This week’s lecture delved straight back into philosophical theories and, after such a long break from these kinds of concepts, I really struggled to piece it all together. Here is my attempt:
We started out by saying in general terms that the modern age of philosophy began with Descartes and Cartesian consciousness, the idea that individual thought is separate from the outside world, but which came first? Ideas like ‘I think therefore I am’ meant that the Ontological problem was dismissed.
However, Heidegger said that this idea of Dualism is completely wrong; there is no ‘I’, no mind. All you can say definitively is ‘there are ideas’, the fact of existence does not follow and is not proven by this. Heidegger was a student of Husserl who said that consciousness is intentional and meaning is fixed subjectively. He argued that ‘knowing’ is a structure, with some ideas having more priority than others, depending on intention.
From this it can be argued that phenomology (meaning and understanding of objects is a mental process) and literary journalism are looking at the familiar as unfamiliar, and vice versa. Heidegger said that being is making choices of what is important – this is existentialism. A new way of looking at things came about; taking things that aren’t normally in your structural understanding and looking closely at them, such as in film making, bringing the sound of a dripping tap into focus, or in writing, focusing on the way clothing falls. This translated into the Minimalism trend in literature, journalism, music, film making, art etc.
Heidegger, who had a relationship with Hannah Arendt and was a Nazi who never apologised or felt guilt, presented a reconsideration of Descartes and dualism. His ‘Cartesian reflections’ that I mentioned earlier (better ‘there are ideas’ than ‘I think therefore I am’) focused on asking ‘what are ideas?’ As with Husserl’s ‘directedness’, he emphasised that ideas depend on intention, mood, ambiguity, the act of choosing and structures of intentions. This brings up the existential problem of choosing. What is the source of our decisions? Possibilities are: social interaction and habit of mind, but the main point out of this question is that our decisions are the result of interactions with others. Other people have an influence on us and the decisions we make; therefore Heidegger argues that there is no self, only a temporary structure of decisions. In this way, it is argued that people live ‘inauthentic’ lives in that they are not the authors of their own life; it is the influence of others that guides our decisions.
This led to the intellectual abandonment of the self-possessed individual. It was no longer thought possible to have control over your own life or be your own person, because the influence of those around us is too strong. It was argued that if put into isolation, we would cease to be people, and many experiments were carried out in which people had hallucinations within minutes of going into isolation from people and senses. I will not even go into the ethical problems that I have with this kind of work, as we will be here all day! HOwever, this meant that one of the bedrock ideas of the Enlightenment and Romanticism was undermined, throwing the work of many people such as Locke, Smith, Marx’s mechanistic materialism, Freud’s subconscious, Kant’s equality of people and Nietzsche (known as ‘the last Romantic’) into question. It also resulted in the collapse of Modernism generally, with concepts of Anthropology, sociology, analytic epistemology and hermeneutics (process of seeing meaning in texts that are not obvious) being subverted by the undermining of the individual.
Heidegger said that existence/being is ‘Dasien’, aka a way of coping and ‘being’ – a structure of choices which allows us to carry on living. It is not what you do, but the way you do it (remind anyone else of a song?).
We then moved on to the ever-difficult question of time. Kant was the first to realise that it is not unified, but is different depending on what we are using it for, eg., whether it is a way to measure our lives or whether it is a way to consider the cosmos. Einstein said that it is a dimension of the universe, a ‘fourth dimension’ which we cannot conceptualise because we can only conceptualise the 3D that we live in. He agreed that time is not uniform. Heidegger saw time as ‘the structure of being’, a threefold structure consisting of the past (which you feel guilt over), the future (which is unknown so you feel fear) and the present. This is building on Einstein’s idea that time is relative, just like positioning is relative to the position of something else as there is no centre of the universe. Heidegger therefore saw time as a mental phenomenon.
Chris then went on to discuss existential morality/ existential psychotherapy, which argues that ‘existence precedes essence’ suggesting that how you came to be is unimportant, and the past should be abandoned as it only makes us feel guilt. These concepts therefore seek to reduce feelings of guilt about the past and to promote indifference towards the future. Therefore, the scope for present freedom is enlarged and you are liberated from both guilt and dread. It is also argued that guilt and dread comes from other people, as can be seen in Sartre’s ‘No Exit’ with the line “Hell is other people”. But, at the same time, WE are other people – the collective consciousness (Carl Jung) creates a world in which we are made to feel guilty for the past and apprehensive about the future.
