Monthly Archives: January 2013

I. The Parable of the Broken Window

Frédéric Bastiat

In 1850, classical liberal theoretician Frédéric Bastiat published his landmark essay That Which Is Seen and That Which Is Unseen (Ce qu’on voit et ce qu’on ne voit pas). In it, he introduces his acclaimed scenario — the “parable of the broken window.” The story is a simple one: a shopkeeper’s son accidentally breaks a pane of glass and hire a glazier. And so it goes:

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child.

But what if windows continue to be broken purposefully; what if the child is, by some oddity, conspiring with the glazier to reap the benefit of profit? In short, “destruction is not profit.” The issue of destruction, and its subsequent fixing, is that of which creates no real value. It merely moves moves money from one hand to another (in this case, from the shopkeeper to the glazier).

The opportunity cost of such an action, the repeated breaking of windows, is at the expense of other actions that could add more net benefit to the town. For one, the glacier may be distracted from other necessary tasks by fixing the shopkeeper’s window repeatedly, acting as a negative constraint on his labor, or the shopkeeper might have rather used the money spent on repairs on either investment or consumption. It best can be summed by Bastiat’s phrase: “society loses the value of things which are uselessly destroyed.”

What will you say, disciples of good M. F. Chamans [French politician], who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

Bastiat goes on to use his argument against protectionism (one which the Austrian school of thought uses often), which is, I feel, an incorrect application of the actual parable. Bastiat was functioning within the French colonial economy and he failed to address the difficulty of smaller firms lacking the economies of scale to compete with already-established firms. This is demonstrated by the Hamiltonian “infant industry argument,” and the adoption of protectionism in the United States, allowed for the development of American industry that would have been eaten up by British competitors had they not been protected. However, this is a separate issue entirely — Bastiat’s parable can be properly applied to the opportunity cost of war and those that claim it “brings growth.” Naturally, he actually applied his thinking to the “war economy” and wrote directly of it. He differentiates between what is “seen” and costs that are “not seen.”

A hundred thousand men, costing the tax-payers a hundred millions of money, live and bring to the purveyors as much as a hundred millions can supply. This is that which is seen.

But, a hundred millions taken from the pockets of the tax-payers, cease to maintain these taxpayers and the purveyors, as far as a hundred millions reach. This is that which is not seen. Now make your calculations. Cast up, and tell me what profit there is for the masses?

Therefore, a war-driven economy does not actually create sustained growth since it takes away necessary labor by enlisting them and deviates capital to military use rather than civilian use.

II. Rapid Growth in the Post-War Era

The Post-WW2 era brought with it a period of unprecedented economy growth. The process of rebuilding Europe was relatively quick and economies sprang back on their feet. Called the “Golden Age of Capitalism,” Western European nations experienced GDP growth rates never seen before in their history and some of the lowest unemployment rates ever recorded. To many, it appeared to be the triumph of capitalism in rebounding from the previous years of carnage and war. Titles were given for each nation’s “recovery miracle” — Wirtschaftswunder in Germany, the Trente Glorieuses in France, and others. However, when placed in context, it was a development consist with capitalism’s short but sporadic history.

Source: The Economics of World War II: Six Great Powers in International Comparison

*Based on Table 1 found in Mark Harrison, The USSR and Total War: Why Didn’t the Soviet Economy Collapse in 1942? from Mark Harrison, “The Economics of World War II: an Overview,” in Mark Harrison, ed., The Economics of World War II: Six Great Powers in International Comparison, Cambridge University Press (1998), 10.

The GDP during the war differed tremendously year by year. The UK economy began feeling the economic consequences of the war after 1943, France after 1939, Italy after 1942, Germany after 1944, and Japan also after 1944. Europe had to be rebuilt — the broken window had to be fixed.

And after the war, the war-torn nations called upon their glaziers: industry. Production soared and is perhaps best demonstrated in automobile production alone, which rose drastically after 1946.

