Erratic Marxism stalks the EU

In Febrary 2015 in the Guardian, Greek Finance Minister Yanis Varoufakis wrote "How I became an erratic Marxist".  The gist is that he's working with European capitalism because

"Europe’s crisis is far less likely to give birth to a better alternative to capitalism than it is to unleash dangerously regressive forces that have the capacity to cause a humanitarian bloodbath."

 Maybe that doesn't sound to you like a Marxist - but he still calls himself one, and that was clearly my experience from his lectures at Sydney University in the 1990s.


In the above Guardian article, he also mentions that he found out later that his Sydney appointment was aimed at keeping out a left-wing candidate - which I find quite ironic, but the best of outcomes.

This article is based on his 2013 address (before his entry to parliament) to the 6th Subversive Festival in Zagreb,Croatia: "Confessions of an erratic Marxist". He argues that "Marx must remain central to our analysis of capitalism" but that at this point [then and now], it is necessary "to stabilise capitalism; to save European capitalism from itself".  You can watch the address here, or read his intermediate version of this article on his blog here.  You can read a more mainstream Marxist response to this ("poppycock") on a blog post from one Michael Roberts, More Erratic than Marxist, which has some debate on the issue afterwards.



(For what it's worth, the Yanis I remember looked more like this:

)

Economics, Europe, intellectual engagement, hats

I had an economics lecturer at university who gave the best course I ever attended.  It was on the history of liberalism.  A sadly misused term in the US, this does not refer to the politics of anyone who is vaguely left of centre: in  the true sense it refers to the political philosophy that underpins the western world, including capitalism.

It was the way he presented the material that mattered the most to me.  Assuming, of course, that I have no fundamental disagreement, I'm a sucker for anyone who has verve and who is intellectually engaging.  And he had that enthusiasm, he had a sharp sharp mind, and he was particularly engaging. Ultimately, his response to liberalism was... praxis.  That is, action.  A punchline that initially sounded like an anticlimax, but it had - and has - a truckload of meaning, in context.  Given the journey and the challenges he took us through in that course, I still have enormous respect for him, and would still take any course he has on offer.

So, it looks like my lecturer, Yanis Varoufakis, is now the Greek Minister of Finance.  And he's going to be central to negotiations on the future of the monetary union.

Of course, his coalition's platform is absolutely opposed to the EU-imposed austerity program in Greece.  And Yanis remains a thorough-going Marxist, whatever anyone says.  But he's a very practical person, and he understands the practical mechanics of capitalist economics very well.  I expect him to be able to face up to the best negotiators Europe has to offer, so I think the ultimate outcome is going to be good for both Greece and Europe.

PS My teenage son's values are different, and none of this matters to him.  The main credibility Yanis has with my son is his contribution to the games-maker Valve, in the economics of trade in virtual hats.

Global market capitalisation, 2011

It was a surprise to hear that Apple had overtaken Microsoft in May 2010 for market capitalisation (that's the total market worth, from the number of shares times the share price).  On the other hand, although such a figure represents the money shareholders could get for selling their shares, it is not realistic.  For one thing, as soon as a perceptible proportion of shares get sold, the price falls and that "market" worth is demonstrably not intrinsic.  And that measure also embodies public sentiment of the company, and in that respect alone, Apple is at an all-time high.

Call me sentimental, but I still like that measure of a company's "value".  The latest collation by the Financial Times is third quarter last year, and it reads as follows (they're all into the hundreds of billions):

1.  Apple (US, tech)
2.  Exxon Mobil (US, oil)
3.  PetroChina (China, oil)
4.  IBM (US, tech)
5.  Microsoft (US, tech)
6.  Industrial/Commercial Bank China (China, bank)
7. China Mobile (China, tech)
8.  Shell (Dutch, oil)
9.  Nestle (Swiss, food)
10. Chevron (US, oil)

Some of my characterisations are simplifications of course, because the larger corporations generally have fingers in several pies.  But on the above basis, four of the top ten are tech and four are oil.  The Chinese ones are said to be state-owned, which would mean that a portion of their shares trade, and the total value is based on what it would be if all were tradeable.  Microsoft was once top, and it's a surprise, given their global ubiquity, that they're now only number three technology.  It's also sobering to think how much capital is at stake in gross carbon emission.

Other useful measures are nett assets, revenue, and nett income.  On the basis of revenue, WalMart's at the top, which may not be surprising if you think of them as a grocer or trader, but retail margins can't be that high, so revenue alone - despite being much-discussed - is, I think, overrated as an indicator.

Yet these indicators are useful for different reasons, different perspectives on the global economy.  Wouldn't you think nett profit or nett assets would be more meaningful than the others?  The downside of the asset measure is that some of the large financial organisations own bulk assets, but liabilities are great too, as they're effectively holding the assets for others.  Meanwhile, however, the control of assets per se can be meaningful.  Surprisingly, nett assets doesn't seem to rate a high mention.

Apple's 2011 profits were the largest, at $25 billion, although Exxon has been making much larger profits for much of the last decade.


All info here has been sourced via Wikipedia, from Forbes and the Financial Times.

Common currency and variant policies

I have long wondered how there can possibly be monetary union without fiscal union.

That is, how can a number of countries share the same currency, yet have economic policies that are not strongly aligned?  A tight budget in one country, a lax spending regime in another, and the money market has mixed – misaligned – signals on the value of the currency.  One set of policies would drag the other down – or up, depending on the relative weight of the national economies.

Of course, it’s all very well to say this after the event.  (What’s a blog for, if not to flag the thought ahead of time?)

