Good old political economy

Yanis Varoufakis’ recently published The Global Minotaur – America, the true origins of the financial crisis and the future of the world economy arrived here in the mountains a few days ago and has provoked a lot of thoughts. 
First about the light which such a political economic (and historical) approach throws on the matter – an honourable American elite which had experienced the financial breakdown of 1929 and the savagery of the 2nd World War was determined to create the conditions to ensure it never happened again. 
Most of us (think we) know about the 1944 Bretton Woods Conference and its institutions and the Marshall Plan. Not so well-known is the (behind-the-scenes) American role in establishing the Coal and Steel Community (leading to the EU); and in setting Japan on its path to post-war success. 
And, until I read this book, I had, frankly, not really understood the significance of the 1971 American decision to break the dollar link with gold. As the Far East has supplanted the US and Europe as the productive powerhouse, the American deficit (and capital inflow) has mounted to stratospheric proportions – thereby creating the conditions for new and toxic financial mechanisms. 

At the heart of Varoufakis’ writing (including his incisive blog) is the danger of a common currency (whether at global or european level) without a recycling mechanism. There are quite a few summaries and interviews in the internet about the book – eg this one from Naked Capitalism - 

Philip Pilkington: In your book The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy you lay out the case that this ongoing economic crisis has very deep roots. You claim that while many popular accounts – from greed run rampant to regulatory capture – do explain certain features of the current crisis, they do not deal with the real underlying issue, which is the way in which the current global economy is structured. Could you briefly explain why these popular accounts come up short? 

Yanis Varoufakis: It is true that, in the decades preceding the Crash of 2008, greed had become the new creed; that banks and hedge funds were bending the regulatory authorities to their iron will; that financiers believed their own rhetoric and were, thus, convinced that their financial products represented ‘riskless risk’. However, this roll call of pre-2008 era’s phenomena leaves us with the nagging feeling that we are missing something important; that, all these separate truths were mere symptoms, rather than causes, of the juggernaut that was speeding headlong to the 2008 Crash. Greed has been around since time immemorial. Bankers have always tried to bend the rules. Financiers were on the lookout for new forms of deceptive debt since the time of the Pharaohs. Why did the post-1971 era allow greed to dominate and the financial sector to dictate its terms and conditions on the rest of the global social economy? My book begins with an intention to home in on the deeper cause behind all these distinct but intertwined phenomena.

PP: What, then, do you find the roots of the crisis to be?

YV: They are to be found in the main ingredients of the second post-war phase that began in 1971 and the way in which these ‘ingredients’ created a major growth drive based on what Paul Volcker had described, shortly after becoming the President of the Federal Reserve, as the ‘controlled disintegration of the world economy’.
It all began when postwar US hegemony could no longer be based on America’s deft recycling of its surpluses to Europe and Asia. Why couldn’t it? Because its surpluses, by the end of the 1960s, had turned into deficits; the famous twin deficits (budget and balance of trade deficits).

Around 1971, US authorities were drawn to an audacious strategic move: instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers decided to do the opposite: to boost deficits. And who would pay for them? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s twin deficits.
The twin deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and capital. While that ‘arrangement’ was the embodiment of the grossest imbalance imaginable at a planetary scale (recall Paul Volcker’s apt expression), nonetheless, it did give rise to something resembling global balance; an international system of rapidly accelerating asymmetrical financial and trade flows capable of putting on a semblance of stability and steady growth.

Powered by America’s twin deficits, the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out the goods while America absorbed them. Almost 70% of the profits made globally by these countries were then transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It turned these capital inflows into direct investments, shares, new financial instruments, new and old forms of loans etc.
It is through this prism that we can contextualise the rise of financialisation, the triumph of greed, the retreat of regulators, the domination of the Anglo-Celtic growth model; all these phenomena that typified the era suddenly appear as mere by-products of the massive capital flows necessary to feed the twin deficits of the United States.

PP: You seem to locate the turning point here at the moment when Richard Nixon took the US off the gold standard and dissolved the Bretton Woods system. Why is this to be seen as the turning point? What effect did de-pegging the dollar to gold have?

YV: It was a symbolic moment; the official announcement that the Global Plan of the New Dealers was dead and buried. At the same time it was a highly pragmatic move. For, unlike our European leaders today, who have spectacularly failed to see the writing on the wall (i.e. that the euro-system, as designed in the 1990s, has no future in the post-2008 world), the Nixon administration had the sense to recognise immediately that a Global Plan was history. Why? Because it was predicated upon the simple idea that the world economy would be governed by (a) fixed exchange rates, and (b) a Global Surplus Recycling Mechanism (GSRM) to be administered by Washington and which would be recycling to Europe and Asia the surpluses of the United States.