And now on to Albert Camus, who was a resistance fighter in France in WW2, with many glamorous and fashionable friends, who died in a racing car accident. He was known for his ‘literature of revolt’ including the book that we will be studying for seminars next week; ‘The Outsider’. This book was written totally in the present tense, therefore creating a perpetual NOW with no past and no future. The main character was described by Chris Horrie as a post-romantic existential hero, who refuses to be determined by other people and seeks authenticity and control in his own life. He has no guilt about his actions and does not care about consequences.
The Romantic idea that you must ‘be yourself’ creates an existential dilemma, as according to existentialism, this is not possible and we will always be inauthentic to some extent. There is also the age-old question ‘why are we here, now?’ to consider, and Heidegger’s answer is that it is moral luck. He called it ‘thrown-ness’ and suggested that we are just thrown into the world, that there is no formal logic to it, just blind luck.
Horrie ended the lecture by saying that the Enlightenment and Western civilisation’s impeccable logic was the cause of the Holocaust and Hiroshima, that the problem is built in to Western civilisation and the way that it has developed. Existentialists say that the holocaust was fairly normal/natural in western development. This is alarming in that it produced ‘popular existentialism’ and presented humanity with a dilemma; collaborate or resist? From here on, it is all down to our strength of belief and what we are willing to sacrifice to maintain our moral standards.
Thursday 24 February 2011
Thursday 17 February 2011
Seminar 1: John Kenneth Galbraith's "The New Industrial State"
It has to be said, I am not a fan of economics. It is just a load of gobbledygook if you ask me, so I was very relieved that Jenni’s seminar paper managed to summarise the book in a way that I almost understood!
Main discussion points that came up were:
General history of Galbraith; a keen follower of Keynesian theory however said that general price controls are required to keep the economy running smoothly. The book seems to be there purely for informational purposes, not to further his political agenda, in the forward he even said that “I do not write … to provoke” and that “one need not – and in the name of science should not – accept any of it”. He therefore is concerned with telling the public what industry is about, from an insider’s viewpoint, so that we can make up our own views and challenge the traditional thinking.
He argued that within high industry and advanced economies, the ‘techno structure’ (teams of specialised people who organise the industry) dwarf and manipulate government action. From the reading, the general consensus of the group was that corporations are soulless, and even when the run campaigns to help society, it is purely to keep the public on side and maximise profits. The industry seems to me to be flawed from the outset, an idea which I think is supported by the fact that even some entrepreneurs resent the organisation which now controls the economy, even though they work within it and need it to keep their businesses alive. It is clear that small businesses don’t really stand a chance; now the oligopoly has started, big business, it seems, will always dominate the market.
Galbraith’s ideas are very much contrary to Adam Smith’s micro-economics which saw the individual as holding the power and driving the economy. In contrast to this individualistic view, Galbraith says that the economy is all about big business, planning and profit, not fulfilling customer needs.
One of the chapters which we discussed in detail was chapter 6. Here, Galbraith describes 3 parts to a successful business; 1) technology to replace blue collar workers (who aren’t skilled so are more dispensable than white collar workers) 2) people to understand/run the technology (who have specialist skills) 3) co-ordination (communication between the specialists and deciding which specialist skills are relevant and needed. This basically means that “we are becoming the servants, in thought as in action, of the machine we have created to serve us”; technology is taking over, creating whole new problems in that production takes longer and is more specialised (and so not easily transferred to a different product/use) and that investments of time and money sky rocket; it is also much riskier to make an investment that involves technology because you are having to anticipate the future demands of the market. The replacement of blue collar workers also brings the problem that, because of the structure of the economy, society and education, blue collar workers are faced with many difficulties before they have the opportunity to become specialised, and so are sort of locked in blue-collar jobs.
Another chapter looked at was chapter 15 which talked about goals for corporations. I was interested to find out that security was their number one goal, before growth/profit. Next comes ‘technological virtuosity’ and then rising dividends (but I don’t actually know what these last two mean). It also talked about GNP (gross national product) which, apparently, is what our country depends on.
