Credit Bubbles. Thought of the Day 90.0

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At the macro-economic level of the gross statistics of money and loan supply to the economy, the reserve banking system creates a complex interplay between money, debt, supply and demand for goods, and the general price level. Rather than being constant, as implied by theoretical descriptions, money and loan supplies are constantly changing at a rate dependent on the average loan period, and a complex of details buried in the implementation and regulation of any given banking system.

Since the majority of loans are made for years at a time, the results of these interactions play out over a long enough time scale that gross monetary features of regulatory failure, such as continuous asset price inflation, have come to be regarded as normal, e.g. ”House prices always go up”. The price level however is not only dependent on purely monetary factors, but also on the supply and demand for goods and services, including financial assets such as shares, which requires that estimates of the real price level versus production be used. As a simplification, if constant demand for goods and services is assumed as shown in the table below, then there are two possible causes of price inflation, either the money supply available to purchase the good in question has increased, or the supply of the good has been reduced. Critically, the former is simply a mathematical effect, whilst the latter is a useful signal, providing economic information on relative supply and demand levels that can be used locally by consumers and producers to adapt their behaviour. Purely arbitrary changes in both the money and the loan supply that are induced by the mechanical operation of the banking system fail to provide any economic benefit, and by distorting the actual supply and demand signal can be actively harmful.

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Credit bubbles are often explained as a phenomena of irrational demand, and crowd behaviour. However, this explanation ignores the question of why they aren’t throttled by limits on the loan supply? An alternate explanation which can be offered is that their root cause is periodic failures in the regulation of the loan and money supply within the commercial banking system. The introduction of widespread securitized lending allows a rapid increase in the total amount of lending available from the banking system and an accompanying if somewhat smaller growth in the money supply. Channeled predominantly into property lending, the increased availability of money from lending sources, acted to increase house prices creating rational speculation on their increase, and over time a sizeable disruption in the market pricing mechanisms for all goods and services purchased through loans. Monetary statistics of this effect such as the Consumer Price Index (CPI) for example, are however at least partially masked by production deflation from the sizeable productivity increases over decades. Absent any limit on the total amount of credit being supplied, the only practical limit on borrowing is the availability of borrowers and their ability to sustain the capital and interest repayments demanded for their loans.

Owing to the asymmetric nature of long term debt flows there is a tendency for money to become concentrated in the lending centres, which then causes liquidity problems for the rest of the economy. Eventually repayment problems surface, especially if the practice of further borrowing to repay existing loans is allowed, since the underlying mathematical process is exponential. As general insolvency as well as a consequent debt deflation occurs, the money and loan supply contracts as the banking system removes loan capacity from the economy either from loan repayment, or as a result of bank failure. This leads to a domino effect as businesses that have become dependent on continuously rolling over debt fail and trigger further defaults. Monetary expansion and further lending is also constrained by the absence of qualified borrowers, and by the general unwillingness to either lend or borrow that results from the ensuing economic collapse. Further complications, as described by Ben Bernanke and Harold James, can occur when interactions between currencies are considered, in particular in conjunction with gold-based capital regulation, because of the difficulties in establishing the correct ratio of gold for each individual currency and maintaining it, in a system where lending and the associated money supply are continually fluctuating and gold is also being used at a national level for international debt repayments.

The debt to money imbalance created by the widespread, and global, sale of Asset Backed securities may be unique to this particular crisis. Although asset backed security issuance dropped considerably in 2008, as the resale markets were temporarily frozen, current stated policy in several countries, including the USA and the United Kingdom, is to encourage further securitization to assist the recovery of the banking sector. Unfortunately this appears to be succeeding.

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Orthodoxy of the Neoclassical Synthesis: Minsky’s Capitalism Without Capitalists, Capital Assets, and Financial Markets

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During the very years when orthodoxy turned Keynesianism on its head, extolling Reaganomics and Thatcherism as adequate for achieving stabilisation in the epoch of global capitalism, Minsky (Stabilizing an Unstable Economy) pointed to the destabilising consequences of this approach. The view that instability is the result of the internal processes of a capitalist economy, he wrote, stands in sharp contrast to neoclassical theory, whether Keynesian or monetarist, which holds that instability is due to events that are outside the working of the economy. The neoclassical synthesis and the Keynes theories are different because the focus of the neoclassical synthesis is on how a decentralized market economy achieves coherence and coordination in production and distribution, whereas the focus of the Keynes theory is upon the capital development of an economy. The neoclassical synthesis emphasizes equilibrium and equilibrating tendencies, whereas Keynes‘s theory revolves around bankers and businessmen making deals on Wall Street. The neoclassical synthesis ignores the capitalist nature of the economy, a fact that the Keynes theory is always aware of.

Minsky here identifies the main flaw of the neoclassical synthesis, which is that it ignores the capitalist nature of the economy, while authentic Keynesianism proceeds from precisely this nature. Minsky lays bare the preconceived approach of orthodoxy, which has mainstream economics concentrating all its focus on an equilibrium which is called upon to confirm the orthodox belief in the stability of capitalism. At the same time, orthodoxy fails to devote sufficient attention to the speculation in the area of finance and banking that is the precise cause of the instability of the capitalist economy.