Main sources: WMVD, SMMT, JAMA, IRF, CCFA, OICA

Military spending also increased as military armaments accumulated in the post-war period. In the years between 1950 to 1960, France doubled their military spending from 11 billion to 22 billion, West Germany from 0 to 22 billion, the United Kingdom from 23 to 29 billion, and the United States from 69 to 168 billion [1]. The need for a permanent armament reserve for potential war against the Soviet forces proved to be a constant in the Cold War economies that would arise in the years after World War 2. Likewise, this stirred production levels to meet these new demands. With the increases in production, fresh new labor was needed to sustain it. Luckily, many troops from the war provided such manpower necessary to sustain these new production levels. They were absorbed into the economy with relatively ease and Western Europe experienced unemployment levels that were at historical lows. Deputy Commissioner Robert J. Myers of the Bureau of Labor Statics writes in 1964:

From 1958 to 1962, when joblessness in [France, former West Germany, Great Britain, Italy and Sweden] was hovering around 1, 2, or 3 per cent, [the U.S.] rate never fell below 5 percent and averaged 6 percent.

However, the reason is quite clear — Europe had room to grow. After being devastated by war, its cities ravaged by bombings, it had to be rebuilt. Industry began to grow rapidly and profits accrued as large inflows of labor were coming into these nations from individuals that were once fighting in the front lines. The conditions were set and the growth was focused on repairs and war production with the help of the Marshall Plan put into effect by the United States. Thereby it can be said, had the war not occurred, GDP would be much higher in these Western nations since they would not forgo the opportunities that were missed in focusing on rebuilding repairs. Once again, Bastiat’s argument can be evoked — “society loses the value of things which are uselessly destroyed.”

III. The Inevitable Crisis

As was expected, the economic boom of the post-WW2 era would not last indefinitely. A conglomeration of issues arose with the advent of the 1970s: the end of the Breton Woods Agreement in 1971, the Oil Crisis of 1973, and the policies of liberalization that ensued. The crisis and murky economic future that followed can best be characterized by employing an analysis of the rate of profit of these Western powers. The fluctuations of the rate of profit can help us better understand the crises that set in and its ramifications in the years that followed. The rate of profit can be best explained by the following simple equation:

S / (C + V)

Whereas S is surplus value, C is constant capital, and V is variable capital. The surplus value can be thought of as undistributed profits, one which do not go towards the costs of the initial labor power and machinery needed to construct the commodity. The difference between constant capital and variable capital is relatively simple — constant capital is machinery, which is relatively constant in the short run, and variable capital is mainly manifested as fluctuating wages. This relationship is crucial because, in a capitalist economy, industrialists want to maximize efficiency in order to better compete. Consequently, the more commodities are produced, the more prices fall. This translates to capital rising and surplus value subsequently falling which causes, in the long run, a tendency of the rate of profit to fall. Granted, this is only a tendency, since there are counter measures to prevent such a phenomenon from occurring (as seen in the neoliberal years of the 1980s).

United States, index numbers: 1960-5 = 100; Source: The Spain-U.S Chamber of Commerce

A crisis was inevitable after the post-WW2 boom since production had exhausted itself. The all-too-common crisis of overproduction soon followed, with the rate of profit dropping sharping starting from 1965 in conjunction with the rise of more radical movements in labor and demands for wage increases and better conditions. The fact that the rate of profit plummeted likely caused the economic malaise and stagflation of the 1970s. And the response was one we are too familiar with today — outsourcing. In order to increase profits, corporate bodies began to move to the Third World to lower their labor costs (variable capital) thus increasing their rate of profit. This is represented by the neoliberal boom of the 1980s with the rise of Reaganomics and Thatcherism

The Rate of profit in the United States; Source: The Spain-U.S Chamber of Commerce

The graph above provides us with a different look of the same data. The average rate of profit fluctuates around 24.4% from the period of 1946-1973, drops down to 18.9% from 1974-1983, and finally rises 1.2% to 20.1% from 1984 to 2009. However, bear in mind, the rate of profit begins to drop at the 2006 mark, serving as a precursor to the Great Recession and the current crisis.

