by Alex Foti

Precarity in the Great Recession

The Great Recession is making millions of precarious workers unemployed. Millions of precarious youth, women, immigrants are being made redundant. The crisis is swelling the ranks of the precariat, the new class created by neoliberalism which is the sum of those who are either unemployed or working under non-standard, temporary, part-time contracts in service, creative, knowledge industries. Those responsible for the crisis — big banks, investment funds, free-market economists and governments — whitewash and greenwash without shame hoping to go on with business as usual. Governments are giving trillions to the bankers and peanuts to the precarious. Riots and protests are spreading as a result, also resisting rising securitarianism and racism, but the fight against political and economic power to defend society and nature has just begun.

This historic crisis parallels the Great Depression in scope, if not in depth (extraordinary monetary expansion has so far cushioned the blow of the financial crisis), and will have similarly far-reaching socioeconomic and political consequences. From the ashes of early 20th century free-market liberalism, the Fordist-Keynesian mode of regulation emerged, ensuring working-class economic inclusion into mass consumerism via high wages and social integration via extensive welfare-state provisions. From the ashes of early 21st century free-market liberalism, a new form of social and political regulation of the economy will have to emerge if the crisis is to find a democratic solution. In fact, just like in the interwar period, especially in Europe, the danger of authoritarian and xenophobic solutions to the Big Crisis is significant.

Today’s crisis marks the end of Neoliberal-Hayekian regulation, as imposed over the course of the 1980s and 1990s, thanks to the seminal political work done by Reagan, Thatcher, Deng, Pinochet in the two hemispheres. But this once-in-a-century crisis occurs in the scary geoclimatic setting of Anthropocene, the man-made geological age triggered by the extremely rapid burning of fossil fuels in order to feed capital accumulation. The climate crisis is becoming frighteningly apparent, from polar caps to river deltas, from temperate plains to tropical forests. Millions of species are dying, millions of people are being displaced by droughts and floods. From the likes of Gore and Stern it’s hard to expect a veritable solution to the causes of climate change, since this would mean to confront the major carbon emitters, such as energy conglomerates, manufacturing corporations and their logistics, the aviation industry, fast food and agribusiness, mass tourism, in essence to shelve global, free-trade capitalism as we have known it since the Fall of the Wall. Turned liberals, most greens today just lack the political teeth needed to confront squarely corporate capitalism for its double responsibility in the economic and ecological crises. If anything, they are for green capitalism. So it falls onto the anarchists, feminists, precarious, immigrants, on those radical actors that have a stake in subverting the present financial order, to fight for real climate justice, to bring the economy back under the control of polities and communities, so that bioregional and atmospheric balances and constraints are respected.

The Great Recession, just like the Great Depression three generations ago, is a major demand crisis leading to mass unemployment and underemployment. It won’t be solved until the collective fruits of social productivity finally accrue to the employed and unemployed instead of managers and financiers. This requires massive fiscal redistribution from the tiny élites to the precarious multitudes. Free public health and education, basic income and leisure expansion, green jobs and new labor and property laws are the first-aid tools to address the crisis and ferry us toward a postcapitalist society, where corporations and investment banks are dismantled, credit is socialized, copyright is abolished, culture and knowledge are freely shared, the global economy is regionalized, food distribution networks are localized, energy production is decentralized, and political power is federalized, in regional and transnational federations of autonomous cities and liberated lands.

The issue of the distribution of productivity is crucial. The structural cause of the Great Recession lies in the failure of neoliberalism to distribute the productivity growth afforded by the digital revolution to large strata of society, who then had to take on debt to finance consumption of the new informational goods and services. Green capitalism wants to solve the economic crisis via green jobs and a new welfare system, but it will succeed in its task, only if it manages to widely redistribute what Negri and Hardt call “common wealth” i.e. the backlog of collective inventions, creations, relations and desires presently appropriated by Gates, Murdoch, Berlusconi, and the like.

The debate is open among leftists about whether green capitalism is economically sustainable (possibly so), and if so, if will lead to ecological sustainability (hardly so). Ecomarxists, for whom the labor theory of value is dogma, believe that the ecological crisis entails a squeeze in the rate of surplus value and thus a tendency for the rate of profit to fall*. Empirically, if productivity declines because of the ecological crisis, due to increases in the cost of energy or to the internalization (inclusion in the business cost of products and services) of the environmental damages caused by the economic process, then ecomarxists are right and green capitalism is unsustainable due to falling profits. If, conversely the ecological crisis triggers a green technological revolution, the rate of profit can stay equal as wages rise, so that green capitalism can create its own demand. In simpler words, if green capitalism is just greenwashing, i.e. marketing hype unsupported by hard facts, ultimately the ecological crisis will end up endangering capitalist accumulation leading to the the common ruin of today’s contending social classes: the global élite and the transnational precariat. If, on the other hand, green capitalism is the harbinger of a fourth industrial revolution (first: steam and textiles; second: electricity, steel, chemicals; third: electronics, networking; fourth: genomics, greenomics), productivity will rise and this would create a favorable context for victories on wages and labor conditions, as well as ease political resistance to income redistribution via progressive taxation (when taxes hit the rich proportionally more than the poor; under neoliberalism taxation has instead been regressive). Another way of looking at this is to consider the fact that the price of a good is equal to the wage rate divided by productivity (production per hour worked) multiplied by one plus the rate of profit, the margin that rewards the entrepreneur and pays interest to the banker. At constant prices, if productivity increases because of a rise in energy efficiency, either the wage rate rises or the rate of profit must increase, or a combination of the two factors§.

Contrary to what Marx predicted, improvements in wages and living standards have been made possible under capitalism thanks to the combination of much-sweated technological innovation and hard-fought social redistribution. Have these improvements come at the cost of bankrupting the biosphere? It will end up like that if social resistance to capitalism is not strong enough to decarbonize the economy. In other words, if climate anarchists lose the incipient struggle with green capitalists. If movements lose the fight for climate justice, Earth might become like Venus. From the experience of the poor and precarious of New Orleans, we know the horrors that lie in store when climate disaster strikes a class-polarized urban society. The climate question conceals a social question, because the precarious stand to lose the most in the biocrisis. On the other hand, precarious need to be empowered to be effective antagonists to global financial élites; only if they secure income and leisure, they can have the freedom to erect the postcapitalist society. Precarious-to-precarious community solutions to urban habitats, energy, food production and social housing will have to become increasingly common as answers to unemployment and environmental crisis. Whole cities can be redesigned by expanding self-organized groups of precarious ecohacktivists living from their collective labor and the sharing of what’s produced and exchanged in their social networks.

If climate justice movements lose the battle that is taking tens of thousands to Copenhagen in December and thus fail to impose their collective will onto government and corporate technocrats, then by the middle of this century most of us will be either drowned or toasted. What’s at stake is neither the survival of capitalism nor industrialism, but of digital civilization and the promise of the universal access to information, knowledge and culture that the switch to postindustrialism has made possible.

Industrialism, informationalism, green capitalism

Green capitalism cannot be simply liquidated as a marketing ploy. It embodies the faction of the global bourgeoisie that understands the reality of climate change and of its own declining political legitimacy in the face of the banking crisis and the consequent end of neoliberal/monetarist hegemony. Capital does seek now to be submitted to a light top-down, as opposed to bottom-up, form of regulation, which, while warranting the survival of megabanks and megacorporations, tries to accommodate ecological imperatives and social needs. Fossil capitalism, on the other hand, is purely reactionary. It has long denied the existence of man-made planetary heating and it is now lobbying to seize upon the spaces opened by geopolitical (Iraq, Sudan etc become up for grabs) and ecological (the North-East and North-West passages are open) disasters. It has spawned the growth of an oil-military complex that is the biggest threat to the peace and welfare of humankind. The open defeat of Bushism by Obama’s civil society (young, women, Blacks, Latinos, churches, unions, community movements) signals the decline of petromilitarism and the rise of green capitalism. The new US administration is a definitely a friend of global capitalism and to ensure its viability is putting forward a set of policies amounting to eco-keynesian regulation lite, to salvage what’s left of the hegemony of US banks and corporations over the world economy. Obama’s economic policy is keynesian because it provides a demand stimulus via deficit spending: in a deep recession, banks are not lending, firms are not investing, consumers are not spending, so the state must step in to provide spending power and capital for investment. But it is eco- in the sense it provides incentives to augment energy efficiency of the economy and de-carbonize part of its power production.

