"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Monday, January 30, 2012

We Are All Marxian Now

As the crisis  goes on, it becomes evident that the European “Fiscal Austerity “ was just the foreplay. The real game ahead is "Competitiveness " ( especially in the Southern  periphery countries).

Fiscal Austerity is an accepted dogma in Europe and its implementation   is already depressing demand (ex. Spain unemployment to 22+%) . “Competiveness” is the private dimension  of a restrictive economic policy with its support for  wage cuts as a prerequisite to restore balance in the Continent (with the obivious implications on consumption and demand). However many economists, including some who dissapprove the Public Austerity policy, support the wage reduction policy as a substitute for "internal devaluation" in order to restore the economic European balance.

Lets see a few quotes

Diverging competitiveness among EU nations: Constraining wages is the key Mickey  Levy , Chief Economist of Bank Of America
“..The policy implications (for Europe EF)  are clear. Realigning real wages with productivity in Greece, Italy, Portugal, and other EU nations is as important, if not more important, than required fiscal austerity. However, this will be easier said than done.” 

Interview with W. Buiter City´s Chief Economist
“ The only thing Spain can do is radical reforms, a more flexible labour market and much lower real labour cost”. These are the clear terms   expressed by Mr Willem Buiter, City`s Chief Economist   about the reality of the Spanish economy, on which he openly speaks about in pessimist terms..."   (Translated from “El Mundo January 29th 2012)   

The message is clear: “Realignment,” “Reform” "Lower labour costs" with the objective to gain Competiveness. This is a serious challenge : we are not dealing with  a proposal  coming from an interested part (such as employers) which can dismissed as a "Class warfare" statement. The proposal carries the seal of professional, neutral  economists  and as such should be analyzed with analytical tools .
First comment : The analytic  focus on labour ALONE is deeply wrong from a 21-century economic perspective ( it is RIGHT from a Marxist perspective... we´ll deal with that later ) .  Past Economists like 19 century D. Ricardo developed the concept that prices (the basis for competitiveness, as in the end you compete with prices and costs) are the sum of   production factors. Back to Econ 101? 

 Labour+ Capital (Earning included) + Land= Cost  

 Therefore those who claim that the Spanish economy (in our case) is not competitive should present a comprehensive analysis of the cost and efficiency of ALL production factors. Otherwise, it is a partial and misleading analysis.

Second Objection :  Even if we maintain the  focus on labour, the actual figures simply do not corroborate the conclusion of our  Economist. Lets have a look on figures taken from the OECD statistic database  (2010)

  Million  Euros
Work Force
Overall Labor  Compensation
   Million   Euros
( GDP / Workforce)
   k Euros 
Average Wage
(Labor Compensation / Workforce) 

 k Euros

As can be seen from the table, the German average worker is more productive than his Spanish counterpart by 14%, but he also earns more, app. 20% more. In other words, if comparing the labour component, the Spanish employee can be competitive with the German worker, and she got a 6% edge on  cost level. So how it comes that Germany is considered more competitive than Spain?   

First of all, we should analyze the relations between both the countries and the rest of th world . Second, we just analyzed the labour component in price, so  in order to get a comprehensive picture we must add Capital (and Rent) . The result might be that the Spanish problem is a too high CAPITAL return in comparison to its productivity and not Labor. 

This is the big TABOO nobody wants to deal with , as it is always easier to accuse the working people for being non productive or earning too much (which in our case fits with racist stereotypes…) . 

Least and not last:  The assessment which considers labour as the main cost generator (as the above economist do) , THE real engine behind values, and  as such THE “key to competiveness” is nothing new to the Economic analysis. . As a matter of fact this is an updates version of the “Labour Theory of Value”, the 19th century idea developed up to its most “pure” level by  …Karl Marx!.

The idea that Labour is the sole value generator of the commodities (including Capital) became under Marx’s   hands a tremendous analytical tool he used to develop a deep social criticism. I doubt that this is the intention of the Wage Cut advocates, but in a certain way they could claim that after decades of ideological debates, WE ARE ALL MARXIAN NOW.    

Friday, January 27, 2012

Davos Proposal of "Free Work" = Slavery?

From Davos Conference ( January 2012)

"Young people should work for free for up to two years to gain experience, youth and business leaders said at the World Economic Forum in Davos Thursday.
A new UN resolution to enshrine the importance of a couple of years of voluntary work for young people was urged by delegates including Maurice Lévy(1), chairman and chief executive of Publicis Groupe, as part of a CNBC-moderated debate on how to avert a lost generation of unemployed youth...”. (http://www.cnbc.com/id/46152716)

Youth unemployment is indeed A PROBLEM, in several countries of dramatic magnitudes (ex.: The level of YU in Spain is close to 50%). So, in that case the issue at stake is not how to define ( or recognize) the problem but how to deal with it. As a matter of fact, innovative ideas  have been already "put on the  tables" ...

Sunday, January 22, 2012

Globalization : The Unfinished Job

The reference for this post will be a recent article titled “Charity needs capitalism to solve the world’s problems” ,written by former US President Mr. Bill Clinton (“Financial Times” website). The article opens with the following statement:

“Charity alone will not solve the world’s problems. Capitalism can help and at the same time put people back to work……” (FT , January 20, 2012)

The cooperation plan between Capitalism and Charity are explained along the article, resumed in one of its ending paragraphs.