What Nixon and his administration recognised was that, once the US had become a deficit country, this GSRM could no longer function as designed. Paul Volcker had identified with immense clarity America’s new, stark choice: either it would have to shrink its economic and geopolitical reach (by adopting austerity measures for the purpose of reining in the US trade deficit) or it would seek to maintain, indeed to expand, its hegemony by expanding its deficits and, at once, creating the circumstances that would allow the United States to remain the West’s Surplus Recycler, only this time it would be recycling the surpluses of the rest of the world (Germany, Japan, the oil producing states and, later, China).

The grand declaration of 15th August 1971, by President Nixon, and the message that US Treasury Secretary John Connally was soon to deliver to European leaders (“It’s our currency but it is your problem.”) was not an admission of failure. Rather, it was the foreshadowing of a new era of US hegemony, based on the reversal of trade and capital surpluses. It is for this reason that I think the Nixon declaration symbolises an important moment in postwar capitalist history.

Immediately after reading the book, I turned to Howard Davies' earlier (2010) book The Financial Crisis; who is to blame? which looked (briefly) at 39 different explanations of the global crisis. Astonishingly - although that book's opening pages mention (positively) the 1980 Brandt Commission's call for reform of the monetary system and other critiques of growth and neo-liberalism, they are then put to one side with the comment that "those arguments go beyond the scope of this book"!!! 
Of course root-and-branch critiques are more difficult to translate into the instantaneous and headline-grabbing policy-making political elites now seem to require. But for someone of Davies' calibre to dismiss proper analysis in this way is quite shocking - and tells us so much about the "commentariat" on whom we depend for our understanding. 
There is, perhaps, a lot to be said for elite, behind-the-scenes manoeuvring!! Except that all elites have their snouts in the swill.

The Global Minotaur makes us think about the different ways we try to make sense of the world; how seldom we change our thinking; and what it takes to make us do that. It will be interesting to see how seriously his analysis is taken by other economists or whether (as I suspect) he will be written off as a .....Greek....bearing intellectual gifts....

The Royals and Brexit

Fascinating story early this morning about an imminent (and potentially constitution-shattering) intervention by the British Royals in Britain's current debate on whether to leave the European Union

Using outside experts who advised that the intervention would need to be presented by a figure with impeccable European credentials, a strong affinity with the continent and the character to speak out, the family has decided that the move should fronted by Prince Philip who has apparently "been hugely impressed by the way the EU stepped in, not just once but several times, to save Greece,” said one official with knowledge of events. “He admires what Tsipras and Varoufakis achieved – in fact he told friends he sees something of his younger self in the charismatic, motorbike-riding, eye-for-the-ladies Varoufakis. Mind you,” added the source, “he also thinks the Greeks would never have got into this mess if the colonels had still been in power.”,,,,,,,,

The leader of Vote Leave is Michael Gove – "that awful little leaker who put it about that the Queen wanted out. They can’t stand him. And as for Boris, the other main outer – he’s a cycling maniac from Islington. All he has done for the royal family is make it difficult to get around London in a decent-sized Daimler. And the third of the trio – Farage – what another awful little man".

Only when I reached the reference to the Greek colonels, did I realise that it is, today, the first of April!!!

The best writing on the global crisis

The intuition of the older generations beats hands-down the arrogance of the post-war generations. They shunned debt – and knew that the products of manufacturing industry were the real thing. My generation thought that it knew better. At any rate it wanted better and made a Faustian deal. It’s payback time now – and few writers are able to explain what has happened, let alone how we cope with the new world.

Some of my previous posts have referred to the accounts of people such as Howard Davies and Robert Skidelsky – the first of whom looked briefly at 39 possible explanations (!!) for the recent global collapse. I've also given space to the more radical accounts of Paul Mason and Yanis Varoufakis who put the events in a deeper context; and covered the more apocalyptic writers such as William Greer and Dmitry Orlov who not only give their own explanations but also spell out the scale and details of the changes we need to make in our own personal lives if we are to survive. 