Original Fordist keynesianism was incredibly wasteful in energy terms. Oil was made so cheap and consumer goods so abundant that the biosphere was trashed in the short space of three decades (1945-1975). The Soviet bloc, placing an increasingly oblolescent emphasis on heavy industry and lacking societal counterbalances to communist policies of industrial might, was proportionally more wasteful, producing a larger share of nuclear and environmental disasters. In their ideological competition, both the US and the USSR strove to empower their working classes as loyal citizens, producers and consumers. Industrialism was their common structural base. However, it will be wrong to look at the present ecological crisis as the crisis of “industrial society”. In fact, over the last three decades, informationalism has replaced industrialism as the dominant system of accumulation. Indeed the failure of command economies to perform the transition from industrialism to informationalism, from the electrical engine to the electronic chip, is viewed by contemporary sociology as the structural reason behind the implosion of the Soviet Union. Now the inherited neoliberal form of informational capitalism is morphing into green capitalism. The evidence for this is mounting: from Silicon Valley becoming a hotbed for solar to green sectors soon surpassing aerospace and defense in economic weight, according to a recent study made by the international bank HSBC. Industrialism is dependent on oil, coal and other hydrocarbons in a way that informationalism is not. Steel needs coal, the Net doesn’t. The problem with green capitalism is that the scale effect is likely to more than offset any improvements in energy intensity, so that emissions continue rise. Left to its own instincts, green capitalism would be ecologically unsustainable. A steady-state market economy can only come into being through extreme regulation from below and above.

Yet, economic growth only has a meaning if measured in money terms, not in physical terms. So, in principle a socially regulated form of capitalism can be envisaged that still grows in dollar terms (and this overcomes the economic crisis), but not in entropic terms. A stage of the economy where immaterial growth becomes the norm, along with the maximization of collective knowledge and social well-being, rather than corporate profit or private wealth. An economy where people mostly exchange immaterial services rather than material goods. In other words, a world where there’s money to be made in the economy, because informational as well as green jobs are available in large and increasing numbers. The question of growth must be reconsidered, and is in fact being reconsidered by economists and politicians in the light of the crisis: GDP will be soon replaced by alternative indicator of economic performance and socio-environmental progress.

Today, the décroissance approach is likely to fall on deaf ears, because it preaches parsimony to a population which is being precarized by the global recession. Climate justice is definitely a stronger rallying cry for all the forces resisting capitalist domination today, one that already resonates from North to South. If the overdeveloped North must certainly decrease material consumption, the recovery from the crisis can only occur if there’s more effective demand in euro, dollar, yuan terms in the hands of those with less money in their pockets and thus likely to spend it when given the opportunity: the poor, women, precarious and/or immigrant youth. Social regulation must ensure that this extra money is not spent at the mall but in ways that are thermodynamically sound: into sustainable mobility, local agricultural produce, reforestation, and renewable energy deployment, for example. Social spending must be used to strengthen the social networks of solidarity within and across generations and lands. The precarious strata and the informal, marginal sectors of society are the ones that stand to benefit the most from fiscal redistribution. Only generalized conflict can emancipate the precarious and lead to sharp increases in social spending.

Like the wobblies a century ago, the precarious must organize across genders and ethnic groups to create their own unions and fight for a much larger slice of the pie. If the pie’s shrinking like Latouche wants, as people save more and consume less, many more will be made jobless and the precariat is gonna end up in an even more precarious condition than under neoliberalism. It’s true that capitalism is addicted to growth, but this is monetary growth, not necessarily an increase in the amount of “stuff” produced.

The distinction between bounded material growth and unbounded immaterial growth is useful to conceive a social scenario that is postcapitalist and progressive. Politically, this would also be a society where the different aims of anarchosyndicalists (constructing a postcapitalist egalitarian commonwealth) and anarchogreens (creating a thermodynamicist society of peers on a biodiverse planet) can be reconciled. It’s a social scenario where the autonomous, pirate, queer practices of the immaterial precariat are able to defeat the political offensive of green capitalism and drive the transition toward postcapitalism, an economy meeting ecological and social targets where grassroots experimentation is encouraged and regulation is horizontal and bottom-up, rather than vertical and top-down. To address both the economic and ecological crisis in my view we would have to push for a service, relational, commons-based peer-production economy, whose aim is the growth in knowledge, leisure and culture as opposed to the growth of goods and material wealth. This would be a society based on ecological remediation, immaterial accumulation and the maximization of happiness among its participants, rather than on material opulence for a minority of people.

Synopsis so far: we have an economic and ecological crisis of capitalism where class and climate struggles become central. The social actors of class struggle are new, since capitalism is no longer industrial, but has become informational. They are the precarious, those whose rights and talents have been immolated on the altar of labor flexibility and financial profit. The precarious in the informational economy must embrace the climate question, because the solidaristic postcapitalist welfare society they demand can only be achieved if the ecological struggle fought by the climate anarchists is won. Since the precariat is the new anticapitalist social subject, radical ecology shall become its ideology.

Anarchist movements and postcapitalism

The death of communism two decades ago and the birth of the antiglobalization movement a decade ago have brought anarchism to the fore as the only plausible anticapitalist ideology, online and offline. But what’s anarchism today? Or more interestingly, who are the anarchists? I think they mainly come in three types: anarchogreens, anarchosyndicalists and anarchoautonomists. One could add the anarchoinsurrectionists, but Julien Coupat in theory and the Greek rebellion in practice have created a new hybrid category, dubbed anarcho-autonomie in France, which is highlighted by the insurgent, antiauthoritarian practices spreading across the dissident/immigrant youth of Europe and North America. Increasingly, the Italian and German traditions of autonomia are intertwined with anarchist, antifascist and antiracist strands to form an anarchoautonomist synthesis across Europe. A generation totally oblivious of 20th century ideological disputes does not distinguish between anarchist and autonomous resistance: on the barricades, all you see is black hoodies fighting state repression and corporate domination. The comparative table below portrays the three major anticapitalist tendencies at work today, and the spectrum of resources for conflict they offer to the disaffected youth of the metropolises of the planet. It will be interesting to see how the various discourses of anticapitalism and radical ecology will mesh into direct action between December 11 and 16 during the COP15 Climate Summit targeting fossil capitalism, policed borders, agribusiness, indigenous peoples’ sovereignty, and the very legitimacy and effectiveness of the conference itself.

Anarchy, Autonomy, Ecology: A Trinity for Anarchists?

It’s vital for anarchist and libertarian tendencies to look out to the wider world, while keeping themselves open to the queer and creative influences coming from contemporary society and popular culture. Ideological purity and historical fidelity are usually obstacles to political effectiveness. What’s important is not showing our lack of complicity in the self-destruction of human civilization, but to prevent it. The fight is not to return to pre-industrial nature, whatever it was, but foster a postcapitalist natural environment, where ecosystems, water, trees and bees are the most precious forms of common wealth.

The solution to the precarious question is not going to be found in the return to the old speculative, overindebted, overdeveloped, ecocidal, supremely unequal consumer economy of yore, but in the fight for a new economic and welfare system built around the environment’s priorities and the social needs of the precarious sectors of society. Redistribution can be achieved thanks to massive strike movements and via capital, corporate and carbon taxation to pay for universal health and education, basic income for all adults and finance a reduction in worktime such as the 4-day week, provide everybody with free access to online knowledge, supply economic incentives for commons-based peer production and sharing, subsidize green housing and green job creation for all unemployed wishing to work, socialize banking to fund renewable energy and sustainable living community projects, promote urban and labor rights of solidarity striking, self-organization and self-unionization, and most of all end the scandalous discrimination and persecution of immigrants and asylum-seekers. The politics of the common and the struggle around commons — and especially of the most precious common of all, the atmosphere — cannot but start from the collective defense and expansion of our own urban commons: squats, social centers, radical associations, alternative theaters, self-managed parks and gardens etc. Social cooperation needs to find its own organizational resources and political strategies to prevail over capitalist enclosures of immaterial assets and privatizations of social space.