Chapter 7 was also of particular interest in discussing the fact that the goal of corporations is to make money, not to uphold or benefit society. As Claire pointed out, it is a very selfish attitude and not conducive to a thriving whole. Claire put this very elegantly, saying you can’t just be your own company, you need to be part of the world. This is very much the same as society. This topic of discussion brought us on to the fact that corporations not only have this huge influence on the economy, but also in the media and far-reaching impact on society. The conglomerates practically control the mass media, and so the public are hugely impacted on by the industry.
And there you go, that was our discussion of economics as set out in Galbraith’s “The New Industrial State”. If you want to actually understand it, go to an economist as I cannot help.
Main discussion points that came up were:
General history of Galbraith; a keen follower of Keynesian theory however said that general price controls are required to keep the economy running smoothly. The book seems to be there purely for informational purposes, not to further his political agenda, in the forward he even said that “I do not write … to provoke” and that “one need not – and in the name of science should not – accept any of it”. He therefore is concerned with telling the public what industry is about, from an insider’s viewpoint, so that we can make up our own views and challenge the traditional thinking.
He argued that within high industry and advanced economies, the ‘techno structure’ (teams of specialised people who organise the industry) dwarf and manipulate government action. From the reading, the general consensus of the group was that corporations are soulless, and even when the run campaigns to help society, it is purely to keep the public on side and maximise profits. The industry seems to me to be flawed from the outset, an idea which I think is supported by the fact that even some entrepreneurs resent the organisation which now controls the economy, even though they work within it and need it to keep their businesses alive. It is clear that small businesses don’t really stand a chance; now the oligopoly has started, big business, it seems, will always dominate the market.
Galbraith’s ideas are very much contrary to Adam Smith’s micro-economics which saw the individual as holding the power and driving the economy. In contrast to this individualistic view, Galbraith says that the economy is all about big business, planning and profit, not fulfilling customer needs.
One of the chapters which we discussed in detail was chapter 6. Here, Galbraith describes 3 parts to a successful business; 1) technology to replace blue collar workers (who aren’t skilled so are more dispensable than white collar workers) 2) people to understand/run the technology (who have specialist skills) 3) co-ordination (communication between the specialists and deciding which specialist skills are relevant and needed. This basically means that “we are becoming the servants, in thought as in action, of the machine we have created to serve us”; technology is taking over, creating whole new problems in that production takes longer and is more specialised (and so not easily transferred to a different product/use) and that investments of time and money sky rocket; it is also much riskier to make an investment that involves technology because you are having to anticipate the future demands of the market. The replacement of blue collar workers also brings the problem that, because of the structure of the economy, society and education, blue collar workers are faced with many difficulties before they have the opportunity to become specialised, and so are sort of locked in blue-collar jobs.
Another chapter looked at was chapter 15 which talked about goals for corporations. I was interested to find out that security was their number one goal, before growth/profit. Next comes ‘technological virtuosity’ and then rising dividends (but I don’t actually know what these last two mean). It also talked about GNP (gross national product) which, apparently, is what our country depends on.
Chapter 7 was also of particular interest in discussing the fact that the goal of corporations is to make money, not to uphold or benefit society. As Claire pointed out, it is a very selfish attitude and not conducive to a thriving whole. Claire put this very elegantly, saying you can’t just be your own company, you need to be part of the world. This is very much the same as society. This topic of discussion brought us on to the fact that corporations not only have this huge influence on the economy, but also in the media and far-reaching impact on society. The conglomerates practically control the mass media, and so the public are hugely impacted on by the industry.
And there you go, that was our discussion of economics as set out in Galbraith’s “The New Industrial State”. If you want to actually understand it, go to an economist as I cannot help.
Thursday 10 February 2011
Semester 2, Lecture 1: Baffled already!
Economics and Keynesianism
You know that when a lecture starts with “money is the rolling force of the universe – pure abstraction” that you are going to get totally confused… so I’m going to post my notes in the least confusing way possible (if I can). In this lecture we basically covered the economic strategies of Britain over the last 200 years or so, and some of the people who influenced them.