Elsewhere, Minsky stresses still more firmly that from the theory of Keynes, the neoclassical standard included in its arsenal only those earlier-mentioned elements which could be interpreted as confirming its preconceived position that capitalism was so perfect that it could not have innate flaws. In this connection Minsky writes:

Whereas Keynes in The General Theory proposed that economists look at the economy in quite a different way from the way they had, only those parts of The General Theory that could be readily integrated into the old way of looking at things survive in today‘s standard theory. What was lost was a view of an economy always in transit because it accumulates in response to disequilibrating forces that are internal to the economy. As a result of the way accumulation takes place in a capitalist economy, Keynes‘s theory showed that success in operating the economy can only be transitory; instability is an inherent and inescapable flaw of capitalism. 

The view that survived is that a number of special things went wrong, which led the economy into the Great Depression. In this view, apt policy can assure that cannot happen again. The standard theory of the 1950s and 1960s seemed to assert that if policy were apt, then full employment at stable prices could be attained and sustained. The existence of internally disruptive forces was ignored; the neoclassical synthesis became the economics of capitalism without capitalists, capital assets, and financial markets. As a result, very little of Keynes has survived today in standard economics.

Here, resting on Keynes‘s analysis, one can find the central idea of Minsky‘s book: the innate instability of capitalism, which in time will lead the system to a new Great Depression. This forecast has now been brilliantly confirmed, but previously there were few who accepted it. Economic science was orchestrated by proponents of neoclassical orthodoxy under the direction of Nobel prizewinners, authors of popular economics textbooks, and other authorities recognized by the mainstream. These people argued that the main problems which capitalism had encountered in earlier times had already been overcome, and that before it lay a direct, sunny road to an even better future.

Robed in complex theoretical constructs, and underpinned by an abundance of mathematical formulae, these ideas of a cloudless future for capitalism interpreted the economic situation, it then seemed, in thoroughly convincing fashion. These analyses were balm for the souls of the people who had come to believe that capitalism had attained perfection. In this respect, capitalism has come to bear an uncanny resemblance to communism. There is, however, something beyond the preconceptions and prejudices innate to people in all social systems, and that is the reality of historical and economic development. This provides a filter for our ideas, and over time makes it easier to separate truth from error. The present financial and economic crisis is an example of such reality. While the mainstream was still euphoric about the future of capitalism, the post-Keynesians saw the approaching outlines of a new Great Depression. The fate of Post Keynesianism will depend very heavily on the future development of the world capitalist economy. If the business cycle has indeed been abolished (this time), so that stable, non-inflationary growth continues indefinitely under something approximating to the present neoclassical (or pseudo-monetarist) policy consensus, then there is unlikely to be a significant market for Post Keynesian ideas. Things would be very different in the event of a new Great Depression, to think one last time in terms of extreme possibilities. If it happened again, to quote Hyman Minsky, the appeal of both a radical interventionist programme and the analysis from which it was derived would be very greatly enhanced.

Neoclassical orthodoxy, that is, today‘s mainstream economic thinking proceeds from the position that capitalism is so good and perfect that an alternative to it does not and cannot exist. Post-Keynesianism takes a different standpoint. Unlike Marxism it is not so revolutionary a theory as to call for a complete rejection of capitalism. At the same time, it does not consider capitalism so perfect that there is nothing in it that needs to be changed. To the contrary, Post-Keynesianism maintains that capitalism has definite flaws, and requires changes of such scope as to allow alternative ways of running the economy to be fully effective. To the prejudices of the mainstream, post-Keynesianism counterposes an approach based on an objective analysis of the real situation. Its economic and philosophical approach – the methodology of critical realism – has been developed accordingly, the methodological import of which helps post-Keynesianism answer a broad range of questions, providing an alternative both to market fundamentalism, and to bureaucratic centralism within a planned economy. This is the source of its attraction for us….

Production of the Schizoid, End of Capitalism and Laruelle’s Radical Immanence. Note Quote Didactics.

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These are eclectics of the production, eclectics of the repetition, eclectics of the difference, where the fecundity of the novelty would either spring forth, or be weeded out. There is ‘schizoproduction’ prevalent in the world. This axiomatic schizoproduction is not a speech act, but discursive, in the sense that it constrains how meaning is distilled from relations, without the need for signifying, linguistic acts. Schizoproduction performs the relation. The bare minimum of schizoproduction is the gesture of transcending thought: namely, what François Laruelle calls a ‘decision’. Decision is differential, but it does not have to signify. It is the capacity to produce distinction and separation, in the most minimal, axiomatic form. Schizoproduction is capitalism turned into immanent capitalism, through a gesture of thought – sufficient thought. It is where capitalism has become a philosophy of life, in that it has a firm belief within a sufficient thought, whatever it comes in contact with. It is an expression of the real, the radical immanence as a transcending arrangement. It is a collective articulation bound up with intricate relations and management of carnal, affective, and discursive matter. The present form of capitalism is based on relationships, collaborations, and processuality, and in this is altogether different from the industrial period of modernism in the sense of subjectivity, production, governance, biopolitics and so on. In both cases, the life of a subject is valuable, since it is a substratum of potentiality and capacity, creativity and innovation; and in both cases, a subject is produced with physical, mental, cognitive and affective capacities compatible with each arrangement. Artistic practice is aligned with a shift from modern liberalism to the neoliberal dynamic position of the free agent.