Redistribution of wealth and power toward the precarious, growth of immaterial knowledge, cultural enrichment of society and massive expansion of leisure are fundamental social preconditions for the horizontal eco-social design of a resilient postcapitalist society, freeing the time to pursue ecohacktive and permacultural activities, giving the time and money back to precarized people to work for environmental remediation and think collectively about their own future, cutting the need for quick consumption and instant satisfaction. A strongly relational and solidaristic economy would fulfill many of the needs today obviated by individualized market transactions. The multigendered and multiethnic precariat can be the social driver for local low-carbon economies of cooperation, exchange and mutual aid, food and energy production, just as the immaterial precariat has so far been the core constituency of the climate camp movement. After all, in a networked information economy, it’s the anarchists not the capitalists that control the strategic means of production — the computing power of connected PCs — enabling the distributed elaboration and production of information, culture and knowledge through networks which is making the age of mass media obsolete. Immaterial labor puts a new, non-market and non-proprietary sector at the center of wealth creation. But capitalist domination strongly resists the encroachment of p2p cooperation on its hitherto unchallenged prerogatives (directing production and marketing innovation) and has parliaments and tribunals squarely on its side striking at the growing commonalism of the precarious class.

To conclude, capitalism destroys environments as it precarizes peoples. The climate anarchists of the world and the precarious of europe must come together in Copenhagen to unmask Barroso’s and Obama’s carbon trading and government bailouts for the rich. We must fight for that money to go to social transfers, green jobs and renewable energy instead, ‘cos the Recession don’t do discounts and the Earth won’t do bailouts.

Notes

*     In algebraic terms, S/V, the ratio between surplus and variable capital (wages and fuel), goes down. The rate of profit is equal to surplus value over total capital invested C+V, which is turn the sum of fixed capital, plant and equipment, and variable capital, wages and raw materials. As V rises, the rate of profit decreases (divide numerator and denominator by V to verify it is so). The same occurs as K rises, which is the case originally considered by Marx.

§          Mark-up price equation: P = w/ π (1 + r) where p is the price level, w is the hourly wage, π is hourly productivity, and r is the rate of profit. Introducing energy costs, the equation gets transformed into P = (w/ π) (1 + r)/( 1 – θp_E) where θ is the energy requirement per unit of output and p_E is the relative price of energy (the price of energy divided by the general price level P) and 1 > θp_E . If θ decreases, because of a rise in energy efficiency, this has the same effect as an increase of productivity π: in order for prices to stay constant, either w or r must rise.

µ             The conflict between the two versions of American capitalism is still unfolding. See for instance the recent exclusion of Van Jones, the prophet of green-collar jobs, from Obama’s circle of close advisors, after the negative campaign orchestrated by the neocon TV channel Fox News.

Bibliositography

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Bye, Greatrecessionists yours

The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.

That effort worked and the free-fall of economic activity eased. There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?

On the first question it looks like the global economy will bottom out in the second half of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts of Asia and Latin America) the recovery has already started.

On the second issue the debate is between those – most of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.

There are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

It was to be expected that our present economic traumas would call into question the state of economics. “Why did no one see the crisis coming?”, Queen Elizabeth reportedly asked one practitioner. A seminar at the British Academy tried to answer and the FT has taken up the discussion.

The Queen’s question is understandable, given the subject’s claims on its own behalf. Ever since modern economics started in the 18th century it has presented itself as a predictive discipline, akin to a natural science. Since the future a year ago included the present slump, it is natural that the failure of the economics profession – with a few exceptions – to foresee the coming collapse should have discredited its scientific pretensions. Economics is revealed to have no more clothes than other social science. One cannot imagine the Queen in, say, nine months’ time, asking a leading political scientist: “Why did no one tell me that Labour was going to win the election?” She would understand that this was not a prediction that any political scientist could make with conviction, however much time he had spent studying present and past opinion polls.

Nevertheless, the Queen’s question was wrong, because it accepted at face value the predictive claim of economics – a feature that has distinguished it from all other social sciences. Karl Popper produced a famous argument against the possibility of prediction in human affairs: one cannot anticipate a new invention because, if one could, one would already have invented it. However, this objection can be overcome if one assumes a stable and repetitive universe in which rational actors make efficient use of the information available to them. In this environment, uncertainty disappears to be replaced by calculable risk. Shocks and mistakes may occur but these will cancel each other out, so that, on average, people get what they expect.

An important implication of this view is that shares are always correctly priced. This is the basis of the so-called efficient market hypothesis that has dominated financial economics. It led bankers into blind faith in their mathematical forecasting models. It led governments and regulators to discount the possibility that financial markets could implode. It led to what Alan Greenspan called (after he had stepped down as chairman of the US Federal Reserve) “the underpricing of risk worldwide”.

It has also led to the discrediting of mainstream macroeconomics. The efficient market hypothesis is simply an application of the recently triumphant New Classical school, which preaches that a decentralised market system is always at full employment. In their obsession with getting government out of economic life, Chicago economists claimed that any consistent set of policies will be learnt and anticipated by a population, and will therefore be ineffective. Since people – apparently including the 10 per cent or so unemployed – are already in their preferred position because of their correct anticipations and instantaneous adjustment to change, “stimulus” policies are bound to fail and even make things worse. Recessions, in this view, are “optimal”.

Most of those unversed in New Classical economics assume that John Maynard Keynes exploded these fallacies 70 years ago. Their re-emergence is not just the result of the failure of Keynesian macroeconomic policy to anticipate or deal with “stagflation” in the 1970s. It reflects a persistent bias in economics towards an idealised account of human behaviour; what Joseph Schumpeter called the “Ricardian Vice” of excessive abstraction. It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?

One of the most interesting contributions to the FT.com debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.

The reconstruction of economics needs to start with the universities. First, degrees in the subject should be broadly based. They should take as their motto Keynes’s dictum that “economics is a moral and not a natural science”. They should contain not just the standard courses in elementary microeconomics and macroeconomics but economic and political history, the history of economic thought, moral and political philosophy, and sociology. Though some specialisation would be allowed in the final year, the mathematical component in the weighting of the degree should be sharply reduced. This is a return to the tradition of the Oxford Politics, Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.

Beyond this, the postgraduate study of macroeconomics might with advantage be separated from that of microeconomics. Courses in microeconomics should concern themselves, as at present, with the building and testing of models based on a narrow set of assumptions. Their field of applicability lies in those areas where we have reliable views of the future. Macroeconomics, though, is an essential part of the art of government, and should always be taught in conjunction with subjects bearing on this.

The obvious aim of such a reconstruction is to protect macroeconomics from the encroachment of the methods and habits of the mathematician. Only through some such broadening can we hope to provide a proper education for those whose usefulness to society will lie as much in their philosophical and political literacy as in their mathematical efficiency.

How to resolve this crisis in macroeconomics? The field must be revamped fundamentally. Some of its shortcomings are obvious. Before the financial crisis, most macroeconomists were blinded by the idea that efficient markets would take care of themselves. They did not bother to put financial markets and the banking sector into their models. This is a major flaw.

There is a deeper problem, though, that will be more difficult to resolve. This is the underlying paradigm of macroeconomic models. Mainstream models take the view that economic agents are superbly informed and understand the deep complexities of the world. In the jargon, they have “rational expectations”. Not only that. Since they all understand the same “truth”, they all act in the same way. Thus modelling the behaviour of just one agent (the “representative” consumer and the “representative” producer) is all one has to do to fully describe the intricacies of the world. Rarely has such a ludicrous idea been taken so seriously by so many academics.

