Tuesday, July 20, 2010

Why the US has a Perpetual War Economy

During WWII, government decisions stopped all market fluctuations. A major power in the middle of a serious war, cannot allow markets to boom and bust. Economic effort was singularly aimed at victory. Besides victory, people just worried about what things would be like once the war was over. The Americans were not themselves suffering from bombing. They never have done. So, an extra year of war was not nearly as great a worry as the question of how the war economy could be switched to peacetime conditions.

Most economic experts thought the transition would involve a violent crisis. Americans were pessimistic. Post-war unemployment, counting women engaged in war work, of up to 20 million were commonly predicted, based on the heavy readjustment crisis after WWI. Things would be no different after WWII, they predicted.

Then there occurred the American economic miracle—the demobilization of ten million people without any upheavals. Transition to a peacetime economy was smooth. Unemployment rose to less than four million—half as much as before the war. The US had mild recessions in 1946, 1949, and 1954 but nothing like a real crisis. America's faith in heaven on earth revived, and the specter of 1929 faded.

Economic optimists quickly became confident, for three reasons:

  1. the American economy was less speculative, as post war stock exchange transactions show, and speculation was strictly controlled compared with 1929, when reckless gamblers used unlimited credit to drive stock to precipitous heights—something that is again familiar
  2. Keynesian principles were applied—a downward trend in the economy was helped by a dose of inflation, and conversely an unhealthy boom invited deflationary measures such as a gentle credit squeeze.
  3. the main one, now obviously swept under the carpet, was rearmament—the perpetuation of the war economy. After WWII, the US continued to spend twenty times as much money on its armed forces and military aid abroad as before the war. In the early post war years, between 12% and 15% of the national income was directly or indirectly spent on war and war preparations, employing 10-12 million people on the Federal budget, near enough the same number as were unemployed pre war.

Post war, financial speculation gradually returned, and Keynesianism was abandoned under pressure from the right wing fad of monetarism, and eventually, Reagan and Thatcher abolished all the regulations that had kept banks and markets under control and stable.

As for the third, and most important factor, it never changed! Rather it has become increasingly important. In fiscal year 2010, total US defense spending accounted for 38–44% of estimated tax revenues. Over sixty years after the war, Americans still spend a large fortune on warfare and armaments supporting, with their tax dollars, the death of their own boys, 6000 miles away murdering mainly innocent Moslems, people simply trying to assert their own freedom in their own country. All of this mayhem to avoid giving benefits to those Americans they call idle—people who cannot find work—and profits to billionaires who could do with a lot less.

The US since the last war has maintained a war economy, supporting utterly wasteful and cynical military adventures all over the world. And the American people seem to be happy it should remain the case when the federal government could be creating useful jobs through civilian projects. Alternatively, why not just give the unemployed sufficient benefits to live on, so that by spending them they thereby employ others! Every tax dollar spent by the government at the grass roots of society is multiplied five times over, as it is successively spent.

A fabulously wealthy country spends over a third of its tax revenue supporting the military industrial complex, when it could transform derelict cities like Detroit, and the decaying suburbs of many other famous cities, taking millions of US citizens off drugs and tranquilizers by letting them live decently. Yet the childishly unselfcritical Yankees profess bafflement that the wicked world does not love them! Will enough Americans ever realize that they are being treated with contempt by the political caste in Washington, the gentlemen soldiers of the ruling megarich elite? They are too ready to believe the bullshit they are constantly fed.

Thursday, July 15, 2010

The Human as Molecule—The Statistical Mechanics of Wage Earners

’Econophysics’ points way to fair salaries in free market

PhysOrg.com—A Purdue University professor of chemical engineering has used “econophysics” to show that under ideal circumstances free markets promote fair salaries for workers and do not support CEO compensation practices common today. The research presents a new perspective on 18th century economist Adam Smith’s concept that an “invisible hand” drives a free market economy to a collective good:

It is generally believed that the free market cares only about efficiency and not fairness. However, my theory shows that even though companies focus primarily on making profits and individuals are only looking out for themselves, the collective self-organizing free market dynamics, under ideal conditions, leads to fairness as an emergent property. In reality, the self-correcting free market mechanisms have broken down for CEOs and other top executives in the market, but they seem to be working fine for the remaining 95 percent of employees.
Venkat Venkatasubramanian

Venkatasubramanian proposes using statistical mechanics and econophysics concepts to gain some insights into the problem:

This is at the intersection of physics and economics. We are generalizing concepts from statistical thermodynamics—the branch of physics that describes the behavior of gases, liquids and solids under heat—to analyze how free markets should perform ideally.