Such attributes have thus become so obvious that the concepts of ‘competence’, ‘trust’ or ‘interest’ are taken as given facts, instead of perceiving them as functions within an arrangement. It is not that neoliberal management has leveraged the world from its joints, but that it is rather capitalism as philosophy, which has produced this world, where neoliberalism is just a part of the philosophy. Therefore, the thought of the end of capitalism will always be speculative, since we may regard the world without capitalism in the same way as we may regard the world-not-for-humans, which may be a speculative one, also. From its inception, capitalism paved a one-way path to annihilation, predicated as it was on unmitigated growth, the extraction of finite resources, the exaltation of individualism over communal ties, and the maximization of profit at the expense of the environment and society. The capitalist world was, as Thurston Clarke described so bleakly, ”dominated by the concerns of trade and Realpolitik rather than by human rights and spreading democracy”; it was a ”civilization influenced by the impersonal, bottom-line values of the corporations.” Capitalist industrial civilization was built on burning the organic remains of ancient organisms, but at the cost of destroying the stable climatic conditions which supported its very construction. The thirst for fossil fuels by our globalized, high-energy economy spurred increased technological development to extract the more difficult-to-reach reserves, but this frantic grasp for what was left only served to hasten the malignant transformation of Earth into an alien world. The ruling class tried to hold things together for as long as they could by printing money, propping up markets, militarizing domestic law enforcement, and orchestrating thinly veiled resource wars in the name of fighting terrorism, but the crisis of capitalism was intertwined with the ecological crisis and could never be solved by those whose jobs and social standing depended on protecting the status quo. All the corporate PR, greenwashing, political promises, cultural myths, and anthropocentrism could not hide the harsh Malthusian reality of ecological overshoot. As crime sky-rocketed and social unrest boiled over into rioting and looting, the elite retreated behind walled fortresses secured by armed guards, but the great unwinding of industrial civilization was already well underway. This evil genie was never going back in the bottle. And thats speculative too, or not really is a nuance to be fought hard on.

The immanence of capitalism is a transcending immanence: a system, which produces a world as an arrangement, through a capitalist form of thought—the philosophy of capitalism—which is a philosophy of sufficient reason in which economy is the determination in the last instance, and not the real. We need to specifically regard that this world is not real. The world is a process, a “geopolitical fiction”. Aside from this reason, there is an unthinkable world that is not for humans. It is not the world in itself, noumena, nor is it nature, bios, but rather it is the world indifferent to and foreclosed from human thought, a foreclosed and radical immanence – the real – which is not open nor will ever be opening itself for human thought. It will forever remain void and unilaterally indifferent. The radical immanence of the real is not an exception – analogous to the miracle in theology – but rather, it is an advent of the unprecedented unknown, where the lonely hour of last instance never comes. This radical immanence does not confer with ‘the new’ or with ‘the same’ and does not transcend through thought. It is matter in absolute movement, into which philosophy or oikonomia incorporates conditions, concepts, and operations. Now, a shift in thought is possible where the determination in the last instance would no longer be economy but rather a radical immanence of the real, as philosopher François Laruelle has argued. What is given, what is radically immanent in and as philosophy, is the mode of transcendental knowledge in which it operates. To know this mode of knowledge, to know it without entering into its circle, is to practice a science of the transcendental, the “transcendental science” of non-philosophy. This science is of the transcendental, but according to Laruelle, it must also itself be transcendental – it must be a global theory of the given-ness of the real. A non- philosophical transcendental is required if philosophy as a whole, including its transcendental structure, is to be received and known as it is. François Laruelle radicalises the Marxist term of determined-in-the-last-instance reworked by Louis Althusser, for whom the last instance as a dominating force was the economy. For Laruelle, the determination-in-the-last-instance is the Real and that “everything philosophy claims to master is in-the-last-instance thinkable from the One-Real”. For Althusser, referring to Engels, the economy is the ‘determination in the last instance’ in the long run, but only concerning the other determinations by the superstructures such as traditions. Following this, the “lonely hour of the ‘last instance’ never comes”.

Prisoner’s Dilemma. Thought of the Day 64.0

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A system suffering from Prisoner’s Dilemma cannot find the optimal solution because the individual driving forces go against the overall driving force. This is called Prisoner’s Dilemma based on the imaginary situation of two prisoners:

Imagine two criminals, named alphabetically A and B, being caught and put in separate prison cells. The police is trying to get confessions out of them. They know that if none will talk, they will both walk out of there for lack of evidence. So the police makes a proposal to each one: “We’ll make it worth your while. If you confess, and your colleague not, we give you 10 thousand euro and your colleague will get 50 years in prison. If you both confess you will each get 20 years in prison”. The decision table for these prisoners is like this:

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As you can see for yourself, the individual option for A, independent of what B decides to do, is confessing; moving from right column to left column, it is either reducing his sentence from 50 to 20 years, or instead of walking out of there even getting a fat bonus on top. The same applies to B, moving from bottom row to top row of the table. So, they wind up both confessing and getting 20 years in prison. That while it is obvious that the optimal situation is both not talking and walking out of prison scot-free (with the loot!). Because A and B cannot come to an agreement, but both optimize their own personal yield instead, they both get severely punished!

The Prisoner’s Dilemma applies to economy. If people in society cannot come to an agreement, but instead let everybody take decisions to optimize the situation for themselves (as in liberalism), they wind up with a non-optimal situation in which all the wealth is condensed on a single entity. This does not even have to be a person, but the capital itself. Nobody will get anything, beyond the alms granted by the system. In fact, the system will tend to reduce these alms – the minimum wages, or unemployment benefit – and will have all kinds of dogmatic justifications for them, but basically is a strategy of divide-and-conquer, inhibiting people to come to agreements, for instance by breaking the trade unions.