We need a new science of macroeconomics. A science that starts from the assumption that individuals have severe cognitive limitations; that they do not understand much about the complexities of the world in which they live. This lack of understanding creates biased beliefs and collective movements of euphoria when agents underestimate risk, followed by collective depression in which perceptions of risk are dramatically increased. These collective movements turn uncorrelated risks into highly correlated ones. What Keynes called “animal spirits” are fundamental forces driving macroeconomic fluctuations.

The basic error of modern macroeconomics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of these decisions create collective movements that are not visible at the micro level.

It will remain difficult to model these collective movements. There is much resistance. Too many macroeconomists are attached to their models because they want to live in the comfort of what they understand – the behaviour of rational and superbly informed individuals.

To paraphrase Isaac Newton, macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, its practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try.

What follows is a fragment of a much larger project of research on debt and debt money in human history. The first and overwhelming conclusion of this project is that in studying economic history, we tend to systematically ignore the role of violence, the absolutely central role of war and slavery in creating and shaping the basic institutions of what we now call ‘the economy’. What’s more, origins matter. The violence may be invisible, but it remains inscribed in the very logic of our economic common sense, in the apparently self-evident nature of institutions that simply would never and could never exist outside of the monopoly of violence – but also, the systematic threat of violence – maintained by the contemporary state.

Let me start with the institution of slavery, whose role, I think, is key. In most times and places, slavery is seen as a consequence of war. Sometimes most slaves actually are war captives, sometimes they are not, but almost invariably, war is seen as the foundation and justification of the institution. If you surrender in war, what you surrender is your life; your conqueror has the right to kill you, and often will. If he chooses not to, you literally owe your life to him; a debt conceived as absolute, infinite, irredeemable. He can in principle extract anything he wants, and all debts – obligations – you may owe to others (your friends, family, former political allegiances), or that others owe you, are seen as being absolutely negated. Your debt to your owner is all that now exists.

This sort of logic has at least two very interesting consequences, though they might be said to pull in rather contrary directions. First of all, as we all know, it is another typical – perhaps defining – feature of slavery that slaves can be bought or sold. In this case, absolute debt becomes (in another context, that of the market) no longer absolute. In fact, it can be precisely quantified. There is good reason to believe that it was just this operation that made it possible to create something like our contemporary form of money to begin with, since what anthropologists used to refer to as ‘primitive money’, the kind that one finds in stateless societies (Solomon Island feather money, Iroquois wampum), was mostly used to arrange marriages, resolve blood feuds, and fiddle with other sorts of relations between people, rather than to buy and sell commodities. For instance, if slavery is debt, then debt can lead to slavery. A Babylonian peasant might have paid a handy sum in silver to his wife’s parents to officialise the marriage, but he in no sense owned her. He certainly couldn’t buy or sell the mother of his children. But all that would change if he took out a loan. Were he to default, his creditors could first remove his sheep and furniture, then his house, fields and orchards, and finally take his wife, children, and even himself as debt peons until the matter was settled (which, as his resources vanished, of course became increasingly difficult to do). Debt was the hinge that made it possible to imagine money in anything like the modern sense, and therefore, also, to produce what we like to call the market: an arena where anything can be bought and sold, because all objects are (like slaves) disembedded from their former social relations and exist only in relation to money.

But at the same time the logic of debt as conquest can, as I mentioned, pull another way. Kings, throughout history, tend to be profoundly ambivalent towards allowing the logic of debt to get completely out of hand. This is not because they are hostile to markets. On the contrary, they normally encourage them, for the simple reason that governments find it inconvenient to levy everything they need (silks, chariot wheels, flamingo tongues, lapis lazuli) directly from their subject population; it’s much easier to encourage markets and then buy them. Early markets often followed armies or royal entourages, or formed near palaces or at the fringes of military posts. This actually helps explain the rather puzzling behavior on the part of royal courts: after all, since kings usually controlled the gold and silver mines, what exactly was the point of stamping bits of the stuff with your face on it, dumping it on the civilian population, and then demanding they give it back to you again as taxes? It only makes sense if levying taxes was really a way to force everyone to acquire coins, so as to facilitate the rise of markets, since markets were convenient to have around. However, for our present purposes, the critical question is: how were these taxes justified? Why did subjects owe them, what debt were they discharging when they were paid? Here we return again to right of conquest. (Actually, in the ancient world, free citizens – whether in Mesopotamia, Greece, or Rome – often did not have to pay direct taxes for this very reason, but obviously I’m simplifying here.) If kings claimed to hold the power of life and death over their subjects by right of conquest, then their subjects’ debts were, also, ultimately infinite; and also, at least in that context, their relations to one another, what they owed to one another, was unimportant. All that really existed was their relation to the king. This in turn explains why kings and emperors invariably tried to regulate the powers that masters had over slaves, and creditors over debtors. At the very least they would always insist, if they had the power, that those prisoners who had already had their lives spared could no longer be killed by their masters. In fact, only rulers could have arbitrary power over life and death. One’s ultimate debt was to the state; it was the only one that was truly unlimited, that could make absolute, cosmic, claims.

The reason I stress this is because this logic is still with us. When we speak of a ‘society’ (French society, Jamaican society) we are really speaking of people organised by a single nation state. That is the tacit model, anyway. ‘Societies’ are really states, the logic of states is that of conquest, the logic of conquest is ultimately identical to that of slavery. True, in the hands of state apologists, this becomes transformed into a notion of a more benevolent ‘social debt’. Here there is a little story told, a kind of myth. We are all born with an infinite debt to the society that raised, nurtured, fed and clothed us, to those long dead who invented our language and traditions, to all those who made it possible for us to exist. In ancient times we thought we owed this to the gods (it was repaid in sacrifice, or, sacrifice was really just the payment of interest – ultimately, it was repaid by death). Later the debt was adopted by the state, itself a divine institution, with taxes substituted for sacrifice, and military service for one’s debt of life. Money is simply the concrete form of this social debt, the way that it is managed. Keynesians like this sort of logic. So do various strains of socialist, social democrats, even crypto-fascists like Auguste Comte (the first, as far as I am aware, to actually coin the phrase ‘social debt’). But the logic also runs through much of our common sense: consider for instance, the phrase, ‘to pay one’s debt to society’, or, ‘I felt I owed something to my country’, or, ‘I wanted to give something back.’ Always, in such cases, mutual rights and obligations, mutual commitments – the kind of relations that genuinely free people could make with one another – tend to be subsumed into a conception of ‘society’ where we are all equal only as absolute debtors before the (now invisible) figure of the king, who stands in for your mother, and by extension, humanity.

What I am suggesting, then, is that while the claims of the impersonal market and the claims of ‘society’ are often juxtaposed – and certainly have had a tendency to jockey back and forth in all sorts of practical ways – they are both ultimately founded on a very similar logic of violence. Neither is this a mere matter of historical origins that can be brushed away as inconsequential: neither states nor markets can exist without the constant threat of force.

One might ask, then, what is the alternative?

Towards a History of Virtual Money

Here I can return to my original point: that money did not originally appear in this cold, metal, impersonal form. It originally appears in the form of a measure, an abstraction, but also as a relation (of debt and obligation) between human beings. It is important to note that historically it is commodity money that has always been most directly linked to violence. As one historian put it, ‘bullion is the accessory of war, and not of peaceful trade.’1

The reason is simple. Commodity money, particularly in the form of gold and silver, is distinguished from credit money most of all by one spectacular feature: it can be stolen. Since an ingot of gold or silver is an object without a pedigree, throughout much of history bullion has served the same role as the contemporary drug dealer’s suitcase full of dollar bills, as an object without a history that will be accepted in exchange for other valuables just about anywhere, with no questions asked. As a result, one can see the last 5,000 years of human history as the history of a kind of alternation. Credit systems seem to arise, and to become dominant, in periods of relative social peace, across networks of trust, whether created by states or, in most periods, transnational institutions, whilst precious metals replace them in periods characterised by widespread plunder. Predatory lending systems certainly exist at every period, but they seem to have had the most damaging effects in periods when money was most easily convertible into cash.