Findings are detailed in a research paper that appeared in the online journal Entropy. Venkatasubramanian has already used the approach to determine that the 2008 salaries of the top 35 CEOs in the United States were about 129 times their ideal fair salaries—and CEOs in the Standard & Poor’s 500 averaged about 50 times their fair pay—raising questions about the effectiveness of the free market to properly determine CEO pay.

In the new work, the researcher has determined that fairness is integral to a normally functioning free market economy. A key idea in Venkatasubramanian’s theory is a new interpretation of entropy, used in science to measure disorder in thermodynamics and uncertainty in information theory. He shows, however, that entropy also is a measure of fairness, an insight that seems to have been largely missed over the years, he said. Andrew Hirsch, another Purdue professor adds:

Venkat’s insight goes beyond the simple grafting of the mathematics of information theory and statistical physics onto the question of fairness of salary distributions within a free market economy. He has recast the notion of entropy into a context that has meaning and relevance for this particular problem.

Venkatasubramanian calls his new theory, statistical teleodynamics, from the Greek telos, which means goal driven:

In statistical thermodynamics, we study the movement of large numbers of molecules. In economic systems, we have a large number of people moving around in a free market system, but instead of thermal energy driving the movement people are motivated by goals.

His theory describes how goal driven rational agents, normally people, will behave in a free market economic environment under ideal conditions.

The bottom line is that the free market does care about fairness. Clearly, the next step is to conduct more comprehensive studies of salary distributions in various organizations and sectors in order to understand in greater detail the deviations in the real world from the ideal, fairness maximizing, free market for labor.

The excessive pay of CEO's can be seen from a simple analysis of the wage distribution curve—too many have incomes way above the average that any defendable distribution curve predicts—showing that CEO's, who pay themselves, with only formal approval from the occasional stockholder meeting, rate themselves as superhuman, according to normal distribution measures. Venkatasubramanian seems to have come up with an ususual basis for a compensation distribution curve, which he claims is 95% fair, but attempts to use the mathematics of statistical physics in sociology and economics have failed in the past. It remains to be seen whether this approach is based on valid asumptions and not merely the desire to use a neat mathematical scheme outside its original frame of reference.

Friday, July 9, 2010

Protests Make Political Parties More Responsive

Latin American protests have caused deaths and national crises since the 1970s, but democratic reforms too. Moises Arce, an associate professor of political science in the Missouri-Columbia College of Arts and Science, has found that political protests, although they can be violent, can bring about stronger political parties and more responsive policies (published in Party Politics):
Many of these protests in Latin America have led to changes in policies and the direction of the government. In some cases, protests may ultimately be helpful for democracy. The established parties may be taking things for granted. Political protests become forms of street accountability. The change that we have seen after many of these protests is the creation of new parties that better represent the popular interests of society, and, therefore, serve as more effective communication channels for political discourse.
By studying political activity and parties in 17 Latin American countries since 1978, Arce found that most protests were because economic policies favored the business sector. Most recent policies have given Latin America large scale economic stability but little improvement from the general public's perspective. There is still a high level of unemployment, and the public has become more knowledgeable of political corruption:
People have died, so it's unfortunate that government reforms happened that way. Currently, almost all Latin American countries have left or left leaning presidents who tend to be more responsive to popular demands and will create a new political equilibrium between those popular demands and the business sector.
Politicians often argue that protests are disruptive and should be suppressed, and that protests are unnecessary in a democracy, but they are happening and have not damaged democratic stability. Of course, generally the political right are ultimately not interested in democracy, only their own power, and many so called Liberals, and even New Labour “socialists” in the UK, are dupes of the rich anyway, so the trend towards unrestrained global capitalism means that “the existing power structure will be forced more and more to directly violate its own formal democratic rules”, as Slavoj Zizek puts it. The Patriot Act in the US and similar repressive legislation laid on incredibly thckly by the Blair and Brown governments are far more dangerous to democracy than a few protests, or even the terrorism attacks they pretend to be to prevent.

People in Latin America are becoming tolerant of protests. In Europe and the US, politicians are getting more and more scared of it. Democracy needs both parties and protests. We have the duff parties. All we need now, according to Arce, are more and more determined protests.