An example of a dogmatic reason is “lowering wages will make that more people get hired for work”. Lowering wages will make the distortion more severe. Nothing more. Moreover, as we have seen, work can be done without human labor. So if it is about competition, men will be cut out of the deal sooner or later. It is not about production. It is about who gets the rights to the consumption of the goods produced. That is also why it is important that people should unite, to come to an agreement where everybody benefits. Up to and including the richest of them all! It is better to have 1% of 1 million than 100% of 1 thousand. Imagine this final situation: All property in the world belongs to the final pan-global bank, with their headquarters in an offshore or fiscal paradise. They do not pay tax. The salaries (even of the bank managers) are minimal. So small that it is indeed not even worth it to call them salary.

Pareto Optimality

There are some solutions. (“If you don’t give a solution, you are part of the problem”). Most important: Human wealth should be set as the only goal in society and economy. Liberalism is ruinous for humans, while it may be optimal for fitter entities. Nobody is out there to take away the money of others without working for it. In a way of ‘revenge’ or ‘envy’, (basically justifying laziness) taking away the hard-work earnings of others. No way. Nobody wants it. Thinking that yours can be the only way a rational person can think. Anybody not ‘winning’ the game is a ‘loser’. Some of us, actually, do not even want to enter the game.

Yet – the big dilemma – that money-grabbing mentality is essential for the economy. Without it we would be equally doomed. But, what we will see now is that you’ll will lose every last penny either way, even without divine intervention.

Having said that, the solution is to take away the money. Seeing that the system is not stable and accumulates the capital on a big pile, disconnected from humans, mathematically there are two solutions:

1) Put all the capital in the hands of people. If profit is made M’-M, this profit falls to the hands of the people that caused it. This seems fair, and mathematically stable. However, how the wealth is then distributed? That would be the task of politicians, and history has shown that they are a worse pest than capital. Politicians, actually, always wind up representing the capital. No country in the world ever managed to avoid it.

2) Let the system be as it is, which is great for giving people incentives to work and develop things, but at the end of the year, redistribute the wealth to follow an ideal curve that optimizes both wealth and increments of wealth.

The latter is an interesting idea. Also since it does not need rigorous restructuring of society, something that would only be possible after a total collapse of civilization. While unavoidable in the system we have, it would be better to act pro-actively and do something before it happens. Moreover, since money is air – or worse, vacuum – there is actually nothing that is ‘taken away’. Money is just a right to consume and can thus be redistributed at will if there is a just cause to do so. In normal cases this euphemistic word ‘redistribution’ amounts to theft and undermines incentives for work and production and thus causes poverty. Yet, if it can be shown to actually increase incentives to work, and thus increase overall wealth, it would need no further justification.

We set out to calculate this idea. However, it turned out to give quite remarkable results. Basically, the optimal distribution is slavery. Let us present them here. Let’s look at the distribution of wealth. Figure below shows a curve of wealth per person, with the richest conventionally placed at the right and the poor on the left, to result in what is in mathematics called a monotonously-increasing function. This virtual country has 10 million inhabitants and a certain wealth that ranges from nearly nothing to millions, but it can easily be mapped to any country.

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Figure 1: Absolute wealth distribution function

As the overall wealth increases, it condenses over time at the right side of the curve. Left unchecked, the curve would become ever-more skew, ending eventually in a straight horizontal line at zero up to the last uttermost right point, where it shoots up to an astronomical value. The integral of the curve (total wealth/capital M) always increases, but it eventually goes to one person. Here it is intrinsically assumed that wealth, actually, is still connected to people and not, as it in fact is, becomes independent of people, becomes ‘capital’ autonomously by itself. If independent of people, this wealth can anyway be without any form of remorse whatsoever be confiscated and redistributed. Ergo, only the system where all the wealth is owned by people is needed to be studied.

A more interesting figure is the fractional distribution of wealth, with the normalized wealth w(x) plotted as a function of normalized population x (that thus runs from 0 to 1). Once again with the richest plotted on the right. See Figure below.

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Figure 2: Relative wealth distribution functions: ‘ideal communist’ (dotted line. constant distribution), ‘ideal capitalist’ (one person owns all, dashed line) and ‘ideal’ functions (work-incentive optimized, solid line).

Every person x in this figure feels an incentive to work harder, because it wants to overtake his/her right-side neighbor and move to the right on the curve. We can define an incentive i(x) for work for person x as the derivative of the curve, divided by the curve itself (a person will work harder proportional to the relative increase in wealth)

i(x) = dw(x)/dx/w(x) —– (1)

A ‘communistic’ (in the negative connotation) distribution is that everybody earns equally, that means that w(x) is constant, with the constant being one

‘ideal’ communist: w(x) = 1.

and nobody has an incentive to work, i(x) = 0 ∀ x. However, in a utopic capitalist world, as shown, the distribution is ‘all on a big pile’. This is what mathematicians call a delta-function

‘ideal’ capitalist: w(x) = δ(x − 1),

and once again, the incentive is zero for all people, i(x) = 0. If you work, or don’t work, you get nothing. Except one person who, working or not, gets everything.

Thus, there is somewhere an ‘ideal curve’ w(x) that optimizes the sum of incentives I defined as the integral of i(x) over x.

I = ∫01i(x)dx = ∫01(dw(x)/dx)/w(x) dx = ∫x=0x=1dw(x)/w(x) = ln[w(x)]|x=0x=1 —– (2)

Which function w is that? Boundary conditions are

1. The total wealth is normalized: The integral of w(x) over x from 0 to 1 is unity.

01w(x)dx = 1 —– (3)

2. Everybody has a at least a minimal income, defined as the survival minimum. (A concept that actually many societies implement). We can call this w0, defined as a percentage of the total wealth, to make the calculation easy (every year this parameter can be reevaluated, for instance when the total wealth increased, but not the minimum wealth needed to survive). Thus, w(0) = w0.