Chris started by arguing that we are all individual, not because of morals or feelings or values, but because of our net worth. We are all worth a different amount and that means that, because in life we trade on how much we are worth and how much we can barter because of this, each of our lives will be different. However the basis of this lecture is not so much the individual as the blanket schemes that govern the individual. Chris also emphasised that there is one thing that money and value cannot buy; poverty. I am not quite sure how this is relevant but it must have some sort of profound meaning which escapes me.
Adam Smith was a mechanistic economist, and was very influential. He argued that people respond to stimuli… pleasure and displeasure… rather than having a subconscious level. In this way, he thought that people are very easy to read by their ‘utility’, which I understand to mean the amount of pleasure and pain stimuli that they are measuring at one point in time, sort of like a thermometer. We seek to maximise the pleasure and minimise the pain and therefore maximise our utility. However, a definition that I have found on the internet says that marginal utility means “The additional satisfaction a consumer gains from consuming one more unit of a good or service”(http://www.investopedia.com/terms/m/marginalutility.asp), which has sort of confused me.
JS Mill, on the other hand, saw utility as an actual quantity that could be measured by price, rather than satisfaction. He saw no moralisation in it, simply value. This had political implications in that Adam Smith said that people must be free to maximise their utility, hence Utilitarianism where there are no restrains on the individual so they will, in theory, actively aggregate to produce as much as possible, which will benefit both the individual and society as a whole.
This is all linked to classical economics, with Utilitarianism (aka liberalism) playing a major role. This was a reaction at a moral level against the Kantean system of reality (categorical imperatives etc) and was based on Smith’s idea of the “hidden hand in the market”, that Free Trade stimulates economic growth and prosperity. To illustrate utilitarian ideals, Chris used the runaway train problem… a train is speeding down the tracks and can’t stop, hundreds of people are sure to die, unless you pull a lever to switch the tracks so that it goes onto a steady incline which will slow it. However, on this other track there is a rail worker who is deaf and blind and would be sure to be killed if the train comes that way. Do you kill the rail worker and save the hundreds? Or do nothing and let the hundreds die? For me, the real problem with this is that either way, innocents die. The Utilitarian answer would be to save the hundreds and sacrifice the one man.
Another example that Chris used was that of the NHS, they are more willing to spend money saving a young life who will contribute many more years to society than an old person that needs, for example an expensive hip replacement, because the old person has few more years to give in service to society. However, I see this as very cynical as sometimes (not often) organisations just want to help.
J M Keynes is, apparently, the person we have to blame for being in boring lectures and education , because he saw that economies were essentially unviable as soon as we were able to bring products such as grain and cotton etc into England, and so saw a need to set up other ways to increase public spending and put liquidity into the local economy.
Richardo thought up the” Labour Theory of Value”, which was contrary to Smith’s theories and suggested that utility is not purely subjective, but depends on the labour that is embedded in it.
Malthus’ “Iron Law of Population” was more interested in economic growth whereas Smith took a more static view rather than looking at changes over time. Malthus argued that the population was the main cause of change, growing geometrically (2 children each = equal, 4 children each = doubling population), while resources only grow arithmetically, causing an imbalance and leading to economic crisis. He argued that famine and disease control population, but the emergence of the welfare state has reduced the effectiveness of this so that the population/resources problem is growing bigger and bigger.
Marx is seen to be a mixture of both Richardo and Malthus’ theories and has been defined as a ‘contradiction of capitalism’. He argues that the free market constantly impoverishes people that work for wages because the Iron Law of wages means that the working class will never get out of poverty. They will never earn enough money to buy what they produce, because profit causes problems. Profit cannot be absorbed by society; there is always a gap and using profit margins only increases the problem. Therefore there is a recurring crisis of over-production and under-consumption. Chris points out that Marx is great at diagnosing the problem, but when it comes to finding a solution is trickier. If we treat the problem as he suggests, we will only be creating more problems. Therefore he saw this crisis as final and would result in a total collapse of the system. Thankfully, this hasn’t happened.
One of the main reasons that the economy didn’t collapse was the 1848 expansion of markets due to emigration and American economic expansion being used as a new source of capital investment. The 1849 gold rush also helped by causing huge migration, therefore reducing the strain of a large population on the resources available.
