TH. Thanks for the kind words.
The "Disequilibrium Economics" post actually came about from trying to compose a K-wave reply to tooearly and others, but I found I was having a difficult time expressing something "essential" to the situation. So I left it for a bit. When I finally read Roach's "Disequilibrium Economics" post, and overlayed the whole "reality vs. perception" or "reality vs. unreality", and combined it with the consequences of reestablishing "economic equilibrium" (and especially with normalizing interest rates), some interesting things fell out.
But again, Carroll Quigley's account of great power monetary policy in the 1920's and 1930's in his tome "Tragedy and Hope" provided some theoretical underpinnings. Which brings me to your comment below:
Care to elaborate on this statement, "I think the answer lies in the creation of an entire new incentive system outside the existing monetary regime."
Yeah, I wouldn't mind elaborating, because there's a fair bit behind this assertion. Rather than tackle this question upfront, however, I think I’ll lay a foundation before providing a direct response. First, I’d like to lay some groundwork by quoting Quigley, and then later come back and address your question.
But a teaser: final conclusions have much to do with the distinction between the stability in the flow of goods (i.e. economic activity and trade), and stability in the exchange of money (i.e. prices).
So, first let’s give a title to this series of posts. Let’s call it “Monetary Regime Transition – a Hypothesis – Part I”. Up first, a little background on the history of Capitalism …
On the nature of Capitalism
First, a few passages from Quigley. On the nature of Capitalism.
"Capitalism ... [is] an economic system motivated by the pursuit of profits within a price system."
Quigley identifies 5 distinct economic and financial regimes in Western Civilization between 1050 to the present day (Quigley wrote the book in the mid-1960's) - they are:
1 – Commercial Capitalism (Company – 1050-1270; Chartered Company – 1440-1690)
2 – Industrial Capitalism (1770-1870)
3 – Financial Capitalism (1850-1932)
4 – Monopoly Capitalism (1890-1950)
5 – Pluralist Economy (1934 to present)
Quigley notes: "The commercial capitalist sought profits from the exchange of goods; the industrial capitalist sought profits from the manufacture of goods; the financial capitalist sought profits from the manipulation of claims on money; and the monopolist capitalist sought profits from manipulation of the market to make the market price and the amount sold such that his profits would be maximized."
Continuing …
“Western Civilization is the richest and most powerful social organization ever made by man. One reason for this success has been its economic organization. This, as we have said, has passed through six stages (Quigley identifies two stages prior to 1770), of which at least four are called “capitalism”. Three features are notable about this development as a whole.
In the first place, each stage created the conditions which tended to bring about the next stage; therefore we could say, in a sense, that each stage committed suicide.”
Discussing this evolution from the birth of Commercial Capitalism:
“… In this second stage, mercantile profits and widening markets created a demand for textiles and other goods which could be met only by application of power to production. This gave the their stage: industrial capitalism. The stage of industrial capitalism soon gave rise to such an insatiable demand for heavy fixed capital, like railroad lines, steel mills, shipyards, and so on, that these investments could not be financed from the profits and private fortunes of individual proprietors. New instruments for financing industry came into existence in the form of limited-liability corporations and investment banks. These were soon in a position to control the chief parts of the industrial system, since they provided capital to it. This gave rise to financial capitalism. The control of financial capitalism was used to integrate the industrial system into ever-larger units with interlinking financial controls. This made possible a reduction of competition with a resulting increase in profits. As a result, the industrial system soon found that it was again able to finance its own expansion from its own profits, and, with this achievement, financial controls were weakened, and the stage of monopoly capitalism arrived. In this fifth stage, great industrial units, working together either directly or through cartels and trade associations, were in a position to exploit the majority of people. The result was a great economic crisis which soon developed into a struggle for the control of the state – the minority hoping to use the state to defend their privileged position, the majority hoping to use the state to curtail the power and privileges of the minority. Both hoped to use the power of the state to find some solution to the economic aspects of the crisis. This dualist struggle dwindled with the rise of economic and social pluralism after 1945.
The second notable feature of this whole development is that the transition of each stage to the next was associated with a period of depression or low economic activity. This was because each stage, after an earlier progressive phase, became later, in its final phase, an organization of vested interests more concerned with protecting its established modes of action than in continuing progressive changes by the application of resources to new, improved methods. This is inevitable in any social organization, but is particularly so with capitalism.