Point being — what does this necessarily have to do with the supposed “Golden Age of Capitalism?” Many Keynesian economists point to their policies and argue they spurred the growth of the post-WW2 era. However, with Europe broken and demolished, their economies could only grow. Growth had to follow since so much capital was required to rebuild post-war Europe. As efficiency increased exponentially and production soared, it was safe to assume another crisis would soon follow, since the inherent contradiction of overproduction always brings with it economy calamity. And to curtail these decreasing rate of profits a new economic ideology was introduced — neoliberal doctrine, which worked to cut taxes, deregulate, and cut labor costs through Third World exploitation. The shaky footing that the “Golden Age” brought gave individuals blissful optimism, as they hoped that the policies instated would continue growth indefinitely, however they failed to curtail the inherent contradiction of the profit accrued and capital needed, which would evoke the crisis that would follow in the 1970s.

***

– Rate of profit graphs were obtained from Short and Long-Term Dynamics of the U.S Profit Rate in the Context of the Current Crisis

– Capital Accumulation and Growth in Central Europe, 1920 – 2006

– The Post-World War II Golden Age of Capitalism and the Crisis of the 1970s

– The “Millennium Crisis” and the Profit Rate

– System Failure: The Falling Rate of Profit and Economic Crisis

Dissecting Racial Privilege and Class

January 17, 2013

Critical Theory

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In contemporary society, “whiteness” is more than a category of pigmented skin. It is a social construct, an advantageous societal badge, a cultural phenomenon — an implicit privilege ingrained in the Western psyche. Likewise, it has connotations that permeate culture, especially those of us who are part of the American variant. The United States has, arguably, experienced the most racial upheaval of any nation in its brief history as a republic. Therefore, it is easy to see the remnants of a past white-supremacist society still festering, albeit not as explicitly as it once was. Now, the issues are implicit rather than explicit, covert rather than overt — they poison our culture as hidden systemic issues, inculcated in the American experience, rather than with symbolic elements that we tend to associate racism with (i.e. the Klu Klux Klan, Jim Crow, etc). Perhaps this poses a greater problem than ever before, since many white Americans have washed their hands clean of the matter after the granting of legal rights in the 1960s. Before such events, racism was in full-view and exposed by movements calling for its destruction during the Civil Rights era and prior. Sadly, these mass-movements have now largely disappeared, since they were mostly in conjunction with Vietnam anti-war protests, and they have escaped the public eye, despite the same problems still persisting.

The reasons for racial complexes are, from my understanding, directly linked to an understanding of class and distributions of affluence. Any hegemonic group, be it cultural or racial, is granted its creation and subsequent dominance by controlling capital and concentrating power. White elitism was a direct product of such concentrations. During the time of the slave power, power was granted to rich white slave-owners by the state. The relationship shifted with the end of the “plantation elites” and the development of racist capitalism in the South, but the dichotomy of oppressor-oppressed in the black experience was little changed. They were barred from many employment opportunities and promptly stripped of political rights after the establishment of Jim Crow once the Union troops left the former Confederate states with the sham of a compromise in 1877.

Convict leasing was actively used in the building of railroads in the South.

In relation to class, it’s quite clear how Jim Crow acquired its luster among white working Americans living in the South. Although their wages were low, their conditions horrid, and their hours long — at least they were white. They found a racial scapegoat. Thus, white capitalists justified their expropriation through a racial lens and trapped freemen in contracts that essentially re-instated elements of slavery, with convict leasing that sold “criminals” to private parties for their bidding. Racism in the south functioned as a buffer to prevent conflict aimed at industrialists. It created a rift between laborers, deviating their attention from inequality and subsequent efforts at unionization.

The issue with class disparity is that it creates the illusion of superiority. The hegemonic status of certain groups corresponds with inequities in wealth; when a group of individuals (i.e. whites, Protestants, etc.) are mostly congregated to one rung of the social ladder, it grants them a higher worth. Rather than attribute their privilege to the lottery of birth, they psychologically justify their position with some innate characteristic — be it race, religion (which is oftentimes taken as birthright), or ethnicity. With centuries of rule by white moneyed interests in the United States, it seems likely that the racist undertones of contemporary society began with class inequality. Therefore, class disparities preceded racist justifications, rather than vice-verse, through the expansion of markets by imperialist forces and expansionism.