We now move on to the history of money. Money = pure abstraction in that it can be anything that carries out the function as a store of value and means of exchange. For classical economists, therefore, money is irrelevant. Money enables trade to occur. At first, they thought that the quantity of gold was constant and therefore could be used as a stable measuring stick for trade, then they discovered that they did not, in fact, have all of it, as huge reserves were discovered in South America (and other places?). This undermining of the traditional measuring stick of value caused inflation and in 1928, gold was no longer used to back currency.
Before 1844, there were no pound notes, only gold sovereigns (the world currency), then English banks began issuing ‘bank notes’ based on the gold reserves that they held. Banks found that they could issue more notes than their gold stocks because not everyone would be cashing in their bank notes at the same time. This meant that the concept of a Credit-Creation Ratio was set up, so that if £1 was held, £10 of notes could be issued. Bank notes were therefore backed by gold, but not directly transferable. The assessment of how stable the country or currency is acts as the defining factor on how much money you can make. A national monopoly was created in which the only money that is legal is bank notes from the Bank of England, which created a relatively stable currency.
Liquidity refers to what fills the gap between what labourers produce and what they earn by loaning the difference, therefore filling the deflation gap. It is the difference between the output of the country and the total purchasing power which is filled by printing money in proportion to the stocks of gold held. This ‘sound money’ allows the price system to be purely nominal.
Marshal attributed the 1880s economic depression to under-consumption, drying up goldmines and countries such as India and China hoarding money. The under-consumption, he argued, leads to liquidity crisis. He advocated a ‘loose money’ system where more money would be printed and circulated, creating more liquidity. However, he failed to comprehend the ‘money effect’, the idea that money has an actual effect on people in the real world, looking purely at the abstract concept of money. The idea that people are affected by money is a rejection of enlightenment rationalism. However, classical economists reject the idea of the ‘money effect’. Marshal said that because of the money effect, a nationalist monetary policy is needed to regulate the amount of money in the economy.
This is regulated via the interest rate which is the price of money, as determined by activity in the bond market. At the moment, the interest rate is about 1%. It is set by issuing government bonds (or ‘gilts’), the more guilt issues, the higher the rate of interest. This depends to a great extent on the legitimacy of the government issuing the bonds and the confidence in their economic policy (aka credit rating). However, there is a gap between the face value of these bonds and what people are willing to pay for them. They are, essentially, an IOU from the government.
The classical approach to Fiscal policy (taxation and government spending) is to regulate the bond market because what the government wants is a balance, for bonds and reserves to match. Bonds are therefore issued to regulate the economy and the purpose of taxation, to classical economists, is to pay off government debt, in the long run. However, Keynes argued that we should ignore the long run, and Keynesians see the purpose of taxation as being to regulate the aggregate demand (make sure that there is enough money to employ and pay everybody). PSBR is the Public Sector Borrowing Requirement, which is the number of bonds that will be issued in one year.
Despite all of these policies, since the 1920s there has been NO attempt to pay down national debt. Nowadays it is more about re-distributing the debt so that we can keep on functioning. The poor are seen as more likely to spend any money that they have while the rich are more likely to save, hence the introduction of income tax, to re-distribute the money so that the poor are spending. Therefore, we are using taxation as a way for the government to guide and regulate spending, rather than what politicians tend to tell us, that we are ‘working off our national debts’. Keynes believed that there should be no taxation except in social engineering.
Back to Smith, he argued that a Free State would work best, however it seems that we have a much more Active State, thanks to neo-mercantilism from the 1880s onwards, protectionism, the popularity of the national workshop concept to keep people employed (a way of putting liquidity into the economy and at the same time boosting morale), lots of state intervention directing economic activity and the introduction of the Welfare State, first in Bismark’s Germany (1880s), using an active state to integrate and subjugate the new German state, later done by France and the US. This nation-building strategy created liquidity, but at the same time devalued currency.
