Category Archives: Economic theory

Left and Right – Good and Wrong?

The old divide in politics between Left and Right can easily be condensed into the dichotomy: Left is altruism and Right is egoism. Translated into universal moral code it would be: Left is good, Right is bad.

There is on the other hand an old aphorism, which I suppose is international and goes like this:  If you are young and not a socialist you don’t have a heart; if you are old and not a conservative you don’t have a brain.

In my world this must have been concocted by an old reactionary, since it puts things on the head. If anything, conservative ideology is impregnated with emotion as opposed to cognition, whilst altruism requires ability to abstract thinking and conscious understanding, such as to identify oneself with other human beings with different backgrounds and traits.

As a slowly maturing child I had some vague political ideas of what we call here bourgeoisie character. In other words: as long as the naive boy was ignorant and immature he was politically a sloppy egoist (maybe evolution’s first choice). Then when he reached 20 in came the 1960s, and a whole new world opened to the post-teen as if he just had learned how to read. It was a revelation, never possible to rescind after that. Now as a rather old man his eyes are more open than ever.

People on the right-wing, if their thinking is not totally petrified, surely are aware of their ideology’s egoistic element. To comfort those people’s conscience there are a number of defense inventions made. On the economic front the most famous is the “Adam Smith gambit”. In short it says that prosperity for all will reach its optimum if everyone just strives for his own personal well-being, after which the famous “invisible hand” automatically will create a divine equilibrium, giving everyone his fair share.

To refute this gambit one just has to take a look at the world, and find – among many other deficiencies in the equilibrium – some three million small children dying each year from uncomplicated illnesses that would have cost us in the rich part of the world a pittance to cure. Empirically it’s thus obvious that the “perfect market hypothesis” has serious shortcomings. To Adam Smith’s honor it should be said that he is not at all so naïve in his main work Wealth of Nations as his right-wing interpreters want us to believe.

Smith was not just an economist but also a moral philosopher, and as such he had serious objections regarding capitalism, the way it functioned already in his days. He never used the term “invisible hand”, except one single time in the whole book, and then in a completely different context. He described how division of labor increased productivity, but at the same time denounced the kind of society it would create. He had not much sympathy for “the masters of mankind” as he called the capitalists of his time. To make Adam Smith a right-wing icon requires thus a very selective reading of his works.

That a socialized economy can function without central planning was not Adam Smith’s “discovery”, contrary to conservative idolizing. Mankind had presumably found that out on the shores of Africa a long time ago. It’s not much of a mystery either, rather a capability naturally produced by evolution. To take a really micro example: in my days we could be some twenty kids coming together on a grass field, one of us owning a football (“soccer” ball) – no parental supervision. In a moment we organized – democratically – two teams and started playing, each of us filling his specific role in the game. It required no planning whatsoever.

Since Left means good, and thus honest, we shall not overlook the benefits of market principles based on the “economic man” assumption (i.e. egoism). It’s obvious that we normally are more ingenious and work harder when we profit from the enterprise ourselves. But the profit mustn’t be in the form of money. The most decisive discoveries and inventions have been made by scientists and engineers who didn’t get a penny of the eventual billion dollar profits that could be the end result. They were happy with their professional achievement, which also is a benefit (but at the same time reveals the fraudulent money principles of capitalism, favoring the unworthy over the worthy).

Today’s China is held up as a triumph for market principles. Without diminishing the Chinese feat that example could require some analyzing. Indeed, a number of billionaires have emerged and a middle class of white color workers have prospered, but for the hundreds of millions on the impoverished countryside the outcome is more debatable. Before the capitalist era China was a much better place for the simple farmers than comparable countries such as India. Now the situation is more complicated.

The most abhorrent aspect of right-wing policy is the “winner takes it all” mentality, emphasized since the neoliberal seizure of dominance some 35 years ago. With just slightly less greed it would have been no big deal to eliminate the conspicuous manifestations of capitalism resulting in suffering for billions of people.

Worst of all is that our mentality has hit the rest of the world in the form of bombs and bullets, in short: with murder. But that’s another story.

Loan bubble in Sweden – promising a phenomenal burst

In July this year the Swedish National bank (Riksbanken) cut its key interest rate by two thirds, to reach the European norm 0.25 percent. The head of the bank – Stefan Ingves – had struggled to keep the rate high in his attempts to suppress the swelling bubble of private debt. He seemed to be one of the few economists in Sweden who really worried about that bubble. It’s just that he was accompanied by OECD, EU, the World Bank and other expert bodies who all have expressed serious concern and had given Sweden grave warnings. Finally Ingves had to give in to the majority of the board, who think that the debt problem should be dealt with by other means and by the government (which probably is correct since Ingves’ policy hasn’t prevented the bubble from growing pathologically).

As we have written earlier on this issue the amount of housing loans in Sweden have literally exploded during the last ten years, from 0.7 trillion SEK to 2.7 trillion, i.e. by 400 percent (1 USD = 6.8 SEK), and are still expanding. This increase is of course not even distantly founded on real economic factors. It has mostly been enabled by the banks emitting fictitious money. One important observation, never mentioned by economists, is that part of that imaginary money certainly has trickled into the economy and created a demand without much foundation in reality. We have hence lived beyond our means and the day of payment lies ahead, perhaps in the near future.

This trickle effect also puts some perspective on our Finance minister’s bragging about the Swedish economy, which apparently escaped the 2008 crisis better than many other countries’. It may have been a giant Keynesian experiment, except that the liabilities are private and has to be paid in real life by living creatures (not by state economies that can dribble with debts in different ways).