“These efforts ( of Charity and Capitalism E.F.) benefit both the communities they target and the corporations and philanthropists involved, diversifying their businesses, expanding their markets, training more potential workers and helping to create a culture of prosperity. All this enhances profits, increases economic inclusion and gives more people a stake in a shared future”

Mr. Clinton actually offers a “Win- Win” deal: Achieving a moral end (“Solve the world problems”…. “Gives more people a stake in a shared future”) by appealing to the Capitalist intuition of profits seeking, a deal adorned with an unequivocal MBA new speak (“Diversifying business….expanding markets…training potential workers…). Social responsibility at its best!

In the philosophical sense, there is nothing really new in Mr. Clinton words. The idea a moral end (such as general prosperity) can be achieved through the pursuit of self interest has been already expressed some 250 years ago by the Philosopher/Political Economist Adam Smith.

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages” (Adam Smith. An Inquiry into the Nature and Causes of the Wealth of Nations)

These 18 century ideas were developed on later decades, becoming the pillar of free market ideology, the foundation of the Globalization for the last 20 years. If so can Mr. Clinton call for a “Capitalism and Charity” system considered as an implicit recognition that the original version of “Smithian” Globalization (launched along his own Presidency years…) actually failed ?

In order to answer the question we address the question what Globalization is all about?: One possible answer is "… (Globalization) When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, and services and labour... (UN agency (ESCWA) From the Wikipedia)

True, barriers to Goods, Capital and Services were (partially) removed: The globalized world allows you an easy transfer of money abroad, the purchase of foreign currencies and/or financial obligations…. Alternatively when landing in a remote country you will find out that you and the native share not only the “human condition” but products, services, and corporations so familiar at home.

But, the above definition got another twist. UN agency is aware that “….although considerable barriers remain to the flow of labour... “

The observation that our “Globalized World” still impedes (20 years since its launch…) from human beings to move freely in the search for a decent life abroad is self evident. Still, the exclusion of labor from the free movement scheme has serious consequences on the whole Globalization edifice.

The theoretical framework of Globalization (or free markets as a general frame) requires that ALL production factors and products should be allocated freely. ALL. Theory can easily demonstrate that restrictions on freedom impacts competition, prices and quantities, all for the worst. Moreover, if the free movement of one “player” in the model is being restricted, the rest must be accommodated, even restricted, something that could unleash a dynamic of more restrictions and protectionism. In other words, Game over….

So, if the outcome from restrictions on labor is BAD, why the system operates this way? Well, it could bad for all,,,, but good for some players . The answer lies in the relative position of the countries and the short term benefits. Rich countries, the ones who dominate the scene have plenty of Capital and products in relation to their workforce. From the other side, Poor / Developing countries have to offer in that scheme plenty of labor and relative shortage of Capital.

It is turning to be a longer than planned post…. So in a very shortly comment, labor restrictions ( in addition to the imposition of production quotas on some products … that is another story …) favors rich countries as it permits to export their excesses and create a two tier production/ consumption system, poor workers vs. rich consumers .That is the main line that explains the widening gap between countries, that feeling we share with Mr. Clinton that his Globalization did not deliver the expected welfare fairly . Just have a look on wages, prices, working conditions, social security nets around the world to understand the bridge, better put the abyss between countries.

So, instead of embrace a half baked Capitalism/Charity ideas in the spirit of Mr. Clinton article, maybe the world should go a step forward and implement a full globalization and fair scheme, without restrictions simply frictionless as possible. The economy will do the rest, and no need for charity.

Even Mr. A. Smith would agree with such proposal. How do I know that? Last quote for today…. (the outlines are mine )

"It is not by the importation of gold and silver, that the discovery of America has enriched Europe. ...The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries." (An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith : Book IV: On Systems of Political Economy Chapter I: On the Principle of the Commercial, or Mercantile System )

Saturday, January 14, 2012

Negative German Yields and Eurospecticism

 From the Wall Street Journal
"In an auction Monday, Germany sold €3.9 billion ($4.96 billion) of six-month bills that had an average yield of negative 0.0122%, the first time on record that yields at a German debt auction moved into negative territory". (WSJ website  , “Germany yields south of Zero" , January 10th , 2012)
A nominal negative yield is very rare event, and for a good reason: As an alternative to the investment the purchaser  can always store her cash in a current account, or just keeping it in a safe with all the possible advantages: Cash is   safer, it offers  100% liquidity and in that case there is no dilemma as  , that case, it earns more money than the alternative investment ! ....(1)
So from an economic logic, (whatever weird theory is built on that matter) there is no point to buy such obligations that FOR SURE will yield less money than the original outset.

Wednesday, January 11, 2012

Deleveraging , Debts and Distribution

Most economists are already convinced that years of massive stimulus spilled on the economy yielded just minor economic results: In any case far from what can be regarded as “Recovery”. Why? Many are the obstacles the economy is facing, though it is widely acknowledged that the private sector heavy indebtedness and its "Deleveraging" .....

Sunday, January 1, 2012

Europe is Heading the "Right" Way

The landslide victory of the Conservative “Popular Party” in Spain ( a couple of weeks ago ) should be analyzed not only from a national context but from a rather wider perspective . In other words, I claim that the Spanish return to the Right is just another brick in an almost completed Conservative European wall . The following paragraphs will try to show that this is not just a mere “feeling” but an almost unprecedented event.

I’ve run a very simple test to understand the magnitude of the Right wing European orientation: