Quite an interesting piece, except for three fundamental flaws, I
contend. Backhouse and Bateman claim:
> It took extensive government action to prevent another Great Depression
This is an unproven assertion. At least in the U.S. the government
action, starting in fall 2008 with Hank Paulson, the Treasury Secretary,
was to commandeer huge funds from the Treasury to bailout some favored
investment banks. Then several large banks were pressured into
receiving billions, allegedly, to stave off the contraction "credit" in
the economy. And then, under Barrack Obama, the spending of billions on
various so-called stimulus programs to "jump-start" the economy, founded
upon the myth of the Keynesian expenditure multiplier. But how can such
diversions of funds from the public by the government be described as
actions that prevented another Great Depression? What would the funds
have been used for if not spent by the government?
The credit contraction during the Great Depression resulted from the
panic and contagion of bank failures, resulting in an $8 billion
contraction of demand deposits between 1930 and 1933 and the failure of
about 2 thousand banks each of those years. The Federal Reserve System
was prohibited under the Gold Standard from expanding its money creation
quickly to meet the demands of the public for cash so as to have staved
off the contraction of savings (credit) with banks. With our changed
financial system, particularly with the institution of the Federal
Deposit Insurance Corporation and its Credit Union counterpart, how
could the actions of the U.S. government, along with those of the
Federal Reserve since the fall of 2008, be said to have been responsible
for sparing us another Great Depression? In fact, the case can be made
that these interventions rather prevented what would have been a quick,
natural correction that investment bankers as well as some irresponsible
mortgage lenders would have faced in terms of bankruptcy. Loanable
credit that depends upon the public's savings would have continued to
flow to credit worthy borrowers and the rest of the economy would have
fared just well.
Backhouse and Bateman also claim that:
> the enormous rewards received by bankers at the heart of the meltdown
> have led many to ask whether unfettered capitalism produced an
> equitable distribution of wealth.
How could our distinguished commentators describe the U.S. economy
before and after the financial crisis a model of "unfettered
capitalism"? Is it unfettered capitalism when government sponsored
institutions like Fannie Mae and Freddie Mac promoted the securing of
home mortgages by financially unworthy individuals? Is it unfettered
capitalism when the U.S. government would bailout investment banks and
insurance companies from taking their losses from their miscalculations
in the marketplace?
Instead of providing clarity of thought, hopefully, for the occupiers,
Backhouse and Bateman also fed their confusion by failing to counter the
question whether unfettered capitalism could produce "an equitable
distribution of wealth." First, what is "equitable distribution of
wealth"? Given that nature does not endow all of us with equal talents
(or luck), how is it possible that we all could accumulate the same
amount of wealth in the marketplace? I find it quite unfortunate that
Backhouse and Bateman did not explain that there is no evil individual
out there inappropriately distributing the national income to us.
Rather, we all engage in (productive) activities that yield us our
incomes. The statistical categorization of income types into size or
functional distributions is not a meaningful way of recognizing the
process through which some people get to be rich and others not so.
Placards by some occupiers calling for the rich to be taxed, if if they
don't already pay taxes, are informed by such statistical categorization
and partly driven by envy. It thus would have been more helpful had our
distinguished colleagues explained the reality of the income earning
process than to have given comfort to people already confused about the
reality of an economic system.
Some of the occupiers also call for socialism or communism. Our
distinguished colleagues could have explained whether, from their
knowledge of "comparative economic systems," the alternatives that the
occupiers call for would promote a higher level of wealth creation or
economic well-being, especially for the poor. As David Ricardo long
observed about the Poor Laws of England, including taxation to provide
for the poor in poor houses, their effect was more to make the rich poor
rather than to have made the poor rich.
James Ahiakpor
> The New York Times
> November 5, 2011
>
> Wanted: Worldly Philosophers
>
> By ROGER E. BACKHOUSE and BRADLEY W. BATEMAN
>
> IT’S become commonplace to criticize the “Occupy” movement for failing
> to offer an alternative vision. But the thousands of activists in the
> streets of New York and London aren’t the only ones lacking
> perspective: economists, to whom we might expect to turn for such
> vision, have long since given up thinking in terms of economic systems
> — and we are all the worse for it.
>
> This wasn’t always the case. Course lists from economics departments
> used to be filled with offerings in “comparative economic systems,”
> contrasting capitalism and socialism or comparing the French,
> Scandinavian and Anglo-Saxon models of capitalism.
>
> Such courses arose in the context of the cold war, when the battle
> with the Soviet Union was about showing that our system was better
> than theirs. But with the demise of the Soviet Union, that motivation
> disappeared. Globalization, so it is claimed, has created a single
> system of capitalism driven by international competition (ignoring the
> very real differences between, say, China and the United States). We
> now have an economics profession that hardly ever discusses its
> fundamental subject, “capitalism.”
>
> Many economists say that what matters are questions like whether
> markets are competitive or monopolistic, or how monetary policy works.
> Using broad, ill-defined notions like capitalism invites ideological
> grandstanding and distracts from the hard technical problems.
>
> There is a lot in that argument. Economists do much better when they
> tackle small, well-defined problems. As John Maynard Keynes put it,
> economists should become more like dentists: modest people who look at
> a small part of the body but remove a lot of pain.
>
> However, there are also downsides to approaching economics as a
> dentist would: above all, the loss of any vision about what the
> economic system should look like. Even Keynes himself was driven by a
> powerful vision of capitalism. He believed it was the only system that
> could create prosperity, but it was also inherently unstable and so in
> need of constant reform. This vision caught the imagination of a
> generation that had experienced the Great Depression and World War II
> and helped drive policy for nearly half a century. He was, as the
> economist Robert Heilbroner claimed, a “worldly philosopher,”
> alongside such economic visionaries as Adam Smith, John Stuart Mill
> and Karl Marx.
>
> In the 20th century, the main challenge to Keynes’s vision came from
> economists like Friedrich Hayek and Milton Friedman, who envisioned an
> ideal economy involving isolated individuals bargaining with one
> another in free markets. Government, they contended, usually messes
> things up. Overtaking a Keynesianism that many found inadequate to the
> task of tackling the stagflation of the 1970s, this vision fueled
> neoliberal and free-market conservative agendas of governments around
> the world.
>
> THAT vision has in turn been undermined by the current crisis. It took
> extensive government action to prevent another Great Depression, while
> the enormous rewards received by bankers at the heart of the meltdown
> have led many to ask whether unfettered capitalism produced an
> equitable distribution of wealth. We clearly need a new, alternative
> vision of capitalism. But thanks to decades of academic training in
> the “dentistry” approach to economics, today’s Keynes or Friedman is
> nowhere to be found.
>
> Another downside to the “dentistry” approach to economics is that
> important pieces of human experience can easily fall from sight. The
> government does not cut an abstract entity called “government
> spending” but numerous spending programs, from veterans’ benefits and
> homeland security to Medicare and Medicaid. To refuse to discuss ideas
> such as types of capitalism deprives us of language with which to
> think about these problems. It makes it easier to stop thinking about
> what the economic system is for and in whose interests it is working.
>
> Perhaps the protesters occupying Wall Street are not so misguided
> after all. The questions they raise — how do we deal with the local
> costs of global downturns? Is it fair that those who suffer the most
> from such downturns have their safety net cut, while those who
> generate the volatility are bailed out by the government? — are the
> same ones that a big-picture economic vision should address. If
> economists want to help create a better world, they first have to ask,
> and try to answer, the hard questions that can shape a new vision of
> capitalism’s potential.
>
> Roger E. Backhouse, a professor of economic history at the University
> of Birmingham, and Bradley W. Bateman, a professor of economics at
> Denison University, are the authors of “Capitalist Revolutionary: John
> Maynard Keynes.”
--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542
(510) 885-3137 Work
(510) 885-4796 Fax (Not Private)
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