In contemporary American society, these same cards are at play, although the deck has been shuffled a bit. The use of “code language” fills the right-wing political arena, which still caters to affluence and power as it always did. The last election of 2012 perhaps signified the last potential “hoorah” for white America — what pundit Bill O’Reilly calls “the real America” — in continuing the hegemony that was once fully enjoyed. The issue is the fact that many white Americans, particularly those in conservative circles, are supposedly “outraged” by the government’s catering to minorities. Some go as far as calling it discriminatory, or reverse-racism, against whites. The severe delusion of these reactionary whites is that they see their marginal decrease in privilege as under-privilege. In retrospect, opportunities are merely equalizing (slowly), not absurdly flipping inversely from white to black. This white anger manifested itself in the past election, with the white vote rallying over Romney and the South vehemently against President Obama. To put it simply, racial politics are at play once again, despite the political right’s insistence that their criticisms are based purely on some disingenuous merited assessment.

Hence, given its elaborate history, privilege is an absurdly difficult topic to wrestle with due to it potentially being “offensive.” Some political commentators have wrongly grown wary of initiating such discussions and insist we live in a “post-racial” society. They believe firmly that if we ignore the race issue, it will simply disappear. Despite their, perhaps, benevolent intentions on the surface, this exasperates the problem rather than curing it. Yes, granted, I would thoroughly like to live in a post-racial society — but, point being, we don’t. Thereby, analyses in racial relations are still crucial in assessing current conditions because we, sadly, still live in a racist society. You can deny such claims, but you are under a grave misapprehension by personally muting the cries of racial injustice in contemporary American society. Out of ethical respect, we should listen and actively take note.

***

– Race, Class, and “Whiteness Theory”

A Brief Economic Analysis of Yugoslavia

January 4, 2013

History, Political Economy

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I. Nationalization and Reindustrialization

The port city of Zadar in Croatia after many bombings during the war.

The port city of Zadar in Croatia after many Allied bombings from 1943 to 1944.

The victory of the Yugoslav Partisan army in World War II created many hefty challenges for the newly-liberated Balkan region. After being occupied by the Ustaše from 1941-1945, the destruction was severe – “the human and material losses were the greatest in Europe after the USSR and Poland” [Simon, Jr. 5]. The former Kingdom of Yugoslavia was virtually left in ruins, being usurped of its raw materials and resources, and stripped of its transport infrastructure, mining, and manufacturing industries.

Being granted the honor of victors after World War II, the Partisans formed their own government, based on the ideology of Southern Pan-Slavism and a socialist economic philosophy in the Marxian tradition. The Socialist Federal Republic of Yugoslavia was established on the 29^th of November, 1945 and, after its creation, quickly allied itself with the Soviet Union. It immediately began to implement programs to rebuild its broken post-war state. Power became strongly centralized, based on the Soviet model of state socialism, and order firmly kept in place by Marshal Josip Broz Tito’s Communist Party. Six regions were then created, of relatively equal political power, in the newly drafted Constitution of 1946: Croatia, Montenegro, Serbia, Slovenia, Bosnia & Herzegovina, and Macedonia. Soon after, sweeping restructuring began to take root; property was transferred from its former private owners to the communist-run state, financial capital was expropriated from formerly being privatized, and the means of production was converted to public ownership. Firstly, large financial institutions, such as the banks, were nationalized to control the money supply and the flow of financial capital. After that was achieved, large industries were then overtaken by state control to promote industrialization in the war-crippled socialist republic. Then, finally, the smaller transport, commercial, and agricultural industries followed suit; they were also nationalized to increase production [Simon, Jr. 5].

II. Deterioration of Yugoslav-Soviet Relations

Edvard Kardelj, one of the creators of the Yugoslav model of socialism.