The curve also has an intrinsic parameter wmax. This represents the scale of the figure, and is the result of the other boundary conditions and therefore not really a parameter as such. The function basically has two parameters, minimal subsistence level w0 and skewness b.

As an example, we can try an exponentially-rising function with offset that starts by being forced to pass through the points (0, w0) and (1, wmax):

w(x) = w0 + (wmax − w0)(ebx −1)/(eb − 1) —– (4)

An example of such a function is given in the above Figure. To analytically determine which function is ideal is very complicated, but it can easily be simulated in a genetic algorithm way. In this, we start with a given distribution and make random mutations to it. If the total incentive for work goes up, we keep that new distribution. If not, we go back to the previous distribution.

The results are shown in the figure 3 below for a 30-person population, with w0 = 10% of average (w0 = 1/300 = 0.33%).

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Figure 3: Genetic algorithm results for the distribution of wealth (w) and incentive to work (i) in a liberal system where everybody only has money (wealth) as incentive. 

Depending on the starting distribution, the system winds up in different optima. If we start with a communistic distribution of figure 2, we wind up with a situation in which the distribution stays homogeneous ‘everybody equal’, with the exception of two people. A ‘slave’ earns the minimum wages and does nearly all the work, and a ‘party official’ that does not do much, but gets a large part of the wealth. Everybody else is equally poor (total incentive/production equal to 21), w = 1/30 = 10w0, with most people doing nothing, nor being encouraged to do anything. The other situation we find when we start with a random distribution or linear increasing distribution. The final situation is shown in situation 2 of the figure 3. It is equal to everybody getting minimum wealth, w0, except the ‘banker’ who gets 90% (270 times more than minimum), while nobody is doing anything, except, curiously, the penultimate person, which we can call the ‘wheedler’, for cajoling the banker into giving him money. The total wealth is higher (156), but the average person gets less, w0.

Note that this isn’t necessarily an evolution of the distribution of wealth over time. Instead, it is a final, stable, distribution calculated with an evolutionary (‘genetic’) algorithm. Moreover, this analysis can be made within a country, analyzing the distribution of wealth between people of the same country, as well as between countries.

We thus find that a liberal system, moreover one in which people are motivated by the relative wealth increase they might attain, winds up with most of the wealth accumulated by one person who not necessarily does any work. This is then consistent with the tendency of liberal capitalist societies to have indeed the capital and wealth accumulate in a single point, and consistent with Marx’s theories that predict it as well. A singularity of distribution of wealth is what you get in a liberal capitalist society where personal wealth is the only driving force of people. Which is ironic, in a way, because by going only for personal wealth, nobody gets any of it, except the big leader. It is a form of Prisoner’s Dilemma.

Liberalism.

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In a humanistic society, boundary conditions (‘laws’) are set which are designed to make the lives of human beings optimal. The laws are made by government. Yet, the skimming of surplus labor by the capital is only overshadowed by the skimming by politicians. Politicians are often ‘auto-invited’ (by colleagues) in board-of-directors of companies (the capital), further enabling amassing buying power. This shows that, in most countries, the differences between the capital and the political class are flimsy if not non-existent. As an example, all communist countries, in fact, were pure capitalist implementations, with a distinction that a greater share of the skimming was done by politicians compared to more conventional capitalist societies.

One form of a humanistic (!!!!!????) government is socialism, which has set as its goals the welfare of humans. One can argue if socialism is a good form to achieve a humanistic society. Maybe it is not efficient to reach this goal, whatever ‘efficient’ may mean and the difficulty in defining that concept.

Another form of government is liberalism. Before we continue, it is remarkable to observe that in practical ‘liberal’ societies, everything is free and allowed, except the creation of banks and doing banking. By definition, a ‘liberal government’ is a contradiction in terms. A real liberal government would be called ‘anarchy’. ‘Liberal’ is a name given by politicians to make people think they are free, while in fact it is the most binding and oppressing form of government.

Liberalism, by definition, has set no boundary conditions. A liberal society has at its core the absence of goals. Everything is left free; “Let a Darwinistic survival-of-the-fittest mechanism decide which things are ‘best'”. Best are, by definition, those things that survive. That means that it might be the case that humans are a nuisance. Inefficient monsters. Does this idea look far-fetched? May it be so that in a liberal society, humans will disappear and only capital (the money and the means of production) will survive in a Darwinistic way? Mathematically it is possible. Let me show you.

Trade unions are organizations that represent the humans in this cycle and they are the ways to break the cycle and guarantee minimization of the skimming of laborers. If you are human, you should like trade unions. (If you are a bank manager, you can – and should – organize yourself in a bank-managers trade union). If you are capital, you do not like them. (And there are many spokesmen of the capital in the world, paid to propagate this dislike). Capital, however, in itself cannot ‘think’, it is not human, nor has it a brain, or a way to communicate. It is just a ‘concept’, an ‘idea’ of a ‘system’. It does not ‘like’ or ‘dislike’ anything. You are not capital, even if you are paid by it. Even if you are paid handsomely by it. Even if you are paid astronomically by it. (In the latter case you are probably just an asocial asshole!!!!). We can thus morally confiscate as much from the capital we wish, without feeling any remorse whatsoever. As long as it does not destroy the game; destroying the game would put human happiness at risk by undermining the incentives for production and reduce the access to consumption.