So as a starting point to any attempt to discern the great rhythms that define the current historical moment, let me propose the following breakdown of Eurasian history according to the alternation between periods of virtual and metal money:

I. Age of the First Agrarian Empires (3500-800 BCE)

Dominant money form: virtual credit money

Our best information on the origins of money goes back to ancient Mesopotamia, but there seems no particular reason to believe matters were radically different in Pharaonic Egypt, Bronze Age China, or the Indus Valley. The Mesopotamian economy was dominated by large public institutions (Temples and Palaces) whose bureaucratic administrators effectively created money of account by establishing a fixed equivalent between silver and the staple crop, barley. Debts were calculated in silver, but silver was rarely used in transactions. Instead, payments were made in barley or in anything else that happened to be handy and acceptable. Major debts were recorded on cuneiform tablets kept as sureties by both parties to the transaction.

Certainly, markets did exist. Prices of certain commodities that were not produced within Temple or Palace holdings, and thus not subject to administered price schedules, would tend to fluctuate according to the vagaries of supply and demand. But most actual acts of everyday buying and selling, particularly those that were not carried out between absolute strangers, appear to have been made on credit. ‘Ale women’, or local innkeepers, served beer, for example, and often rented rooms; customers ran up a tab; normally, the full sum was dispatched at harvest time. Market vendors presumably acted as they do in small scale markets in Africa, or Central Asia, today, building up lists of trustworthy clients to whom they could extend credit.

The habit of money at interest also originates in Sumer – it remained unknown, for example, in Egypt. Interest rates, fixed at 20 percent, remained stable for 2,000 years. (This was not a sign of government control of the market: at this stage, institutions like this were what made markets possible.) This, however, led to some serious social problems. In years with bad harvests especially, peasants would start becoming hopelessly indebted to the rich, and would have to surrender their farms and, ultimately, family members, in debt bondage. Gradually, this condition seems to have come to a social crisis – not so much leading to popular uprisings, but to common people abandoning the cities and settled territory entirely and becoming semi-nomadic ‘bandits’ and raiders. It soon became traditional for each new ruler to wipe the slate clean, cancel all debts, and declare a general amnesty or ‘freedom’, so that all bonded labourers could return to their families. (It is significant here that the first word for ‘freedom’ known in any human language, the Sumerian amarga, literally means ‘return to mother’.) Biblical prophets instituted a similar custom, the Jubilee, whereby after seven years all debts were similarly cancelled. This is the direct ancestor of the New Testament notion of ‘redemption’. As economist Michael Hudson has pointed out, it seems one of the misfortunes of world history that the institution of lending money at interest disseminated out of Mesopotamia without, for the most part, being accompanied by its original checks and balances.

II. Axial Age (800 BCE – 600 CE)

Dominant money form: coinage and metal bullion

This was the age that saw the emergence of coinage, as well as the birth, in China, India and the Middle East, of all major world religions.2 From the Warring States period in China, to fragmentation in India, and to the carnage and mass enslavement that accompanied the expansion (and later, dissolution) of the Roman Empire, it was a period of spectacular creativity throughout most of the world, but of almost equally spectacular violence.

Coinage, which allowed for the actual use of gold and silver as a medium of exchange, also made possible the creation of markets in the now more familiar, impersonal sense of the term. Precious metals were also far more appropriate for an age of generalised warfare, for the obvious reason that they could be stolen. Coinage, certainly, was not invented to facilitate trade (the Phoenicians, consummate traders of the ancient world, were among the last to adopt it). It appears to have been first invented to pay soldiers, probably first of all by rulers of Lydia in Asia Minor to pay their Greek mercenaries. Carthage, another great trading nation, only started minting coins very late, and then explicitly to pay its foreign soldiers.

Throughout antiquity one can continue to speak of what Geoffrey Ingham has dubbed the ‘military-coinage complex’. He may have been better to call it a ‘military-coinage-slavery complex’, since the diffusion of new military technologies (Greek hoplites, Roman legions) was always closely tied to the capture and marketing of slaves. The other major source of slaves was debt: now that states no longer periodically wiped the slates clean, those not lucky enough to be citizens of the major military city-states – who were generally protected from predatory lenders – were fair game. The credit systems of the Near East did not crumble under commercial competition; they were destroyed by Alexander’s armies – armies that required half a ton of silver bullion per day in wages. The mines where the bullion was produced were generally worked by slaves. Military campaigns in turn ensured an endless flow of new slaves. Imperial tax systems, as noted, were largely designed to force their subjects to create markets, so that soldiers (and also, of course, government officials) would be able to use that bullion to buy anything they wanted. The kind of impersonal markets that once tended to spring up between societies, or at the fringes of military operations, now began to permeate society as a whole.

However tawdry their origins, the creation of new media of exchange – coinage appeared almost simultaneously in Greece, India, and China – appears to have had profound intellectual effects. Some have even gone so far as to argue that Greek philosophy was itself made possible by conceptual innovations introduced by coinage. The most remarkable pattern, though, is the emergence, in almost the exact times and places where one also sees the early spread of coinage, of what were to become modern world religions: prophetic Judaism, Christianity, Buddhism, Jainism, Confucianism, Taoism, and eventually, Islam. While the precise links are yet to be fully explored, in certain ways, these religions appear to have arisen in direct reaction to the logic of the market. To put the matter somewhat crudely: if one relegates a certain social space simply to the selfish acquisition of material things, it is almost inevitable that soon someone else will come to set aside another domain in which to preach that, from the perspective of ultimate values, material things are unimportant, and selfishness – or even the self – illusory.

III. The Middle Ages (600 CE – 1500 CE)3

The return to virtual credit money

If the Axial Age saw the emergence of complementary ideals of commodity markets and universal world religions, the Middle Ages were the period in which those two institutions began to merge. Religions began to take over the market systems. Everything from international trade to the organisation of local fairs increasingly came to be carried out through social networks defined and regulated by religious authorities. This enabled, in turn, the return throughout Eurasia of various forms of virtual credit money.

In Europe, where all this took place under the aegis of Christendom, coinage was only sporadically, and unevenly, available. Prices after 800 AD were calculated largely in terms of an old Carolingian currency that no longer existed (it was actually referred to at the time as ‘imaginary money’), but ordinary day-to-day buying and selling was carried out mainly through other means. One common expedient, for example, was the use of tally-sticks, notched pieces of wood that were broken in two as records of debt, with half being kept by the creditor, half by the debtor. Such tally-sticks were still in common use in much of England well into the 16th century. Larger transactions were handled through bills of exchange, with the great commercial fairs serving as their clearing houses. The Church, meanwhile, provided a legal framework, enforcing strict controls on the lending of money at interest and prohibitions on debt bondage.

The real nerve centre of the Medieval world economy, though, was the Indian Ocean, which along with the Central Asia caravan routes connected the great civilisations of India, China, and the Middle East. Here, trade was conducted through the framework of Islam, which not only provided a legal structure highly conducive to mercantile activities (while absolutely forbidding the lending of money at interest), but allowed for peaceful relations between merchants over a remarkably large part of the globe, allowing the creation of a variety of sophisticated credit instruments. Actually, Western Europe was, as in so many things, a relative late-comer in this regard: most of the financial innovations that reached Italy and France in the 11th and 12th centuries had been in common use in Egypt or Iraq since the 8th or 9th centuries. The word ‘cheque’, for example, derives from the Arab sakk, and appeared in English only around 1220 AD.

The case of China is even more complicated: the Middle Ages there began with the rapid spread of Buddhism, which, while it was in no position to enact laws or regulate commerce, did quickly move against local usurers by its invention of the pawn shop – the first pawn shops being based in Buddhist temples as a way of offering poor farmers an alternative to the local usurer. Before long, though, the state reasserted itself, as the state always tends to do in China. But as it did so, it not only regulated interest rates and attempted to abolish debt peonage, it moved away from bullion entirely by inventing paper money. All this was accompanied by the development, again, of a variety of complex financial instruments.