Although the initial recovery program enacted under Tito’s leadership was derived from Stalin’s 5-year plan model, significant splits shortly began to ferment between the Soviet leadership and the Yugoslav communists. Economic blockades were being placed on the young socialist state because of their alliance with the Soviet Union, and Tito’s independent stance on issues angered Stalin and his associates. Moreover, Yugoslav theoreticians began to formulate their own strains of Marxist thought and began to criticize the internal political and economic structure of the Soviet Union. Consequently, this gradually led to Yugoslavia’s expulsion from the Cominform by the end of the 1940s. It was at this point Yugoslavia began to economically develop differently than its socialist counterparts – creating a unique form of decentralized market socialism based on workers’ self-management [Simon, Jr. 6]. Frankly, the idea behind it was simple; the withering of bureaucratic state would only occur if innovative mass-participatory structures were created. Egalitarianism and populism became more of a principle rather than a political tool, contrary to the Soviet Union. Decentralized socialization of industry quickly followed Yugoslavia’s alienation from the Soviet Union. Led by the efforts of thinkers by the likes of Edvard Kardelj and Milovan Đilas, the original state-control of industry began to be broken down into localities and councils were created for respective industries. The profits were distributed amongst the workers in each individual firm, and some functions of state control were relinquished and allocation became more relied on the basic mechanisms of the market to ensure self-management and proper distribution [Frei, 45].

III. An Economic Revolution

Strictly speaking, this economic transformation can be described as taking place in three major stages: Firstly, in the 1950s, workers’ collectives were created but were restricted by the state’s regulation of capital construction. This was actually a remnant of the Soviet model of socialism. Secondly, the 1960s and 1970s were a radical shift from the aforementioned control that was present in the previous decade; rather than allow the state to control capital allocation and production, socialized markets began allocating it themselves with a self-managing structure using the labor involved. Thirdly and finally, liberalization reform followed until the ultimate collapse during the 1980s and late 1970s mainly caused by inflation and debt [Simon, Jr. 7].

Lunch break for Yugoslav workers, 1952.

The decentralized Yugoslav model mainly employed during the 60s and early 70s was localized, but complex and interconnected. Authorities in certain districts were authorized to oversee consumption and production services, to ensure each commune (the basic local government units) were working in each others interests. Moreover, each autonomous region in Yugoslavia was different; each had different legislative procedures for planning. However, it did still remain a federalist system of governance – most of executive power was exerted in creating land uses, the geographic location of large industries, traffic networking, and grandiose public service projects that required cooperation with different regions [Simmie, 272]. Most of power was derived from the legislative regions, but the localities were actually given little statutory powers. Rather, they were consulted and functioned as “pressure groups” to ensure local interests within the regions are met such as in the areas of housing, settlement, education, national defense, and the likewise [Simmie, 274]. It was a demonstration of a collective economy at work, absent of a real large-scale “free market,” where different elements of production were decided by long-term plans, medium-term plans, and annual action plans – while also being guided by the mechanisms of the supply and demand curves in a regular market, except profits were socialized as was production [Simmie, 276].

The economic growth seen during the period of decentralization was upward and dynamic. Comparatively speaking, Yugoslavia experienced the greatest per capita GDP growth out of all the Eastern Bloc economies [Groningen]. It also embraced a tight-controlled policy on imports from developed capitalist countries after the restoration of Soviet-Yugoslav relations in 1954-1955; foreign trade with socialist countries increased from 1.8% to about 28% in the decade following the return of good relations, while the share from Western capitalist nations dropped from 80.9% to 57.7% mostly due to the policies enacted by the Committee on Foreign Trade which was given extra power in 1956 to protect infant self-managing industries in developing Yugoslavia. Equally important, Yugoslavia enjoyed a balance of trade with the socialist nations during this period – amounting to $176 million of exports and $169 million of imports in 1962. Manufactured goods, machinery, and equipment were traded with the Eastern Bloc nations, while trade with developed capitalist countries consisted mainly of raw materials, food, and tobacco [Frei, 45, 46]. Banking was also heavily regulated, but broken down locally. In 1961, it consisted of eight large sub-national banks and over 380 communal banks, all overseen by the National Bank of Yugoslavia, the main credit institution of the country and giver-of-loans. The sub-national bank, granted on a regional basis, served as intermediaries between the National bank and the communal banks. The idea behind this was to encourage development by focusing giving loans to regions in need of aid, and they used communal banking institutions to do so [Frei, 48, 49].