On the other hand, the spokesmen of the capital will always talk about labor cost contention, because that will increase the marginal profit M’-M. Remember this, next time somebody talks in the media. Who is paying their salary? To give an idea how much you are being fleeced, compare your salary to that of difficult-to-skim, strike-prone, trade-union-bastion professions, like train drivers. The companies still hire them, implying that they still bring a net profit to the companies, in spite of their astronomical salaries. You deserve the same salary.

Continuing. For the capital, there is no ‘special place’ for human labor power LP. If the Marxist equation can be replaced by

M – C{MoP} – P – C’ – M’

i.e., without LP, capital would do just that, if that is optimizing M’-M. Mathematically, there is no difference whatsoever between MoP and LP. The only thing a liberal system seeks is optimization. It does not care at all, in no way whatsoever, how this is achieved. The more liberal the better. Less restrictions, more possibilities for optimizing marginal profit M’-M. If it means destruction of the human race, who cares? Collateral damage.

To make my point: Would you care if you had to pay (feed) monkeys one-cent peanuts to find you kilo-sized gold nuggets? Do you care if no human LP is involved in your business scheme? I guess you just care about maximizing your skimming of the labor power involved, be they human, animal or mechanic. Who cares?

There is only one problem. Somebody should consume the products made (no monkey cares about your gold nuggets). That is why the French economist Jean-Baptiste Say said “Every product creates its own demand”. If nobody can pay for the products made (because no LP is paid for the work done), the products cannot be sold, and the cycle stops at the step C’-M’, the M’ becoming zero (not sold), the profit M’-M reduced to a loss M and the company goes bankrupt.

However, individual companies can sell products, as long as there are other companies in the world still paying LP somewhere. Companies everywhere in the world thus still have a tendency to robotize their production. Companies exist in the world that are nearly fully robotized. The profit, now effectively skimming of the surplus of MoP-power instead of labor power, fully goes to the capital, since MoP has no way of organizing itself in trade unions and demand more ‘payment’. Or, and be careful with this step here – a step Marx could never have imagined – what if the MoP start consuming as well? Imagine that a factory robot needs parts. New robot arms, electricity, water, cleaning, etc. Factories will start making these products. There is a market for them. Hail the market! Now we come to the conclusion that the ‘system’, when liberalized will optimize the production (it is the only intrinsic goal) Preindustrial (without tools):

M – C{LP} – P – C’ – M’

Marxian: M – C{MoP, LP} – P – C’ – M’

Post-modern: M – C{MoP} – P – C’ – M’

If the latter is most efficient, in a completely liberalized system, it will be implemented.

This means

1) No (human) LP will be used in production

2) No humans will be paid for work of producing

3) No human consumption is possible

4) Humans will die from lack of consumption

In a Darwinistic way humanity will die to be substituted by something else; we are too inefficient to survive. We are not fit for this planet. We will be substituted by the exact things we created. There is nowhere a rule written “liberalism, with the condition that it favors humans”. No, liberalism is liberalism. It favors the fittest.

It went good so far. As long as we had exponential growth, even if the growth rate for MoP was far larger than the growth rate for rewards for LP, also LP was rewarded increasingly. When the exponential growth stops, when the system reaches saturation as it seems to do now, only the strongest survive. That is not necessarily mankind. Mathematically it can be either one or the other, without preference; the Marxian equation is symmetrical. Future will tell. Maybe the MoP (they will also acquire intelligence and reason somewhere probably) will later discuss how they won the race, the same way we, Homo Sapiens, currently talk about “those backward unfit Neanderthals”.

Your ideal dream job would be to manage the peanut bank, monopolizing the peanut supply, while the peanut eaters build for you palaces in the Italian Riviera and feed you grapes while you enjoy the scenery. Even if you were one of the few remaining humans. A world in which humans are extinct is not a far-fetched world. It might be the result of a Darwinian selection of the fittest.

Capital as a Symbolic Representation of Power. Nitzan’s and Bichler’s Capital as Power: A Study of Order and Creorder.

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The secret to understanding accumulation, lies not in the narrow confines of production and consumption, but in the broader processes and institutions of power. Capital, is neither a material object nor a social relationship embedded in material entities. It is not ‘augmented’ by power. It is, in itself, a symbolic representation of power….

Unlike the elusive liberals, Marxists try to deal with power head on – yet they too end up with a fractured picture. Unable to fit power into Marx’s value analysis, they have split their inquiry into three distinct branches: a neo-Marxian economics that substitutes monopoly for labour values; a cultural analysis whose extreme versions reject the existence of ‘economics’ altogether (and eventually also the existence of any ‘objective’ order); and a state theory that oscillates between two opposite positions – one that prioritizes state power by demoting the ‘laws’ of the economy, and another that endorses the ‘laws’ of the economy by annulling the autonomy of the state. Gradually, each of these branches has developed its own orthodoxies, academic bureaucracies and barriers. And as the fractures have deepened, the capitalist totality that Marx was so keen on uncovering has dissipated….

The commodified structure of capitalism, Marx argues, is anchored in the labour process: the accumulation of capital is denominated in prices; prices reflect labour values; and labour values are determined by the productive labour time necessary to make the commodities. This sequence is intuitively appealing and politically motivating, but it runs into logical and empirical impossibilities at every step of the way. First, it is impossible to differentiate productive from unproductive labour. Second, even if we knew what productive labour was, there would still be no way of knowing how much productive labour goes into a given commodity, and therefore no way of knowing the labour value of that commodity and the amount of surplus value it embodies. And finally, even if labour values were known, there would be no consistent way to convert them into prices and surplus value into profit. So, in the end, Marxism cannot explain the prices of commodities – not in detail and not even approximately. And without a theory of prices, there can be no theory of profit and accumulation and therefore no theory of capitalism….