All this is not to say that this period did not see its share of carnage and plunder (particularly during the great nomadic invasions) or that coinage was not, in many times and places, an important medium of exchange. Still, what really characterises the period appears to be a movement in the other direction. Most of the Medieval period saw money largely delinked from coercive institutions. Money changers, one might say, were invited back into the temples, where they could be monitored. The result was a flowering of institutions premised on a much higher degree of social trust.

IV. Age of European Empires (1500-1971)

The return of precious metals

With the advent of the great European empires – Iberian, then North Atlantic – the world saw both a reversion to mass enslavement, plunder, and wars of destruction, and the consequent rapid return of gold and silver bullion as the main form of currency. Historical investigation will probably end up demonstrating that the origins of these transformations were more complicated than we ordinarily assume. Some of this was beginning to happen even before the conquest of the New World. One of the main factors of the movement back to bullion, for example, was the emergence of popular movements during the early Ming dynasty, in the 15th and 16th centuries, that ultimately forced the government to abandon not only paper money but any attempt to impose its own currency. This led to the reversion of the vast Chinese market to an uncoined silver standard. Since taxes were also gradually commuted into silver, it soon became the more or less official Chinese policy to try to bring as much silver into the country as possible, so as to keep taxes low and prevent new outbreaks of social unrest. The sudden enormous demand for silver had effects across the globe. Most of the precious metals looted by the conquistadors and later extracted by the Spanish from the mines of Mexico and Potosi (at almost unimaginable cost in human lives) ended up in China. These global scale connections that eventually developed across the Atlantic, Pacific, and Indian Oceans have of course been documented in great detail. The crucial point is that the delinking of money from religious institutions, and its relinking with coercive ones (especially the state), was here accompanied by an ideological reversion to ‘metallism’.4

Credit, in this context, was on the whole an affair of states that were themselves run largely by deficit financing, a form of credit which was, in turn, invented to finance increasingly expensive wars. Internationally the British Empire was steadfast in maintaining the gold standard through the 19th and early 20th centuries, and great political battles were fought in the United States over whether the gold or silver standard should prevail.

This was also, obviously, the period of the rise of capitalism, the industrial revolution, representative democracy, and so on. What I am trying to do here is not to deny their importance, but to provide a framework for seeing such familiar events in a less familiar context. It makes it easier, for instance, to detect the ties between war, capitalism, and slavery. The institution of wage labour, for instance, has historically emerged from within that of slavery (the earliest wage contracts we know of, from Greece to the Malay city states, were actually slave rentals), and it has also tended, historically, to be intimately tied to various forms of debt peonage – as indeed it remains today. The fact that we have cast such institutions in a language of freedom does not mean that what we now think of as economic freedom does not ultimately rest on a logic that has for most of human history been considered the very essence of slavery.

V. Current Era (1971 onwards)

The empire of debt

The current era might be said to have been initiated on 15 August 1971, when US President Richard Nixon officially suspended the convertibility of the dollar into gold and effectively created the current floating currency regimes. We have returned, at any rate, to an age of virtual money, in which consumer purchases in wealthy countries rarely involve even paper money, and national economies are driven largely by consumer debt. It’s in this context that we can talk about the ‘financialisation’ of capital, whereby speculation in currencies and financial instruments becomes a domain unto itself, detached from any immediate relation with production or even commerce. This is of course the sector that has entered into crisis today.

What can we say for certain about this new era? So far, very, very little. Thirty or forty years is nothing in terms of the scale we have been dealing with. Clearly, this period has only just begun. Still, the foregoing analysis, however crude, does allow us to begin to make some informed suggestions.

Historically, as we have seen, ages of virtual, credit money have also involved creating some sort of overarching institutions – Mesopotamian sacred kingship, Mosaic jubilees, Sharia or Canon Law – that place some sort of controls on the potentially catastrophic social consequences of debt. Almost invariably, they involve institutions (usually not strictly coincident to the state, usually larger) to protect debtors. So far the movement this time has been the other way around: starting with the ’80s we have begun to see the creation of the first effective planetary administrative system, operating through the IMF, World Bank, corporations and other financial institutions, largely in order to protect the interests of creditors. However, this apparatus was very quickly thrown into crisis, first by the very rapid development of global social movements (the alter-globalisation movement), which effectively destroyed the moral authority of institutions like the IMF and left many of them very close to bankrupt, and now bsy the current banking crisis and global economic collapse. While the new age of virtual money has only just begun and the long term consequences are as yet entirely unclear, we can already say one or two things. The first is that a movement towards virtual money is not in itself, necessarily, an insidious effect of capitalism. In fact, it might well mean exactly the opposite. For much of human history, systems of virtual money were designed and regulated to ensure that nothing like capitalism could ever emerge to begin with – at least not as it appears in its present form, with most of the world’s population placed in a condition that would in many other periods of history be considered tantamount to slavery. The second point is to underline the absolutely crucial role of violence in defining the very terms by which we imagine both ‘society’ and ‘markets’ – in fact, many of our most elementary ideas of freedom. A world less entirely pervaded by violence would rapidly begin to develop other institutions. Finally, thinking about debt outside the twin intellectual straitjackets of state and market opens up exciting possibilities. For instance, we can ask: in a society in which that foundation of violence had finally been yanked away, what exactly would free men and women owe each other? What sort of promises and commitments should they make to each other?

Let us hope that everyone will someday be in a position to start asking such questions. At times like this, you never know.

David Graeber <d.graeber AT gold.ac.uk> undertook his original research in the relations between former nobles and former slaves in a rural community in Madagascar; it was about magic as a tool of politics, about the nature of power, character, and the meaning of history. He has recently completed a research project on social movements dedicated to principles of direct democracy and has written widely on the relation between anthropology and anarchism. He is currently working on a project about the history of debt

Footnotes

1 Geoffrey W. Gardiner, ‘The Primacy of Trade Debts in the Development of Money’, in Randall Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Cheltenham: Elgar, 2004, p.134.

2 The phrase the ‘Axial Age’ was originally coined by Karl Jaspers to describe the relatively brief period between 800 BCE – 200 BCE in which, he believed, just about all the main philosophical traditions we are familiar with today arose simultaneously in China, India, and the Eastern Mediterranean. Here, I am using it in Lewis Mumford’s more expansive use of the term as the period that saw the birth of all existing world religions, stretching roughly from the time of Zoroaster to that of Mohammed.

3 I am here relegating most of what is generally referred to as the ‘Dark Ages’ in Europe into the earlier period, characterised by predatory militarism and the consequent importance of bullion: the Viking raids, and the famous extraction of danegeld from England in the 800s, might be seen as one the last manifestations of an age where predatory militarism went hand and hand with hoards of gold and silver bullion.

4 The myth of barter and commodity theories of money was of course developed in this period.

Originally publish at Metamute.

By Ben Funnell,  June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is asset manager at GLG Partners

Today we look at U.S. and global efforts to reduce carbon emissions and slow global warming. Last Friday, June 26 2009, The U.S. House of Representatives approved the landmark America Clean Energy and Security Act by a narrow seven vote margin, including 44 no votes from Democrats. The legislation, also known as Waxman-Markey after its sponsors, or the climate bill, will face an even tougher audience in the Senate, where it must meet a 60-vote threshold. The Minnesota Supreme Court’s decision to seat Al Franken in the Senate may add to the Democrats’ leverage. The bill aims to cut 2005 emissions levels by 17% by 2020 and has at its core a Cap-and-Trade system which calls for mandatory caps on greenhouse gas emissions. Any companies wishing to emit above a certain level will need to purchase permits to do so. Additionally the bill requires large utilities to increase their use of renewable energies such as hydro, wind, solar and geothermal power generation.