IV. The Collapse of Yugoslavia

Despite strong economic growth and potential – experiencing an annual GDP growth of 6.1%, a life expectancy of 72 years, and literacy rate of 91% according to 1991 World Bank Statistics from 1960 to 1980 – the experimental Yugoslav system soon imploded on itself due to a variety of factors. Perhaps more importantly, the Oil Crisis of the 1970s had the greatest impact on Yugoslavia and was a precursor to the catastrophe that would unfold after Tito’s death in 1980, ultimately leading to the breakup of the federation in a bloody civil war. The recession in the developed nations in the West severely hurt Yugoslavia, and hindered the economic growth it was experiencing for 30 years. Massive shortages followed in electricity, fuel, and other necessities and unemployment reached 1 million by 1980 due to the energy crisis and the increasing economic embargos imposed by Western powers. Soon, structural economic issues came to light and richer regions became frustrated from over-subsidizing the poorer regions of southern Yugoslavia, called “economic black holes” [Asch, 26]. Production severely dropped, and conditions only worsened as the decade went on; GDP dropped -5.3% from 1980 to 1989, the regions of Kosovo and Montenegro being hit the hardest [Kelly]. Real earnings dropped 25% from 1975 to 1980, further crushing the poorest regions. In an effort to curb the domestic crisis, Yugoslavia began to take loans from the IMF to boost infrastructure development and bring back production levels to their pre-crisis levels. Soon, its debt skyrocketed – Yugoslavia incurred $19.9 billion in foreign debt by 1981 [Massey, Taylor, 159]. As a request for incurring so much IMF debt, the IMF demanded market liberalization and many regions began to implement economic shock therapy: cutting subsidies, privatizing, and quickly opening trade to allow foreign capital, which only worsened Yugoslavia’s economic crisis. Inflation rates soared and Yugoslavia entered a period of hyperinflation, unable to cope with the currency crisis because of its complex banking system – it soon began printing large amounts of Yugoslav dinar banknotes, created a new note of 2,000,000 Yugoslav dinars in 1989. As the broken nation spiraled into further calamity, the terrible war, which would be the bloodiest on European soil since World War 2, would soon begin to rear its dark head and finally put an end to the Yugoslav experiment that lasted little over just 40 years.

The Yugoslav Partisan Army marching through the city of Bitola, Macedonia.

V. Bibliography

– Simon, Jr., György. An Economic History of Socialist Yugoslavia. Rochester: Social Science Research Network, 2012. 1-129.

– Simmie, James. The Town Planning Review , Vol. 60, No. 3 (Jul., 1989), pp. 271-286

– The Groningen Growth and Development Centre, n.d. Web. 3 Jun 2012. http://www.rug.nl/feb/onderzoek/onderzoekscentra/ggdc/inde&xgt;

– Frei, L. The American Review of Soviet and Eastern European Foreign Trade , Vol. 1, No. 5 (Sep. – Oct., 1965), pp. 44-62

– Beth J. Asch, Courtland Reichmann, Rand Corporation. Emigration and Its Effects on the Sending Country. Rand Corporation, 1994. (pg. 26)

– Mills Kelly, “GDP in Yugoslavia: 1980-1989,” Making the History of 1989, Item #671, http://chnm.gmu.edu/1989/items/show/671 (accessed June 03 2012, 10:32 pm).

– Douglas S. Massey, J. Edward Taylor. International Migration: Prospects and Policies in a Global Market. OxfordUniversity Press, 2004. (pg. 159)

– Government of the Republic of Croatia – Information on Croatian Economy http://www.vlada.hr/en/about_croatia/information/croatian_economy

– Ballinger, Pamela. “Selling Croatia or Selling Out Croatia?” Bowdoin College, 24 Oct. 2003. Web.

– Vojmir Franičević. Privatization in Croatia: Legacies and Context Eastern European Economics, Vol. 37, No. 2 (Mar. – Apr., 1999), pp. 5-54

—Into the Rose-garden

Maps of our strange world

Archive

Monthly Archives: January 2013

The Falling Rate of Profit

Dissecting Racial Privilege and Class

A Brief Economic Analysis of Yugoslavia