Tuesday, December 22, 2009

Part 3: The Economy is doomed forever? – Boom-Bust Cycles

Boom-Bust Business Cycle – democapitalists lie on the people.

Ancient Chinese warfare discipline has good advice – before you want to chart out the strategy, understand the terrain that you want to conquer. So, let’s try to do that here.

It is accepted in current democratic-capitalistic (hereinafter referred to as “demo-capitalistic system”) thought that the economy will undergo cyclical patterns of “ups and downs” or “booms and bust”.  It has its roots in the classic business cycle theory. According to this theory, booms are initiated by a series of real inventions which in turn lead to real investment (employment of resources). Early periods of “boom” often leads to “jumping on the bandwagon” type of behaviour (economists call this competitive pressures caused by optimism) resulting in further investment than is necessary or profitable. They argue that this inevitably causes collapse or a bust of the economy. 

Business cycle economist actually welcomes this boom-bust phenomenon arguing that the economic forces will play out an equilibrium position thus achieving “efficiency of allocation of resources”! (we will have to come back to analyse this phrase). Their reasoning sounds perfectly logical and indeed up to the date of writing this article, it is accepted as an “economic truth” by none less than the economists of the renowned universities of the world (Harvard, Oxford, etc).

I have always had my apprehensions about “mutated economic theories” masquerading for centuries as premised on Adam Smith’s framework. Today we have various “sects” from the time of Adam Smith – the monetarists, the neo-classical economists, the Keynesians, etc. etc, etc. The world experience since the economic depressions of the 1930s has heightened my skepticism and in fact disbelief in these theories. The fact is, today one cannot really pinpoint what is the philosophical basis of any economic policy other than a concoction of fire-fighting measures with a view to temporarily sustaining the “economy” within the political life span of an elected leader. Other than that, it is clearly business as usual for the vested interest groups discussed earlier despite the impact on the mass citizenry.

The boom-bust theory with its justification of an equilibrium at the end of it seems to have overlooked the critical role of one greedy rascal – the banks and the financial institutions of sorts, that is, the glorified and protected ‘alongs’ (hereinafter referred to as the “gralongs”).

Recapping the boom-bust cycle: with inventions, there is investment leading to optimism and further over-investment.  This over-investment leads to a bust which in turn is said to eventually lead to equilibrium of the economy at which point it is argued that there is efficient employment of resources (hereinafter referred to as “The cycle logic”). I see the following flaws in this “logical argument’:-

1)                  The so-called equilibrium is a self defining concept. The trick is this: it does not solve any economic woes (there is still unemployment of resources) but in the world of demo-capitalistic economic thought, once equilibrium is reached, the situation is defined as efficient. You create the game and the rules, and according to the rules, the problem is solved! What about the unemployed, your ordinary mind may ask. That, in the world of the demo-capitalists is a wrong question. You should be asking: what about the employable but they are unemployed. In the past fifty years or so, it has become “employable and unemployable” and no longer “employed or unemployed”.  This is a very subtle development in the demo-capitalistic system which many are unaware of or choose to remain silent.  The implications and impact is massive – among other thing, it sustains the vested interest groups and ensures that the vast majority of the people remain worker ants in a state of dependency.

2)                  The cycle logic also overlooks the role of the gralongs. Firstly, we have to be very clear about the gralongs – they do not have any noble intentions other than to maximize their profits by creating DEBT.  Let us not get duped or conned into the jargons that have sprung in the last fifty years such as securities, bonds, mortgages, etc (nowadays they are termed in Arabic to appear divine sanctioned). Basically, they are debts.  There is nothing wrong with debt per se.  I still owe one of my staff twenty ringgit which she advanced when I was overseas. 

Back to the cycle logic, this is the missing link: there is no longer a distinction being made between “real” and “monetary”. For example, you produce a pencil and it is priced at RM10. If there are 10 pencils in the economy, the statistics will show that there is RM100 worth of pencils in the economy. Assuming, the price of pencils increase to RM20 each but the number of pencils remain the same. Statistically, your capitalist politician will boast to you that there is now RM200 worth of pencils. Statistically it has doubled! Very few will investigate and find out that in real terms, you actually have the same number of pencils. Now, assuming that your income had remained the same despite the doubling in the price of the pencil, you now may not be able to afford the pencil! Your standard of living in real terms is now worse off.  Unfortunately, we have now entered the era of the statistical dupers.

Now, the cycle logic seems to deliberately or inadvertently omit the role of the gralongs during the period of upswing and downswing. Gralongs often give out debts (investment more polite!), and thus while encouraging greater increase in production and consumption they actually magnify the boom artificially. However, when there is the slightest pessimism in the market, they magnify the bust by their sudden and abrupt withdrawal of facilities - head you lose, tails they win. It is only at the time of default of payment that the banks get its hands on real goods – your property, your cars, etc.  The boom is often characterized by the ‘monetary layer’ which will burst and hurt very innocent hardworking people because the ‘real layer’ has never increased or had increased when it was not necessary. For example, allowing the construction of houses in a particular area because that area is seen profitable even though the real need is elsewhere (this another area where is a complex web of deceit going on).

Since therefore, the gralongs are playing prominent roles in the boom-bust cycle and it is no longer due to demand and supply of real goods and services, the solution seems to be to urgently review the roles of these gralongs. However, as argued earlier, vested interest groups will not allow this. Further, the boom-bust cycle has become a major deceit and a lie couched in very clever and sophisticated language and statistics. This is because, it has ignored the rise and the critical role played by the financial capitalists. 

It may sound complex but the basics are simple. Assuming we play a game of monopoly. You buy houses or hotels as the dice falls. But somewhere through the game, we decide to use (buy/sell) the currency instead to see who can win the game. The currency, which in the beginning was the medium of exchange has now become a good unto itself! At the end of the game, there will be no hotels and houses built but we will all have monopoly money!!! And if there is only one house on the board, all the others will be priced out by the person with the most amount of currency in his hand. Now wonder we are doomed!

3)                  The boom-bust cycle pretends to be a result of free market mechanism and ignores other factors such as the role of the capitalists, the oligopolies and the speculators. ……….to be continued in PART 4 – God willing.

Peace !


E.J. Dodson said...

For most of human civilization, societies were dominated by heirarchy and by agrarian landlordism. The development of manufacturing did not supplant these dynamics. Rather, the system almost unthinkingly referred to as "capitalism" is really what is best described as "industrial and agrarian landlordism."

In virtually every society, almost all the best locations in cities and almost all the natural resource-laden lands are held by a very small number of wealthy individuals or corporate entities.

The promise of what the philosopher Mortimer J. Adler described as "universal capitalism" has never been realized because our political systems everywhere have made effective use of law to establish and maintain entrenched systems of privilege. And, as Winston Churchill wrote as a young Liberal campaigning for a seat in the House of Commons, land monopoly is not the only monopoly, but it is the mother of all monopolies. Remove land monopoly and we come closer to guaranteeing THE basic human right -- our equal birthright to the earth and the resources provided by nature.

There is a growing body of research (see UK economist Fred Harrison's books on the subject) showing that land monopoly is the central cause of the so-called business cycles. The solution -- a solution endorsed by many of history's greatest moral philosophers -- is for societies to collect the annual rental value of all locations, while eliminating the taxation of the goods we produce and the services we provide to one another.

Jahamy said...

EJ Dodson,

Thank you for you insightful comments. I totally agree that "land monopoly" is entrenched in this democapitalist economy and incidentally will be covering it in point 5. While local citizens are have been politically engineered to squabble among themselves over "title to the land", unknown to them, much of the land in their respective countries has already "belonged" to corporations very far from their shores!