In the 1920s there was not enough gold in Britain to pay for the war, so Britain had to abandon the Gold Standard and simply print money, without the backing. This caused huge inflation, with too much money chasing too few goods; this led to speculation and rising prices which caused a huge stock market crash, leading us into the Great Depression. The neo-classical view argued for a ‘temporary market correction’ which mean reducing the cost of wages and money itself (interest rates) and putting a restriction on the number of bonds issued.
However, in 1925, Winston Churchill decided to take Britain back onto the Gold Standard system in a bid to bring us out of the Great Depression. He restricted the issuing and printing of money, however this only served to intensify the depression. Keynesians said that they should increase aggregate demand by printing money. This is expressed in the following formula:
Household Spending (C) + Private Investment (I) + Government Spending (G)
Y = C + I + G
This would use taxation to manage demand and cut inflationary expenditure (God knows how… I don’t understand this, if any-one does please explain in the comments!)
There were many problems with Keynesian theory:
1. Inflation and ‘stagflation’ – unemployment returns were ‘caused’ by inflation.
2. Increased role of the state meant a decline in freedom and went against Smith’s argument that a Free State would fare better.
3. It meant a destruction of profitability.
4. Orientation towards arms spending and militarism (as ways of increasing liquidity – ways to waste money which had no direct competition with the private sector and pumps more money into technological innovation) (aka Military Keynesianism).
5. Collapse of rational expectations.
6. Lame ducks/ picking losers/ protectionism/ failure to innovate/ scarcity of real investment funds/ bureaucracy/ racism (as seen in The Road to Serfdom).
7. The Keynesian idea that we are owed a living.
8. Central government planning undermines democracy, depends on a technological elite, means that policies do not necessarily reflect the General Will and can be seen as negative as politicians lie about the reasons for taxation.
9. Cheap credit, asset inflation leading to a ‘credit crunch’, bank failures leading to credit shortages, universal bankruptcy, possible currency collapse.
I don’t know if this is because I haven’t understood properly, but it does seem to me that whatever we do, there is no way to rectify the mistakes that have been made economically in the past, so we had better get used to living in debt… not the most cheerful thought, I have to say.
You know that when a lecture starts with “money is the rolling force of the universe – pure abstraction” that you are going to get totally confused… so I’m going to post my notes in the least confusing way possible (if I can). In this lecture we basically covered the economic strategies of Britain over the last 200 years or so, and some of the people who influenced them.
Chris started by arguing that we are all individual, not because of morals or feelings or values, but because of our net worth. We are all worth a different amount and that means that, because in life we trade on how much we are worth and how much we can barter because of this, each of our lives will be different. However the basis of this lecture is not so much the individual as the blanket schemes that govern the individual. Chris also emphasised that there is one thing that money and value cannot buy; poverty. I am not quite sure how this is relevant but it must have some sort of profound meaning which escapes me.
Adam Smith was a mechanistic economist, and was very influential. He argued that people respond to stimuli… pleasure and displeasure… rather than having a subconscious level. In this way, he thought that people are very easy to read by their ‘utility’, which I understand to mean the amount of pleasure and pain stimuli that they are measuring at one point in time, sort of like a thermometer. We seek to maximise the pleasure and minimise the pain and therefore maximise our utility. However, a definition that I have found on the internet says that marginal utility means “The additional satisfaction a consumer gains from consuming one more unit of a good or service”(http://www.investopedia.com/terms/m/marginalutility.asp), which has sort of confused me.
JS Mill, on the other hand, saw utility as an actual quantity that could be measured by price, rather than satisfaction. He saw no moralisation in it, simply value. This had political implications in that Adam Smith said that people must be free to maximise their utility, hence Utilitarianism where there are no restrains on the individual so they will, in theory, actively aggregate to produce as much as possible, which will benefit both the individual and society as a whole.
This is all linked to classical economics, with Utilitarianism (aka liberalism) playing a major role. This was a reaction at a moral level against the Kantean system of reality (categorical imperatives etc) and was based on Smith’s idea of the “hidden hand in the market”, that Free Trade stimulates economic growth and prosperity. To illustrate utilitarian ideals, Chris used the runaway train problem… a train is speeding down the tracks and can’t stop, hundreds of people are sure to die, unless you pull a lever to switch the tracks so that it goes onto a steady incline which will slow it. However, on this other track there is a rail worker who is deaf and blind and would be sure to be killed if the train comes that way. Do you kill the rail worker and save the hundreds? Or do nothing and let the hundreds die? For me, the real problem with this is that either way, innocents die. The Utilitarian answer would be to save the hundreds and sacrifice the one man.