Modern capitalists are removed from production: they are absentee owners. Their ownership, says Veblen, doesn’t contribute to industry; it merely controls it for profitable ends. And since the owners are absent from industry, the only way for them to exact their profit is by ‘sabotaging’ industry. From this viewpoint, the accumulation of capital is the manifestation not of productive contribution but of organized power.

To be sure, the process by which capitalists ‘translate’ qualitatively different power processes into quantitatively unified measures of earnings and capitalization isn’t very ‘objective’. Filtered through the conventional assessments of accountants and the future speculations of investors, the conversion is deeply inter-subjective. But it is also very real, extremely imposing and, as we shall see, surprisingly well-defined.

These insights can be extended into a broader metaphor of a ‘social hologram’: a framework that integrates the resonating productive interactions of industry with the dissonant power limitations of business. These hologramic spectacles allow us to theorize the power underpinnings of accumulation, explore their historical evolution and understand the ways in which various forms of power are imprinted on and instituted in the corporation…..

Business enterprise diverts and limits industry instead of boosting it; that ‘business as usual’ needs and implies strategic limitation; that most firms are not passive price takers but active price makers, and that their autonomy makes ‘pure’ economics indeterminate; that the ‘normal rate of return’, just like the ancient rate of interest, is a manifestation not of productive yield but of organized power; that the corporation emerged not to enhance productivity but to contain it; that equity and debt have little to do with material wealth and everything to do with systemic power; and, finally, that there is little point talking about the deviations and distortions of ‘financial capital’ simply because there is no ‘productive capital’ to deviate from and distort.

Jonathan Nitzan, Shimshon Bichler- Capital as Power:_ A Study of Order and Creorder 

 

Thermodynamics of Creation. Note Quote.

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Just like the early-time cosmic acceleration associated with inflation, a negative pressure can be seen as a possible driving mechanism for the late-time accelerated expansion of the Universe as well. One of the earliest alternatives that could provide a mechanism producing such accelerating phase of the Universe is through a negative pressure produced by viscous or particle production effects. The viscous pressure contributions can be seen as small nonequilibrium contributions for the energy-momentum tensor for nonideal fluids.

Let us posit the thermodynamics of matter creation for a single fluid. To describe the thermodynamic states of a relativistic simple fluid we use the following macroscopic variables: the energy-momentum tensor Tαβ ; the particle flux vector Nα; and the entropy flux vector sα. The energy-momentum tensor satisfies the conservation law, Tαβ = 0, and here we consider situations in which it has the perfect-fluid form

Tαβ = (ρ+P)uαuβ − P gαβ

In the above equation ρ is the energy density, P is the isotropic dynamical pressure, gαβ is the metric tensor and uα is the fluid four-velocity (with normalization uαuα = 1).

The dynamical pressure P is decomposed as

P = p + Π

where p is the equilibrium (thermostatic) pressure and Π is a term present in scalar dissipative processes. Usually, it is associated with the so-called bulk pressure. In the cosmological context, besides this meaning, Π can also be relevant when particle number is not conserved. In this case, Π ≡ pc is called the “creation pressure”. The bulk pressure,  can be seen as a correction to the thermostatic pressure when near to equilibrium, thus, it should be always smaller than the thermostatic pressure, |Π| < p. This restriction, however, does not apply for the creation pressure. So, when we have matter creation, the total pressure P may become negative and, in principle, drive an accelerated expansion.

The particle flux vector is assumed to have the following form

Nα = nuα

where n is the particle number density. Nα satisfies the balance equation Nα = nΓ, where Γ is the particle production rate. If Γ > 0, we have particle creation, particle destruction occurs when Γ < 0 and if Γ = 0 particle number is conserved.

The entropy flux vector is given by

sα = nσuα

where σ is the specific (per particle) entropy. Note that the entropy must satisfy the second law of thermodynamics sα ≥ 0. Here we consider adiabatic matter creation, that is, we analyze situations in which σ is constant. With this condition, by using the Gibbs relation, it follows that the creation pressure is related to Γ by

pc = − (ρ+p)/3H Γ

where H = a ̇/a is the Hubble parameter, a is the scale factor of the Friedmann-Robertson-Walker (FRW) metric and the overdot means differentiation with respect to the cosmic time. If σ is constant, the second law of thermodynamics implies that Γ ≥ 0 and, as a consequence, particle destruction (Γ < 0) is thermodynamically forbidden. Since Γ ≥ 0, it follows that, in an expanding universe (H > 0), the creation pressure pc cannot be positive.

Political Ideology Chart

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It displays anarchism (lower end) and authoritarianism (higher end) as the extremes of another (vertical) axis as a social measure while left-right is the horizontal axis which is an economic measure.

Anarchism is about self-governance, having as little hierarchy as possible. As you go to the left, the means of production are distrubuted more equally; and as you go to the right, individuals and corporations own more of the means of production and accumulate capital.

On the upper left you have an authoritarian state, distributing the means of production to the people as equally as possible; on the lower left you have the collectives, getting together voluntarily utilizing their local means of production and sharing the products; on the lower right you have anarchocapitalists, with no state, tax or public service, everything operated by private companies in a completely free and global market; and finally on the top right you both have powerful state and corporations (pretty much all the countries).