The bill’s passage by the House is historic and will likely increase President Obama’s leverage in global climate negotiations as global leaders try to replace the soon-to-expire Kyoto Protocol. Detractors though point to its economic costs and the limited nature of the final legislation

How the Bill Works

At the heart of the bill is a Cap-and-Trade system, a market-based system which caps emissions at a certain level and allows large emitters to buy permits for additional emissions from other companies that emit less than the upper limit. The legislation calls for the number of permits to be reduced over time to encourage lower emissions. In practice, establishing a market for these permits will increase the cost of using carbon-based energy (especially electricity from coal), which will in turn reduce demand.

The revenue earned through auctioning would be distributed among households to offset the negative effect on their purchasing power from the higher cost of energy. Initial plans called for all or at least a majority of the permits to be auctioned but the vote-getting process increased the number allocated. The bill passed by the House calls for 85% to be allocated and 15% to be auctioned. Some of the allocated permits will go to utility companies, the idea being that they will either invest the proceeds in renewable fuels or temper price increases for consumers. This change reduces the potential revenue generation of the policy and runs the risk that low electricity costs could actually encourage greater usage.

Cost Estimates

Estimates of the total economic costs of the U.S. Cap-and-Trade program have varied widely. According to the Congressional Budget Office (CBO), the net annual economic cost of the Cap-and-Trade program in 2020 would be $22 billion—or about $175 per household. Analysis of the CBO results suggests that the implicit tax is relatively progressive. While this estimate has been accused of being understated (and it is worth noting that the Environmental Protection Agency came to an even lower estimate) it presented a baseline for analysis. Other estimates put the ultimate cost much higher. An analysis from the Heritage Foundation concludes that the Cap-and-Trade system described in the bill would cost the economy $161 billion by 2020–or about $1,870 per household. Such estimates do not necessarily account for changes in the price of energy that would occur naturally as a lack of investment limits production of fossil fuel based energy. Furthermore, they may not fully include the technological and efficiency gains that the current legislation hopes to encourage. For example, some of the allocations to utilities are granted with the expectation that they will be auctioned off and the proceeds will be used to fund renewable energy development. It’s worth noting, however, that there’s no guarantee the utilities will do this in practice.

Sector-By -Sector

Where the United States is concerned, the likely impact of the new price for carbon varies by sector. Utilities are likely to the most affected, especially in those regions that derive much of their power from coal-fired plants. The Midwest, the country’s already-shrinking industrial and manufacturing base and the home of many of its coal-fired plants, seems particularly vulnerable. (The distribution of allowances in the legislation is intended to find the funds to improve competitiveness of coal plants.)

The effects on agriculture are also varied. Recent Deutsche Bank research suggests that no-till agriculture, which limits disturbance of the soil, as well as reforestation and planting of vegetative buffers could derive significant carbon credits annually under a Cap-and-Trade regime. By some counts up to 20% of U.S. carbon emissions come from the release of carbon dioxide from farmland. However, the bill puts off to the future one contentious issue–the promotion of agricultural land to grow corn for ethanol, which critics suggest is very inefficient and contributed to global food shortages in 2008. The legislators also chose the Department of Agriculture, more likely to be sympathetic to farmers concerns, rather than the EPA, to be the regulator for approving carbon offsets.

The oil and metals sectors may also face vulnerabilities. Some analysts worry that emissions standards would encourage companies to keep inventories low and to import more refined fuels, contributing to idle capacity in U.S. refineries. However, it may also encourage the creation of cleaner processes or the development of carbon capture technologies, which are as yet far from being commercial. Overall, businesses have supported establishing a climate regime, given that clarity over regulatory responses is key to planning. However, there are still many uncertainties about how such a regime will be implemented.

Trade Concerns

There is also a growing fear that climate change policies could prompt trade protectionist policies. The risk that higher costs might accelerate a decline in the U.S. manufacturing base as more production is moved offshore has contributed to the suggestion that compensatory import taxes might be placed on carbon-intensive imported goods. President Obama, in saluting the bill’s passage, did insist that the U.S. not discriminate against imports. Doing so might lead to retaliatory protectionism and a further hit to trade. In a report released last week, the World Trade Organization (WTO) suggested that import taxes might be WTO-compliant if they limit distortions. Paul Krugman suggests that the WTO’s view is analogous to that for value added taxes. However, Martin Feldstein notes that the system could be very complex. With different countries each having country-specific caps and different tariffs, it could be very difficult to assess how comparable the measures are and what remedies might be needed. Thus the implications for international trade and trade law could be quite significant. Moreover, developing countries are petitioning for trade restrictions on carbon-reducing technologies to be lifted or for technology transfer of such goods. The mostly advanced economy companies who developed such expertise have been reluctant to cut prices.

Other Efficiency Steps

The administration’s energy policy more broadly tries to offset potential costs with new opportunities and technological advances to boost productivity growth. It aims to generate 25% of U.S. energy from renewable sources by 2025, create “green jobs” and reduce dependence on imported oil. Projects to develop renewable fuels and improve the efficiency of the power grid received funding in the stimulus bill, in part to offset the impact of the triple shock of lower energy demand, lower credit and lower hydrocarbon prices on renewable producers. President Obama’s team plans to spend $150 billion over the next decade to promote energy from solar, wind and other renewable sources, as well as energy conservation.

Other key steps include the May 2009 auto efficiency program, which requires the American fleet to increase to an average mileage standard of 39 miles per gallon (mpg) for cars and 30 mpg for trucks by 2016 – a jump from the current average for all vehicles of 25 miles per gallon. Doing so would create a new national standard, after many states have unilaterally taken more aggressive steps. A national standard could make it easier for car companies to supply different jurisdictions. Government estimates that oil consumption may fall 1.8 billion barrels from 2012 to 2016 and greenhouse gas emissions may fall by 900 million metric tons could be overoptimistic. They may, however, be more effective than the recently announced “cash for clunkers” program in which consumers receive a rebate for a new more fuel efficient vehicle if they turn in a gas guzzler. Yet the required fuel efficiency increase is rather low (only 4mpg) and the threshold is lower than the current national average. As such, the latter policy, which has been effective in stocking auto demand in countries like China, Germany and South Korea, might have limited effect in the United States. However the effects of such incentives may be temporary. If they elapse without a sustained increase in consumption, demand for autos could fall quickly especially in developed economies which already have a high number of cars per household.

These initiatives together hope to reduce the amount of oil the United States imports. The bulk of energy imports (oil, gas, electricity) come not from the Middle East but from Canada. An increasing amount of the oil supplied is bitumen from the oil sands, which continues to bear an expensive environmental and economic cost per barrel under current technology. Bitumen’s carbon footprint is improving though through technological innovation – and the fuel expended in transport is clearly lower than the amount needed to ship oil from Saudi Arabia. Yet there is still a long way to go. Given the shift towards energy efficiency and lower emissions fuel supply, Canadian authorities and producers are struggling to improve production so that their largest consumer will keep buying. On President Obama’s visit to Ottawa, his first foreign trip as president, he and Prime Minister Harper announced joint investment in carbon capture technology, adding to funds already pledged by the province of Alberta. Such measures hope to help the U.S. meet energy security needs without adding to environmental insecurity. However, carbon capture technology is still far from being commercial.

Assessing Alternatives

One of the biggest benefits of this legislation is that it provides a mechanism to set a price for carbon over the mid-term. Doing so will help households and businesses make investment and savings decisions. However, economists have long argued that a carbon tax would be more efficient than a Cap-and-Trade system, as it would be less complex and vulnerable to distortions. A carbon tax would set a specific cost per unit of carbon dioxide, thus establishing a clear cost for carbon. A Cap-and-Trade system, on the other hand, would set an upper limit for emissions, but the prices it established for carbon might be variable. Of course, introducing new taxes is rarely popular, particularly not during a recession, even if the tax option would be more efficient and have lower compliance costs.

The European Union’s experience with Cap-and-Trade over the past several years provides reason for caution. The first iteration of the policy, issued too many permits, undermining demand. With prices for carbon low, so was the incentive to reduce emissions. A reformulation improved this balance and emissions have been reduced, though European countries still have a significant space to reach their targets. The EU system allows companies to bank or store their allocations for the future or to borrow them from the future. The EU system also illustrates an effect of the global recession. The drastic reduction in industrial output has meant that many companies are producing well lower than their quotas and are seeking to sell their excess allocation. Several companies sought to raise cash by selling their carbon certificates, causing the price of carbon to plummet. A market-derived carbon price might actually be very volatile.