Another example that Chris used was that of the NHS, they are more willing to spend money saving a young life who will contribute many more years to society than an old person that needs, for example an expensive hip replacement, because the old person has few more years to give in service to society. However, I see this as very cynical as sometimes (not often) organisations just want to help.
J M Keynes is, apparently, the person we have to blame for being in boring lectures and education , because he saw that economies were essentially unviable as soon as we were able to bring products such as grain and cotton etc into England, and so saw a need to set up other ways to increase public spending and put liquidity into the local economy.
Richardo thought up the” Labour Theory of Value”, which was contrary to Smith’s theories and suggested that utility is not purely subjective, but depends on the labour that is embedded in it.
Malthus’ “Iron Law of Population” was more interested in economic growth whereas Smith took a more static view rather than looking at changes over time. Malthus argued that the population was the main cause of change, growing geometrically (2 children each = equal, 4 children each = doubling population), while resources only grow arithmetically, causing an imbalance and leading to economic crisis. He argued that famine and disease control population, but the emergence of the welfare state has reduced the effectiveness of this so that the population/resources problem is growing bigger and bigger.
Marx is seen to be a mixture of both Richardo and Malthus’ theories and has been defined as a ‘contradiction of capitalism’. He argues that the free market constantly impoverishes people that work for wages because the Iron Law of wages means that the working class will never get out of poverty. They will never earn enough money to buy what they produce, because profit causes problems. Profit cannot be absorbed by society; there is always a gap and using profit margins only increases the problem. Therefore there is a recurring crisis of over-production and under-consumption. Chris points out that Marx is great at diagnosing the problem, but when it comes to finding a solution is trickier. If we treat the problem as he suggests, we will only be creating more problems. Therefore he saw this crisis as final and would result in a total collapse of the system. Thankfully, this hasn’t happened.
One of the main reasons that the economy didn’t collapse was the 1848 expansion of markets due to emigration and American economic expansion being used as a new source of capital investment. The 1849 gold rush also helped by causing huge migration, therefore reducing the strain of a large population on the resources available.
We now move on to the history of money. Money = pure abstraction in that it can be anything that carries out the function as a store of value and means of exchange. For classical economists, therefore, money is irrelevant. Money enables trade to occur. At first, they thought that the quantity of gold was constant and therefore could be used as a stable measuring stick for trade, then they discovered that they did not, in fact, have all of it, as huge reserves were discovered in South America (and other places?). This undermining of the traditional measuring stick of value caused inflation and in 1928, gold was no longer used to back currency.
Before 1844, there were no pound notes, only gold sovereigns (the world currency), then English banks began issuing ‘bank notes’ based on the gold reserves that they held. Banks found that they could issue more notes than their gold stocks because not everyone would be cashing in their bank notes at the same time. This meant that the concept of a Credit-Creation Ratio was set up, so that if £1 was held, £10 of notes could be issued. Bank notes were therefore backed by gold, but not directly transferable. The assessment of how stable the country or currency is acts as the defining factor on how much money you can make. A national monopoly was created in which the only money that is legal is bank notes from the Bank of England, which created a relatively stable currency.
Liquidity refers to what fills the gap between what labourers produce and what they earn by loaning the difference, therefore filling the deflation gap. It is the difference between the output of the country and the total purchasing power which is filled by printing money in proportion to the stocks of gold held. This ‘sound money’ allows the price system to be purely nominal.
Marshal attributed the 1880s economic depression to under-consumption, drying up goldmines and countries such as India and China hoarding money. The under-consumption, he argued, leads to liquidity crisis. He advocated a ‘loose money’ system where more money would be printed and circulated, creating more liquidity. However, he failed to comprehend the ‘money effect’, the idea that money has an actual effect on people in the real world, looking purely at the abstract concept of money. The idea that people are affected by money is a rejection of enlightenment rationalism. However, classical economists reject the idea of the ‘money effect’. Marshal said that because of the money effect, a nationalist monetary policy is needed to regulate the amount of money in the economy.