It should be noted that only 2 of these writers could be designated an academic (Skidelsky and Varoufakis)

But this week I came across perhaps the most impressive bit of analysis and writing – from Tim Morgan who writes strategic papers for a consultancy. They are all clear, challenging and well worth reading. The latest is called Perfect Storm and basically attributes the global crisis of the past 4 years to four factors -

• The madness of crowds
• The "globalisation disaster"
• Self-delusion (eg statistical lying)
• Seriously diminishing returns from the exploitation of fuels on which our growth has depended for the past two centuries

I’m only half way through the paper but let me share some excerpts from his gripping introduction -

With 24-hour news coverage, the media focus has shifted inexorably from the analytical to the immediate. The basis of politicians’ calculations has shortened to the point where it can seem that all that matters is the next sound-bite, the next headline and the next snapshot of public opinion. The corporate focus has moved all too often from strategic planning to immediate profitability as represented by the next quarter’s earnings.
This report explains that this acceleration towards ever-greater immediacy has blinded society to a series of fundamental economic trends which, if not anticipated have devastating effects.
The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability.

We date the acceleration in short-termism to the early 1980s. Since then, there has been a relentless shift to immediate consumption as part of something that has been called a “cult of self-worship”.
The pursuit of instant gratification has resulted in the accumulation of debt on an unprecedented scale.
The financial crisis, which began in 2008 and has since segued into the deepest and most protracted economic slump for at least eighty years, did not result entirely from a short period of malfeasance by a tiny minority, comforting though this illusion may be.
Rather, what began in 2008 was the denouement of a broadly-based process which had lasted for thirty years, and is described here as “the great credit super-cycle”.
The credit super-cycle process is exemplified by the relationship between GDP and aggregate credit market debt in the United States (see fig. 1.1 of the report). In 1945, and despite the huge costs involved in winning the Second World War, the aggregate indebtedness of American businesses, individuals and government equated to 159% of GDP. More than three decades later, in 1981, this ratio was little changed, at 168%. In real terms, total debt had increased by 214% since 1945, but the economy had grown by 197%, keeping the debt ratio remarkably static over an extended period which, incidentally, was far from shock-free (since it included two major oil crises).
As figure 1.1 shows, this changed dramatically in the 2 decades following – with the percentage of debt hitting almost 400% in 2008.

Does being an outsider improve the quality of someone’s writing?

A rather rambling post a couple of weeks ago tried to explore the insights which can come from straddling worlds which are normally kept separate. This drew on material from 3 years earlier about Ways of Seeing and about Role Conflict.   

Indeed I now see there is a book whicih argues this - Rebel Ideas - the power of diverse thinking by Mathew Syad (2019)

I’m now shifting the focus to try to identify the qualities of a non-fiction book that make it “terrific” rather than merely “good”. I last tried that with Yanis Varoufakis whose books zing with zest….and only, I think, once before with detailed comments on a great book called Defending Politics

Perhaps this will allow me to add a further test to those I suggested in the famous post Why we need to ration non-fiction books.  

Like the good social scientist I am, I already have a hypothesis – namely that the feeling of being an outsider is a catalyst to identify and challenge “groupthink” and that writing is an effective way of exploring the multiple perspectives which subsequently open up…..

Clearly one can be a great writer without being (or feeling) an outsider - although I suspect that people who lack empathy won’t be great writers. But the weak point in my argument is the connection between creativity and writing. There’s no obvious reason why those with creative insights should be able to express them clearly in writing,,,,……

Or is there?    

I have already identified some of the people whose (non-fiction) writing I admire and the first column of the table below simply lists them – in the order in which they came to  mind. 

The second column is my own feeble attempt to label them….

The third will try to explain their “outsider” status which can relate to country, discipline, ethnicity or even gender…Significant that all but one are men? Adding Susan George, Polly Toynbee, Oriana Fallaci or Simone de Beauvoir at this stage is artificial….the point is that their names didn’t come to mind….

What do these great writers have in common?

Name	Status	Outsider in what sense?
Yanis Varoufakis	Globetrotting political economist	Spent first 20 or so years in Greece; European perspective
Theodor Zeldin	Writer, maverick Oxford academic	Came to UK as a child (Russian parents); strong French connection
Arthur Koestler	Central European journalist who made UK his home	Was a communist in Germany. Jailed in Franco Spain. Strong interest in science
JK Galbraith	Prolific Canadian/American economist and writer	23 when he left Canada – American civil servant handling rationing; Ambassador to India for JFK; attracted envy from academic colleagues
Robert Heilbronner	US economic historian	author of the famous “The Worldly Philosophers”; very much a generalist;
Charles Handy	Irish management writer and guru	changed his career every decade
Ralf Dahrendorf	German academic and politician; EC Commissioner, Director of LSE; and Lord	Straddled German and British academic and political worlds - for 25 years apiece
Richard Rose	Policy analyst, writer	had been a young journalist, Came to UK when 27
Roger Scruton	Maverick academic,	Often complained that his traditional brand of conservatism marginalised him
David Graeber	Anthropologist, activist, anarchist	Author of “Bullshit Jobs” Failed to have his academic position renewed by Harvard. Anthropology, almost by definition, means being an outsider
Jan Morris	Journalist	Change of sex certainly gives one a new perspective! And (s)he’s half English and half-Welsh – with this article explicitly referring to her felt “outsider”status
Jonathan Meade	Journalist and film maker – culture and buildings	His autobiography “An Encyclopaedia of Myself” makes it fairly clear he felt he was an outsider
Michael Pollan	Academic (Prof of Journalism), writer	He graduated in English; Generalist; jewish Author of “Cooked”, “In Defence of Food” etc
Alain de Botton	Pop philosopher	Early years in Switzerland
David Runciman	British political scientist; writer	Author of “How Democracy Ends” Son of a famous father, his case simply doesn’t fit!
Ha-Joon Chang	Development Economist	Graduated from South Korea; came to Cambridge for further studies and remained, Author of “23 things they don’t tell uoi about capitalism”
Yuval Harari	Israeli historian	Graduated Israel and now writes bestsellers like “Homo Sapiens”
Rutger Bregman	Dutch historian/journalist	Author of “Utopia for Realists”

Explaining the blog's title

The blog was ten years old last autumn – making it one of the longest-running (english-speaking) blogs of its kind.  It first saw the light of day as "Carpathian Musings" because the blogging started in my mountain house in that area but, after a few winters spent in Sofia, I realized that the title was no longer a precise description of its source.

The blog was therefore, for 5 years or so, called “Balkan and Carpathian Musings”.

But neither the word "Balkan" nor "Carpathian" are keywords people use when they are googling on the topics the blog deals with - such as "the global financial crisis", "organisational reform", "social change", "capitalism" - let alone "Romanian culture", "Bulgarian painting", "transitology"etc.... 
So clearly the blog needed a name which better expresses its content and objectives. I realise, of course, that the way to increase the profile of a blog or website is to manipulate the algorithms – but this costs money I’m not willing to pay…

Let’s be clear, I’m not interested in raising the profile as an end in itself…..I have no illusions about my significance. But I am confident that my blog (and website) is an almost unique “resource” or, if you prefer, “library”…..Not perhaps so much of my writing – but of the insights of others whose books and papers I’ve taken the time and trouble to seek out and whose significance I’ve both recognized and wanted to pass on……Two crucial but not necessarily connected factors!!

So, let me try to explain why, for the past few months, I’ve been running with the title “Exploring No-Man’s Land”. The images of battlefields this summons up are quite deliberately chosen.

First, an accident of birth had me straddling the borderland of the West and East ends of a shipbuilding town in the West of Scotland – with class, religious and political tensions simmering in those places. 

Then political and academic choices in my late 20s brought me slap into the middle of the no-man’s land between politicians and different sorts of professional and academic disciplines.

Then, when I was almost 50, I became a nomadic consultant, working for the next 25 years in ten different countries

Previous posts have tried to give a sense of how that experience has made me who I am….

I was the son of a Presbyterian Minister (or “son of the manse” as we were known) and received my education in a state school which still then possessed the positive features of Scotland’s Democratic Tradition……now, sadly, much traduced.

It would have been easier for my parents to send me to the secondary school just a few blocks from our house but, as home was a manse (owned by the Church of Scotland) in the exclusive “West End”, that school was fee-paying. And my parents (although no radicals) would never have contemplated taking a step which would have created a barrier with my father’s congregation who were stalwarts of the town’s lower middle classes with modest houses and apartments in the centre and east of the town.

Thus began my familiarization with the nuances of the class system – and with the experience of straddling boundaries which was to become such a feature of my life. Whether the boundaries are those of class, party, professional group intellectual discipline or nation, they are well protected if not fortified…..And trying to straddle such borders – let alone explore them – can be an uncomfortable experience.

When I became a young councillor in 1968 (for the Catholic-dominated Labour party), I found myself similarly torn I developed loyalties to the local community activists but found myself in conflict with my (older) political colleagues and officials.

And I felt this particularly strongly when I was elevated to the ranks of magistrate and required to deal with the miscreants who confronted us as lay judges every Monday morning – up from the prison cells where they had spent the weekend for drunkenness and wife-beating……..

The collusion between the police and my legal adviser was clear but my role was to adjudicate “beyond reasonable doubt” and the weak police testimonials often gave me reason to doubt….I dare say I was too lenient and I certainly got such a reputation – meaning that I was rarely disturbed to sign search warrants!

And, on being elevated a few years later to one of the leading positions in a giant new Region, I soon had to establish relations with - and adjudicate between the budgetary and policy bids of - senior professionals heading specialized Departments with massive budgets and manpower.

It was at that stage that I developed a diagram for my students to make sense of the “conflict of loyalties” to what I saw as 4 very different pressures (audiences) to which politicians are subjected – 

- local voters (if the electoral system is based on local constituencies);

- the party (both local and national)

- the officials (and laws) of the particular government agency they had entered;

- their conscience.

Politicians, I argued, differ according to the extent of the notice they took of each of the pressures coming from each of these sources – and the loyalties this tended to generate. And I gave names to the 4 types which could be distinguished – “populist”; “ideologue”, “statesman”,  “maverick”.

The effective politician, however, is the one who resists the temptation to be drawn exclusively into any one of these roles. Each has its own important truth - but it is when someone blends the various partialities into a workable and acceptable proposition that we see real leadership.

And I would make the same point about the different professional and academic disciplines.

Each generates its own way of looking at the world – as you will see from the table below which looks only at seven academic disciplines

The core assumptions of academic subjects

Discipline	Core assumption	Most Famous exponents (not necessarily typical!)
Sociology	Struggle for power	Durkheim, Max Weber, Talcott Parsons, C Wright Mills,Robert Merton,  Herbert Simon, A Etzioni, Ralf Dahrendorf
Economics	Rational choice	Adam Smith, Schumpeter, Keynes, P Samuelson, M Friedmann, J Stiglitz, P Krugman
Political science	Rational choice (at least since the 1970s)	Robert Dahl, Gabriel Almond, David Easton, S Wolin, Peter Hall, James Q Wilson, Bo Rothstein, Francis Fukuyama
Geography	??	Mackinder, David Harvey, Nigel Thrift, Danny Dorling
Public management	mixed for traditional bodies - rational choice for New PM	Woodrow Wilson, Chris Hood, Chris Pollitt, Guy Peters, G Bouckaert,
anthropology	shared meaning	B Malinowski, Evans-Pritchard, Claude Levi-Strauss, Margaret Mead, Mary Douglas, Chris Shore, David Graeber
Political economy	draws upon economics, political science, law, history, sociology et al to explain how political factors determine economic outcomes.	JK Galbraith, Susan Strange, Mark Blyth, Wolfgang Streeck, Geoffrey Hodgson, Yanis Varoufakis,

And, of course, each of these seven fields has a variety of sub-fields each of which has its own specific “take” even before you get to the eccentricities of individual practitioners – let me remind you of this table about 10 sub-fields in Economics which I used in a recent post

Pluralism in Economics

Name of “school”	Humans….	Humans act within…	The economy is…..
Old “neo-classical”	optimise narrow self-interest	A vacuum	Stable
New “neo-classical”	can optimise a variety of goals	A market context	Stable in the absence of friction
Post-Keynes	use rules of thumb	A macro-economic context	Naturally volatile
Classical	act in their self-interest	Their class interests	Generally stable
Marxist	do not have predetermined patterns	Their class and historical interests	Volatile and exploitative
Austrian	have subjective knowledge and preferences	A market context	Volatile – but this is generally sign of health
Institutional	have changeable behaviour	Instit envt that sets rules and social norms	Dependent on legal and social structures
Evolutionary	act “sensibly” but not optimally	An evolving, complex system	Both stable and volatile
Feminist	exhibit engendered behaviour	A social context	Ambiguous
Ecological	act ambiguously	Social context	Embedded in the environment

This is an excerpt only – the full table is from Ho-Joon Chang’s “Economics – a User’s Guide” but can be viewed at diagram at p61 of The Econocracy – the perils of leaving economics to the experts; Earle, Moran and Ward-Perkins (2017)

Please understand, I’m not trying to confuse – rather the opposite….I’m trying to liberate!

Once we become aware of the very different worlds in which people live, our world suddenly becomes a very richer place – in which we have choices about the particular lens we use to make sense of it all…

I remember the first time I really became aware of this – when I did the Belbin team test. And The Art of Thinking by Bramsall and Harrison (1984) very usefully sets out different types of strategic thinking..

Here’s another example - https://nomadron.blogspot.com/2020/01/framing-capitalism.html