But after all, these terms change meanings through history and different cultures. Under unrestrained capitalism the accumulation of wealth both creates monopolies and more importantly political influence. So that influences state interference and civil liberties also. It also aspires for infinite growth which leads to the depletion of natural resources which is another diminishing fact for the quality of living for the people. At that point it favors conservatism rather than progressive scientific thinking. Under collective anarchism, since it’s localized, it is quite difficult to create global catastrophes, and this is why in today’s world, the terms anarchism and capitalism seems as opposite.

Austrian Economics. Ruminations. End Part.

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Mainstream economics originates from Jevons’ and Menger’s marginal utility and Walras’ and Marshall’s equilibrium approach. While their foundations are similar, their presentation looks quite different, according to the two schools which typically represent these two approaches: the Austrian school initiated by Menger and the general equilibrium theory initiated by Walras. An important, albeit only formal, difference is that the former presents economic theory mainly in a literary form using ordinary logic, while the latter prefers mathematical expressions and logic.

Lachmann, who excludes determinism from economics since acts of mind are concerned, connects determinism with the equilibrium approach. However, equilibrium theory is not necessarily deterministic, also because it does not establish relationships of succession, but only relationships of coexistence. In this respect, equilibrium theory is not more deterministic than the theory of the Austrian school. Even though the Austrian school does not comprehensively analyze equilibrium, all its main results strictly depend on the assumption that the economy is in equilibrium (intended as a state everybody prefers not to unilaterally deviate from, not necessarily a competitive equilibrium). Considering both competition and monopoly, Menger examines the market for only two commodities in a barter economy. His analysis is the best to be obtained without using mathematics, but it is too limited for determining all the implications of the theory. For instance, it is unclear how the market for a specific commodity is affected by the conditions of the markets for other commodities. However, interdependence is not excluded by the Austrian school. For instance, Böhm-Bawerk examines at length the interdependence between the markets for labor and capital. Despite the incomplete analysis of equilibrium carried out by the Austrian school, many of its results imply that the economy is in equilibrium, as shown by the following examples.

a) The Gossen-Menger loss principle. This principle states that the price of a good can be determined by analyzing the effect of the loss (or the acquisition) of a small quantity of the same good.

b) Wieser’s theory of imputation. Wieser’s theory of imputation attempts to determine the value of the goods used for production in terms of the value (marginal utility) of the consumption goods produced.

c) Böhm-Bawerk’s theory of capital. Böhm-Bawerk proposed a longitudinal theory of capital, where production consists of a time process. A sequence of inputs of labor is employed in order to obtain, at the final stage, a given consumption good. Capital goods, which are the products obtained in the intermediate stages, are seen as a kind of consumption goods in the process of maturing.

A historically specific theory of capital inspired by the Austrian school focuses on the way profit-oriented enterprises organize the allocation of goods and resources in capitalism. One major issue is the relationship between acquisition and production. How does the homogeneity of money figures that entrepreneurs employ in their acquisitive plans connect to the unquestionable heterogeneity of the capital goods in production that these monetary figures depict? The differentiation between acquisition and production distinguishes this theory from the neoclassical approach to capital. The homogeneity of the money figures on the level of acquisition that is important to such a historically specific theory is not due to the assumption of equilibrium, but simply to the existence of money prices. It is real-life homogeneity, so to speak. It does not imply any homogeneity on the level of production, but rather explains the principle according to which the production process is conducted.

In neoclassical economics, in contrast, production and acquisition, the two different levels of analysis, are not separated but are amalgamated by means of the vague term “value”. In equilibrium, assets are valued according to their marginal productivity, and therefore their “value” signifies both their price and their importance to the production process. Capital understood in this way, i.e., as the value of capital goods, can take on the “double meaning of money or goods”. By concentrating on the value of capital goods, the neoclassical approach assumes homogeneity not only on the level of acquisition with its input and output prices, but also on the level of production. The neoclassical approach to capital assumes that the valuation process has already been accomplished. It does not explain how assets come to be valued originally according to their marginal product. In this, an elaborated historically specific theory of capital would provide the necessary tools. In capitalism, inputs and outputs are interrelated by entrepreneurs who are guided by price signals. In their efforts to maximize their monetary profits, they aim to benefit from the spread between input and output prices. Therefore, money tends to be invested where this spread appears to be wide enough to be worth the risk. In other words, business capital flows to those industries and businesses where it yields the largest profit. Competition among entrepreneurs brings about a tendency for price spreads to diminish. The prices of the factors of production are bid up and the prices of the output are bid down until, in the hypothetical state of equilibrium, the factor prices sum up to the price of the product. A historically specific theory of capital is able to describe and analyze the market process that results – or tends to result – in marginal productivity prices, and can therefore also formulate positions concerning endogenous and exogenous misdirections of this process which lead to disequilibrium prices. Consider Mises,

In balance sheets and in profit-and-loss statements, […] it is necessary to enter the estimated money equivalent of all assets and liabilities other than cash. These items should be appraised according to the prices at which they could probably be sold in the future or, as is especially the case with equipment for production processes, in reference to the prices to be expected in the sale of merchandise manufactured with their aid.

According to this, not the monetary costs of the assets, which can be verified unambiguously, but their values are supposed to be the basis of entrepreneurial calculation. As the words indicate, this procedure involves a tremendous amount of uncertainty and can therefore only lead to fair values if equilibrium conditions are assumed.