The third notable feature of the whole development is closely related to the special nature of capitalism. Capitalism provides very powerful motivations for economic activity because it associates economic motivations so closely with self-interest. But the same feature, which is a source of strength in providing economic motivation through the pursuit of profits, is also a source of weakness owing to the fact that so self-centered a motivation contributes very readily to a loss of economic coordination. Each individual, just because he is so powerfully motivated by self-interest, easily loses sight of the role which his own activities play in the economic system as a whole, and tends to act as if his activities “were” the whole, with inevitable injury to that whole. We could indicate this by pointing out that capitalism, because it seeks profits as its primary goal, is never primarily seeking to achieve prosperity, high production, high consumption, political power, patriotic improvement, or moral uplift. Any of these may be achieve under capitalism, and any (or all) of them may be sacrificed and lost under capitalism, depending on this relationship to the primary goal of capitalism activity – the pursuit of profits. During the nine-hundred year history of capitalism, it has, at various times, contributed both to the achievement and to the destruction of these other social goals.
Capitalism, Goods, and Money
The different stages of capitalism have sought to win profits by different kinds of economic activities. The original stage, which we call commercial capitalism, sought profits by moving goods from one place to another. In this effort goods went from places where they were less valuable to places where they were more valuable, while money, doing the same thing, moved in the opposite direction. This valuation, which determined the movement of both goods and of money and which made them move in opposite directions, was measured by the relationship between these two things. Thus the value of goods was expressed in money, and the value of money was expressed in goods. Goods moved from low-price to high-price areas, and money moved from high-priced areas to low-price areas, because goods were more valuable where prices were high and money was more valuable where prices were low.
Thus, clearly, money and goods are not the same thing but are, on the contrary, exactly opposite things. Most confusion in economic thinking arises from the failure to recognize this fact. Goods are wealth which you have, while money is a claim on wealth which you do not have [my comment: and also, is “time dependent”]. Thus goods are an asset; money is debt. If goods are wealth; money is not-wealth, or negative wealth, or even anti-wealth [my comment: only relatively in relation to goods]. They always behave in opposite ways, just as they usually move in opposite directions. If the value of one goes up, the value of the other goes down, and in the same proportion. The value of goods, expressed in money, is called “prices”, while the value of money, expressed in goods, is called “value”.
… In the course of time the central fact of the developing economic system, the relationship between goods and money, became clear, at least to bankers. This relationship, the price system, depended upon five things: the supply and the demand for goods, the supply and the demand for money, and the speed and exchange between money and goods. An increase in three of these (demand for goods, supply of money, speed of circulation) would move the prices of goods up and the value of money down. This inflation was objectionable to bankers, although desirable to producers and merchants. On the other hand, a decrease in the same three items would be deflationary and would please bankers, worry producers and merchants, and delight consumers (who obtained more goods for less money). The other factors worked in the opposite direction, so that an increase in them (supply of goods, demand for money, and slowness of circulation or exchange) would be deflationary.”
A brief comment on the Gold Standard
A brief comment by Quigley on the Gold Standard of the 19th and early 20th centuries:
The influence of financial capitalism and of the international bankers who created it was exercised both on business and on governments, but could have done neither if it had not been able to persuade both these to accept two “axioms” of its own ideology. Both of these were based on the assumption that politicians were too weak and too subject to temporary popular pressures to be trusted with control of the money system; accordingly, the sanctity of all values and the soundness of money must be protected in two ways: by basing the value of money on gold and by allowing bankers to control the supply of money. To do this it was necessary to conceal, or even to mislead, both governments and people about the nature of money and its methods of operation.
For example, bankers called the process of establishing a monetary system on gold “stabilization”, and implied that this covered, as a single consequence, stabilization of exchanges and stabilization of prices. It really achieved only stabilization of exchanges, while its influence on prices were quite independent and incidental, and might be unstabilizing (from its usual tendency to force prices downward by limiting the supply of money). As a consequence, many persons, including financiers and even economists, were astonished to discover, in the twentieth century, that the gold standard gave stable exchanges and unstable prices. It had, however, already contributed to a similar, but less extreme, situation in much of the nineteenth century.
To be continued ...
glenn :) |
