Look ma, no invisible hands!
Gordon Brown says: "The old Washington consensus is dead. The combination of western-style capitalism and democracy, that we've been pushing on the world for the last 50 or 60 years, has shown it won't work."
American capitalism before the 1980s was a very different animal from the Reagan/Clinton/Bush version of capitalism. From Roosevelt through JFK, we had a stable setup with these six components:
1. Considerable gov't regulation.
2. Many big companies operated as semi-governmental utilities.
3. Henry Ford's closed circle.
Hire local workers, pay them enough to buy your own products, buy local materials.
4. Relatively high tariffs and carefully watched bilateral trade agreements.
5. Stocks more like bonds, purchased mainly for dividends.
6. Banks operate in a closed circle, paying interest to attract depositors and charging interest on loans. Variations in interest rate slow down foolish borrowing and encourage saving when it's needed.
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Through the 80s and 90s, concluding with the Enron laws of 1999, all of these changed.
Now we have:
1. Low regulation
2. Even companies that should be utilities by any normal definition are free to seek maximal share price instead of customer service.
3. Broken circle. Eliminate employees, send factories abroad, buy from abroad. This removes the "invisible hand" of capitalism, because there is no feedback.
4. Low tariffs for imports, and dependence on global trade organizations, while our trade partners continue to apply high tariffs to our exports. Accountability is supposedly transferred to the trade organization, which is accountable to nobody.
5. Stocks, bonds, derivatives, all bought and sold for microsecond-scale price change, which drives business away from production and toward fraud.
6. Big banks use securitization, hedges and credit default swaps. All of these devices are loop-breakers, designed to keep interest rates constant and negative, and to remove consequences of bad decisions. The "invisible hand" of banking is gone.
These two systems are grossly different, yet most economists crunch them together under the term "western-style capitalism."
In fact what we have now is more akin to a slave-based market system, because the costs and benefits of labor, the advantages of maintaining human capital, have been factored out.
The new slave-market system certainly achieves Economic Efficiency, and it has certainly collapsed. This shouldn't have been a surprise: a system with no error-correction loops is guaranteed to roar out of control and crash.
The Roosevelt/Eisenhower/JFK setup has not failed
because we haven't been using it.
In fact we know from history and personal experience that the lives of ordinary Americans were better under the theories of Henry Ford than they are under the theories of Phil Gramm.
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Update 4/4: CNN's Richard Quest, the annoyingly growly Brit, has also recognized this chronological distinction, though he didn't describe it in my annoyingly engineerish way.
Labels: the broken circle