In the last statistics the debt increase had accelerated compared to the previous year. With the lowered rates now taking effect we can expect further aggressive uttering of loans by the banks. The other day I even had a letter from our large cooperative organization – Coop – trying to persuade me to accept a loan for a quarter of a million SEK, without any specific security. Everyone is eager to make some easy profits as long as it works. And when it doesn’t work anymore the banks rest assured that the taxpayers will save their stock holders from any losses. The same tax payers that will end up with a personal debt for lifetime if they aren’t among the least vulnerable.

Since politicians and economists can’t claim to be totally deaf and blind there has been some minor debate on the debt problem. But just shallow and scarce discussions, with the only exception of some miniscule measures guaranteed not to provide any real effects whatsoever. The present bourgeoisie government is expected to lose next month’s elections with a large margin, and it seems as if they willingly are handing over the problem to the Social Democrats.

In this rare debate one economist actually was admitted an op-ed in our main paper DN, one weeks ago. He dealt on some of the measures discussed, and strongly advised against one of them. We are in this country endowed with a tax reduction amounting to 30 percent of interest payments on all kinds of loans. One of the measures discussed is to repeal this right to reduction, an operation our economist strongly opposed. His argument was that such an action probably would trigger the avalanche and create the crisis it was intended to prevent.

Another aspect discussed is the norm for amortizing house loans. Those norms are extremely liberal here compared with most other countries. Since three decades house owners have de facto been relieved from paying any part of their loans whatsoever. Some demand for minor net repayments are now in place. Our economist’s argument generalizes to this measure, and to all others that has a substantive effect. A demand for repayment that really would impede increasing loans has to be of a magnitude that would tip too many house owners off the cliff and thus make the bubble burst.

It’s almost a law of nature that financial bubbles can’t be deflated in a controlled way. There is no smooth landing for a rocket. That’s probably one reason why our most distinguished economists are silent about the loan crisis. At best they are relying on the perfect market hypothesis, but probably they just prepare to keep hiding when the crash comes. Our politicians will probably put their heads in a bag and blame some previous government and the other parties.

Autumn and election years constitute a fruitful environment for financial crisis, both coming up soon in Sweden. Right now everything seems calm and under control, but that is also a precursor as good as any for dramatic events on the economic arena. I wouldn’t be surprised if the loan bubble here would burst any time soon, and if I had a house to sell I would already had done it.

Are there reasons to revise the old thesis that profit is theft?

We are in the season for economic reports from the Swedish business world, with their staggering profits announced to happy shareholders, as we simultaneously still read about a world where millions suffer from the latest catastrophe concocted by respected criminals in international finance corporations.

In a rather discrete article in my paper one could read the other day that the large companies in our country bestow their shareholders this year with almost 200 billion Crowns (SEK) in dividends alone (7 SEK = 1 USD). Total profits are thus considerably more than that. And this is just from the large companies.

Extrapolating to all companies and total profits one could estimate that each household in Sweden pays about the same amount of “taxes” to private businesses as they pay in taxes to the community, state and local. How this can go on year after year with only marginal comments in the main media should have been some kind of mystery, at least. But there are “explanations”.

The first line of defense is that we all provide the huge profits to capitalists on a voluntary basis. And yes, we are not forced by anyone to buy any goods or services… unless we don’t want to become homeless and live on the sidewalks. It’s rather difficult to survive without feeding the wolfs, although there are some alternatives in the margin, such as cooperatives and the like.

We can take the Swedish bank system as an example. There are four major banks which provide all necessary banking services in this country. For everyone with a normal private economy it’s almost imperative to apply to any of these four banks for services. And these banks don’t compete with prices. They charge too high interest rates on loans and offers too low on deposits, thus making huge profits, half of which they hand out to their owners this year.

If the four banks would arrange meetings in which they agree on this oligopolistic pricing, it would be illegal. But no meetings are necessary. They know perfectly well how to keep interest rates on profitable levels and how to prevent competition, thereby forcing an average household to pay the equivalent of one month’s salary in “taxes” to their bank each year. And we are all enough disciplined not to start any tax revolt in this case, in fact not even react in the most modest way.

Another line of defense for businesses when they practically steal from consumers to create profits is that some of the stolen property returns to ordinary people through pension funds, who are large investors in shares and bonds. That’s of course true but rather pointless. To first deprive people of money, only to give back some part of it, is in all circumstances to drain off wealth in benefit of a rich minority.

It’s a fact that Swedish industries are large exporters, thus that their profits in part are paid by foreigners. If this would be an argument it’s also true that there are many foreign companies operating in Sweden with the opposite effect. But it’s of course a lousy argument. Where the ordinary people who pay for the profits happen to live should be irrelevant.

We are made to believe that profit is a necessary concept in a capitalist society. But in fact profit is an anomaly within neoclassical economic theory. In that model the productive factors worthy of compensation are labor and capital, through wage and interest respectively. To become valid the theory presupposes perfect competition, which entails that economic actors will compete until the margin for profits is compressed to nil.

This inconvenient circumstance has of course bothered economists eager to defend the prevailing system, and numerous attempts have been made to extract something productive from the capitalists’ juggling with their money. But this is a problem just for a narrow world of theoretical discussion. In real life the disastrous shortcoming of the dominant economic theory is totally ignored. Profit is not just considered absolutely natural but indeed one of the most important indicators of the health of an economy.