The Road to Copenhagen

World leaders will meet this December in Copenhagen to negotiate a replacement to the Kyoto Protocol, which expires in 2012. The Kyoto Protocol aimed at reducing emissions of 1990 greenhouse gases levels by 5.2% by 2012. The range that is now being discussed is around 25% to 40% of 1990 levels by 2020. The previous U.S. administration withdrew from ratifying the Kyoto protocol, saying it deemed it unfair for allocating reductions targets between developed and developing countries. The reluctance of emerging market economies to make emissions cuts that might stunt their growth could again be an obstacle to a deal later this year.

The United States and China are the world’s top two greenhouse gas emitters, together accounting for more than 40% of annual emissions. If the United States and China can become catalysts in bringing about a strategic transformation to a low-carbon, sustainable global economy, the world will take a giant step forward in combating climate change. Given the complexities of global discussions, analysts like Kenneth Lieberthal suggest that climate change is yet another policy arena that could be best tackled by a G-2, that is bilateral talks by the two countries. Despite its reluctance to take any steps that might reduce economic growth, China, has been taking some steps to curb emissions growth. China rivals the United States as a carbon emitter, despite having low levels per capita, but now has domestic interests to slowly make changes. In particular, the increase in pollution-related illness is taxing the Chinese health care system. Yet many of these measures, such as China’s own cash for clunkers program, may be of limited effect given the potential demand for primary energy. Coal remains the primary feedstock for Chinese electrical plants, although the country is planning to build several nuclear power plants and is sourcing more of its electricity from wind. China is now the world’s largest assembler of solar technology, but little is applied domestically. Should China choose to allocate a greater share of infrastructure spending towards power generation from renewable fuel sources, it could have a significant effect on global use of such technologies.

Chinese heavy industry has been particularly hard hit by slumping global demand, leading to emissions reductions. Electricity demand continues to fall, year-on-year (as of May at least), despite the aggressive government stimulus which has including new metals processing. In fact, the persistent weakness in industrial electrical demand suggests that overall growth could be weaker than some officials suggest. Electricity demand has tended to be a proxy for economic growth. A more domestically driven growth pattern might reduce the pace of Chinese new energy demand growth over time, however, suggesting that this correlation could change if more output is shifted to the services sector.

Coming to a global consensus might therefore be difficult. Already many European countries, including Sweden, which takes up the EU presidency today, may have hoped for a more aggressive commitment from Washington. Emerging and frontier market economies like South Africa, Mexico and the UAE are now taking measures to reduce their carbon footprint. Brazil has moved to reduce the destruction of its rain forests. However these countries continue to be wary of restrictions on emissions, arguing that advanced economies should bear the bulk of the costs. They are also pushing for more technology transfer from the companies and countries that developed some of these techniques.

Higher Carbon Costs and the Global Economy

A higher price for carbon-based energy could be one of several increased taxes and costs which weigh on U.S. consumption in the near future. Should the recovery in U.S. consumption be as sluggish as feared, such higher costs could be a limitation in the absence of real investment which might prompt productivity gains. Despite the risks of a new carbon price, this cost, plus the allocation of government and private sector funds, could spur innovation and energy savings technology that could lead to productivity growth.

Moreover, the cost of energy could increase quite substantially even in the absence of a carbon price. Even in 2009, there is a risk that higher oil prices might dampen any economic recovery. Further increases, perhaps to the $80-90 a barrel range, could keep the economy well in recessionary territory this year. Given current and past short-falls in oil investment, production growth might be quite sluggish going forward. If petroleum demand returns to trend, this could contribute to higher prices in 2010. Higher oil and coal prices could encourage a change in behavior that could boost the position of alternatives in the energy mix, even though carbon-based fuels – albeit higher cost ones – are likely to fuel the economy for years to come.

By Ralph Atkins in Frankfurt, June 30 2009 11:03

Eurozone annual inflation has turned negative for the first time, complicating the job of the European Central Bank as draws a line under emergency measures to tackle continental Europe’s recession.

Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union’s statistical office.

It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991. Inflationary pressures in continental Europe are now lower than at anytime since at least the early 1950s, according to calculations by some economists.

The fall in prices reflected sharply lower energy costs but also the effects of the worst post-war economic downturn. The US had already reported year-on-year falls in consumer prices.

News that inflation had turned negative – and was massively undershooting the ECB’s target of an annual rate “below but close” to 2 per cent – came as the ECB prepares for Thursday’s interest rate setting meeting in Luxembourg.

Since last October, the ECB has slashed its main policy rate by 325 basis points to 1 per cent, and pledged to meet in full banks’ demands for liquidity – which resulted in it last week pumping €442bn in one-year loans in the banking system.

But the ECB’s governing council is not expected to cut official borrowing costs further at this week’s meeting and analysts expect the main policy rate to remain at 1 per cent for many months – possibly well into next year or even beyond.

The ECB believes the impact of its measures have still to feed through into the economy. But it faces a difficult balancing act. Even though the inflation outlook justified further action, the central bank feared “that more aggressive easing now could risk financial stability and or a too sharp acceleration of inflation over the longer-term,” said Nick Kounis, European Economist at Fortis Bank.

Jean-Claude Trichet, ECB president, is likely to stress on Thursday that negative inflation will be only a temporary with a return to positive annual rates expected later this year. But ECB forecasts show inflation remaining well below 2 per cent in 2010 and the worry for ECB policymakers is that months of below-zero inflation rates will stoke fears of full-blown deflation – generalised and persistent falls in prices that wreak significant economic damage.

Meanwhile, credit figures released by the ECB just ahead of the inflation news highlighted how the liquidity it has pumped into the banking system have not yet stopped credit flows to the economy from being thrown into reverse. Businesses repaid a net €5bn in loans in May, slowing the annual rate of growth in such loans to just 4.4 per cent. Even more dramatically, the annual rate of growth of borrowing by households turned negative, with loans down 0.2 per cent on the year.

The ECB has been stepping up its appeals recently for banks to pass on the extra liquidity they have been lent, but it could be some months before any extra lending to businesses and households shows up in official data.

Last updated: June 23 2009 00:44

Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace.

US government bond yields followed equity prices lower, confounding analysts who had expected that Treasury rates would rise this week as the federal government auctioned off a record $104bn of debt.

Analysts said the market mood was captured by a World Bank report that said the global economy would contract 2.9 per cent this year, compared with a previous estimate of a 1.7 per cent fall. A White House spokesman said later in the day that the US unemployment rate was likely to rise to 10 per cent in the next couple of months.

The downbeat commentary reinforced the view that investors should be more worried about the impact of economic weakness on corporate profits than the possibility of higher inflation and interest rates.

“We have had a great run in equities, emerging market currencies, credit and other risky assets, now people are struggling to justify lofty valuations,” said Alan Ruskin, strategist at RBS Securities. He added: “The ‘green shoots’ argument for the economy was very tentative to start with.”

Executives in charge of the largest US companies sent a signal of their concerns by selling far more shares than they bought this month, according to data based on Securities and Exchange Commission filings.

Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases.

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.

The S&P 500 index fell 3.06 per cent to 893.04 – its first close below 900 this month. Analysts noted that the index closed below its 50-day and 200-day moving averages. “This is evidence that the rally since March has been a correction and not necessarily the start of a meaningful multi-year rally,” said Jack Ablin, chief investment officer at Harris Private Bank.

The yield on the 10-year Treasury fell 10 basis points to 3.68 per cent. Crude oil prices fell $2.62, or 3.77 per cent, to $66.93 a barrel.

Earlier, the FTSE Eurofirst 300 index slid 2.6 per cent while London’s FTSE 100 index fell 2.3 per cent. Emerging market equities also fell sharply, with Russia leading the retreat.