute misery, just as a war in the Congo is brute misery. It is incumbent upon whatever non-conservative thinkers exist to educate themselves collectively and collectively produce and circulate pro-Enlightenment, low-inequality, environmentally-sound political-economic theories and policies that can help pave the way toward a less miserable, less brutish humanity.

And we must now acknowledge that the Marxists are correct: Whether liberal or conservative economic theory governs, a capitalist economy will periodically fail. There are fundamental contradictions within capitalism—it’s a total system that requires accumulating wealth and power without crushing the social and economic base—a nearly impossible balance, politically (even for social democrats, who still do the best at it). Over time, capitalism requires that people consume more as they earn less. Not immediately, but over time that integral requirement just breaks down the system, just as it initially built it up. Such integral contradictions can only be patched and glossed for a time, never eradicated.

(Hence exuberant, speculative bubbles are not signs of success—though they do allow their winners to amass fortunes and they do provide jobs and bolster consumption for a few years. But they don’t fix a collapsed foundation. Speculative bubbles are indicators that the capitalist economy is already headed for a depression. The reign of finance capital is a very bad sign for the working class. It means that working class people–and by this I also mean middle class people–are about to be used for meat.)

What can be done?

Too long we have wallowed in fatuous, elitist, misanthropic accounts, philosophical, political-economic, and artistic, of how social rationality does nothing but create mediocre humans. We need to grow up and face the fact that humans, including elites, are in fact somewhat mediocre great apes. We have a few good parlor tricks, and it’s amazing that we’re alive and we need to maximize experiences for everyone, but we are all each and every one of us, innately, fundamentally unspectacular. We have got to get over our petulant, egotistic, neurotic elitist fetish, because (Alas, Ayn and Frederick!) it’s all rubbish. (Want a sort of tally? Read Alan Weisman’s The World without Us (2007).)

The historical record around the world is clear: overpopulation, ignorance, and irrationality are maximized through high-inequality human relationships. For pity’s sake—think of the jaw-dropping human capacity, released under such circumstances, for pillaging, plundering, inflicting suffering and debasement, and committing atrocities.

We should never elevate accumulation to the level of prime directive. We do not produce better humans when we turn our backs on history, not when we collapse into the adolescent dream that by freeing the most powerful to do whatever they want, we liberate the human potential. Rather, it is in a world in which all humans may develop throughout their lives that we will see a proliferation of human ingenuity. We may not worship ingenuity from afar as much, but the thrill of wonder will be unchained from mystifications when human ingenuity is freed. (Think of it as the second coming of Prometheus.)

We progress when we actively work to decrease inequality—so mentally and physically damaging to social animals such as ourselves—and operate our social systems—including our political economies—as if they were the context and medium for all humans, which they are, rather than a throne built of human bodies for Great Men.

Given that our leaders are stuck in a conservative paradigm, just as elite economic leaders were stuck in a liquidationist paradigm in the early 1930s (again we’re all limited humans, including elites), non-elites should consider the following economic survival strategies:

1) Organize. Social movements can substitute for community where communities are not thick enough to help individuals and families, and social movements buffer political, economic and environmental costs. Organize around political economic approaches that do not discount working class, female, minority, immigrant, youth, and disabled people’s life quality, as well as environmental quality. Models for social movement are many and include the Minnesota Farm-Labor Party in the 1930s, the Grange at the turn of the 20th century, the multi-pronged social movement(s) in turn of the 20th century Sweden, the contemporary Dem Party Economic Recovery house meetings, the Civil Rights Movement in black churches in the mid-20th century US, etc. (See a social movements sociologist for guidance.) People involved in social movements usually build organizations. Create alternative goods and services co-ops.

2) Plant food gardens.

3) Take home maintenance classes. Develop a skill you can trade in an economic depression.

4) Buy a bike trailer and get a commuting bike for everyone in the family. Use bikes for transport as much as possible.

5) Real estate prices must go down to real estate value (based on income)–that is, 2001 prices. You should NOT pay more than the 2001 price for a home. If you can’t negotiate the 2001 price at the moment, rent, and wait a couple years until you can. The price WILL go down to the 2001 price. It is sheer irrationality to throw away your money to save someone else who gambled on the vain hope of infinitely balooning assets (blithely ignoring stagnant and declining incomes) and eventually lost. Interest rates for homebuyers may go up to 7 or 8%. (It’s only interest rates for capital that must be suppressed in conservative theory. For a good discussion of the role of high consumer interest rates in destroying a country’s productive capacity, see Thomas Geoghegan’s “Infinite Debt” in the April 2009 issue of Harper’s.) If you find a good landlord who is not in danger of foreclosure, rent. When asset prices have inflated as they have, renting is cheaper than all the costs associated with home ownership, and renting will give you much more flexibility to stay on your feet in a time of economic instability. Update: Banks aren’t lending to non-investors now (2009) anyway, so you probably cannot buy a home even if you want to. This means that investors rather than working class families will own an increasing share of property in the US, and in light of this, you should see survival strategy #1 above: Organize renters.

6) If you lose your job or do not make enough to pay credit cards and/or mortgage, see here for instructions.

7) Bear no or very few children. There are plenty of poor people in the US and plenty of children who need adults, if you want to nurture humans.

Depression-era investment tips:

7) Only invest in oil *before* the US goes to war on an oil country. Then get out before prices decline.
8) Stem cell technology will boom. In fact, luxury medical services or luxury medical organizations (hospitals that cater to the rich, etc.) will continue to thrive as inequality goes off the charts.
9) Luxury goods and services will continue to do fine as inequality goes off the charts.
10) The entertainment industry will do fine, as it did in the last Great Depression.
11) Alcohol sales will increase.

The end of globalization

Note for the acadmic-industrial complex that is about to melt down anyway: Globalization is over.

Although the rest of his logic is clear, Bernake does not make explicit the rationale for why taxpayers should prop up prices on top of keeping money supplied to capitalists. Though, in general, conservative theory holds that the government and the society should do anything to ensure that people who control money retain whatever wealth there is to be had. However, Bernake does imply that the conservative price-propping policy recommendation is deduced from the observation that countries that dropped the gold standard recovered from the depression faster. Perhaps the gold standard research has simply been used willy-nilly to support all hypotheses deriving from conservative economic theory.

Post-1980 monetarist research into the Depression-era relationship between the gold standard and depression severity could produce other conclusions not mentioned by Bernake. Another implication of the gold standard observation is that a globalized economy requires that one country—traditionally Britain and then the US—be firmly in a respected superpower position to manage banks and money markets around the world. If banks and capitalists around the world lose faith in that superpower’s ability to manage money, then globalization collapses.

An alternative policy conclusion stemming from the early-20th century gold standard observation could be that countries should abandon the reserve currency in a depression—say, the dollar in upcoming years. That is, countries should bail out of globalization. Otherwise, when other countries hold the reserve currency—for example, gold in the Great Depression, the dollar today—their economic depression will be exacerbated. In either case, I don’t think the current scenario looks good for the US dollar or globalization.