This is regulated via the interest rate which is the price of money, as determined by activity in the bond market. At the moment, the interest rate is about 1%. It is set by issuing government bonds (or ‘gilts’), the more guilt issues, the higher the rate of interest. This depends to a great extent on the legitimacy of the government issuing the bonds and the confidence in their economic policy (aka credit rating). However, there is a gap between the face value of these bonds and what people are willing to pay for them. They are, essentially, an IOU from the government.
The classical approach to Fiscal policy (taxation and government spending) is to regulate the bond market because what the government wants is a balance, for bonds and reserves to match. Bonds are therefore issued to regulate the economy and the purpose of taxation, to classical economists, is to pay off government debt, in the long run. However, Keynes argued that we should ignore the long run, and Keynesians see the purpose of taxation as being to regulate the aggregate demand (make sure that there is enough money to employ and pay everybody). PSBR is the Public Sector Borrowing Requirement, which is the number of bonds that will be issued in one year.
Despite all of these policies, since the 1920s there has been NO attempt to pay down national debt. Nowadays it is more about re-distributing the debt so that we can keep on functioning. The poor are seen as more likely to spend any money that they have while the rich are more likely to save, hence the introduction of income tax, to re-distribute the money so that the poor are spending. Therefore, we are using taxation as a way for the government to guide and regulate spending, rather than what politicians tend to tell us, that we are ‘working off our national debts’. Keynes believed that there should be no taxation except in social engineering.
Back to Smith, he argued that a Free State would work best, however it seems that we have a much more Active State, thanks to neo-mercantilism from the 1880s onwards, protectionism, the popularity of the national workshop concept to keep people employed (a way of putting liquidity into the economy and at the same time boosting morale), lots of state intervention directing economic activity and the introduction of the Welfare State, first in Bismark’s Germany (1880s), using an active state to integrate and subjugate the new German state, later done by France and the US. This nation-building strategy created liquidity, but at the same time devalued currency.
In the 1920s there was not enough gold in Britain to pay for the war, so Britain had to abandon the Gold Standard and simply print money, without the backing. This caused huge inflation, with too much money chasing too few goods; this led to speculation and rising prices which caused a huge stock market crash, leading us into the Great Depression. The neo-classical view argued for a ‘temporary market correction’ which mean reducing the cost of wages and money itself (interest rates) and putting a restriction on the number of bonds issued.
However, in 1925, Winston Churchill decided to take Britain back onto the Gold Standard system in a bid to bring us out of the Great Depression. He restricted the issuing and printing of money, however this only served to intensify the depression. Keynesians said that they should increase aggregate demand by printing money. This is expressed in the following formula:
Household Spending (C) + Private Investment (I) + Government Spending (G)
Y = C + I + G
This would use taxation to manage demand and cut inflationary expenditure (God knows how… I don’t understand this, if any-one does please explain in the comments!)
There were many problems with Keynesian theory:
1. Inflation and ‘stagflation’ – unemployment returns were ‘caused’ by inflation.
2. Increased role of the state meant a decline in freedom and went against Smith’s argument that a Free State would fare better.
3. It meant a destruction of profitability.
4. Orientation towards arms spending and militarism (as ways of increasing liquidity – ways to waste money which had no direct competition with the private sector and pumps more money into technological innovation) (aka Military Keynesianism).
5. Collapse of rational expectations.
6. Lame ducks/ picking losers/ protectionism/ failure to innovate/ scarcity of real investment funds/ bureaucracy/ racism (as seen in The Road to Serfdom).
7. The Keynesian idea that we are owed a living.
8. Central government planning undermines democracy, depends on a technological elite, means that policies do not necessarily reflect the General Will and can be seen as negative as politicians lie about the reasons for taxation.
9. Cheap credit, asset inflation leading to a ‘credit crunch’, bank failures leading to credit shortages, universal bankruptcy, possible currency collapse.
I don’t know if this is because I haven’t understood properly, but it does seem to me that whatever we do, there is no way to rectify the mistakes that have been made economically in the past, so we had better get used to living in debt… not the most cheerful thought, I have to say.
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