Clearly, union of economic policies in the Euro zone is a bridge too far - at present at least.  Thus European politicians (and econocrats) are by necessity making the case that there can be a way to salvage a common currency – no doubt through the gradualism that seems to have become a feature of the evolution of the EU.

The European Union (and predecessors) has always been the most advanced polity in the world.  Yet I never expected it to be carried this far this quickly.  That gradualism that did it, though, has led to the current mess which will tip many economies into recession.

But if they can sort it out, they are showing the way forward for the whole planet.  Unless, of course, the world ends up in blocs à la 1984.  Whether that’s a bad thing, we still can’t say with certainty, but surely such integration means a more stable, rational world – either way.

Latest on Australian interest rates and economic prognosis

Australia's Reserve Bank left interest rates on hold today - but this can't last.

The news didn't filter to the forefront of the Fairfax media (the Sydney Morning Herald's analysis is relegated to the business section, and lifted from Melbourne's Age); Murdoch's Australian gives it more prominence but scant analysis (see their lead article and brief analysis), but everyone seek different devils in the detail, in this case, the RBA's statement that accompanied the 'inaction'.

In fact, analysis of the differences between phrases emitted this month and last show more heat - subtlely, but definitely - in today's release.  They all but raised interest rates, and patently flagged at least one rise in the next couple of months.

The trade deficit is worse, but business investment imports don't imply a negative.  Australia is, after all, the only major developed economy not to experience recession - which suggests bravura economic stimulus measures, albeit ones that could have been more strategically targetted (but fast action and conservative economics are not good bedfellows).  This alone can win the government next year's election - and they can be expected to ram it home.

Expect employment recovery to lag.

James Hardie's lack of corporate ethics

I doubt company directors and CEOs ever consider themselves thugs. Generally, they would claim their only aim is to protect shareholders' funds; often they claim that as their overriding legal obligation.

Yet James Hardie's managers indulged in thuggery - and they've been caught out.

With a significant liability on their books due to ongoing and emerging claims from their asbestos business, they sought a way to limit that liability. What better way than to sequester set funds in a trust, then high-tail it off to a foreign jurisdiction?

Which they did, reincorporating from Australia to the Netherlands. Yet thuggery it is, since they left behind insufficient cover for current and future victims.

"As a sufferer of asbestosis since 1992, I have no sympathy for their public humiliation. They brought it on themselves by their contemptible behaviour."
..."Big deal. You can guarantee they will not be driving cabs for a living."

- letters to the editor, SMH, 22-Aug-09

The specific crime was a mere technicality. The ten directors were punished because they approved a media release (claiming the trust was "fully funded") which was inaccurate, but deemed to be intended to affect the market.

Penalties were fines of $30,000 to $350,000, and being banned from CEO and board positions for five to fifteen years. The latter tends to have the greatest effect - on their careers. All have left James Hardie; some have resigned other management positions. However, a couple of them are working in the US, where the bans don't apply.

Their defence: each one of them claims they didn't read or don't remember reading the draft press release. Those claims were judged not to have been genuine.

And the James Hardie business (building supplies) has started to rebound from the recession already.

Trends in Australia's recessionary unemployment

I recently asserted that all recessions are different. Why so? The question is, why is economics not a science? Because it is wrapped up in human affairs, and is a product of human history, which is moving forwards, changing all the time. We are not entirely doomed to repeat mistakes of the past; moreover, economic events are responsive to the political tides, which are constantly changing.

One example: unemployment in Australia.

We have weathered the recession reasonably well, all things considered. The government's economic stimulus packages have had an effect... and unemployment has not shot up as fast as it might have (SMH's Ross Gittens notes here Australia's more favourable position than the major western economies - and that the estimate of peak unemployment has been revised downwards from 8.5 to 7.5%.)

Why? A recent survey has found that employers have largely avoided shedding jobs, and are using a number of strategies to avoid this. Altruism aside, this could be simply because the costs of redundancies are a sufficient disincentive.

About half the employers surveyed cut back worker hours; about 40% froze salaries - one in six reducing executive pay; others cut pay or introduced job sharing.

(On an anecdotal basis, over the past year I have frequently seen companies with resourcing needs that despite looking first at external options, subsequent choose to plug the gap from their existing labour pool.)

The reason for this is said to be immediate past experience with skill shortages, which encourages employers to hedge by retaining skilled staff.

In mitigation, University of Newcastle's Bill Mitchell noted that in the 1991 recession, employers reduced hours - but then subsequently cut jobs anyway.

Countering that: job losses to date have been largely in manufacturing, and another survey had found business confidence at a two-year high (!) - particularly in manufacturing.


Update 13-Aug-09: Boom times indeed! Commonwealth Bank has reported very strong results; now Telstra has too. And Australian consumer confidence has positively rocketed. Perversely, while these are flags for interest rates to rise,employment is likely to lag significantly, as it usually does. Not a good time for unemployment with a mortgage.

Recessions are all different

Arthur Laffer (of Laffer curve fame) served under Ronald Regan, and was a huge fan of the economics of both Regan and Bill Clinton - the latter because he apparently cut government spending as a proportion of GDP by more than any other president. Naturally, he doesn't like the Keynesian effort to prime economies through government spending, in particular because he says it will fuel inflation. He thinks the solution to the current global recession is for the government to give everyone a full holiday from federal taxes for 12 months.

But there are a lot of traps in his suggestion. First, he phrased it as a "let's try this" proposal, which rather suggested it is less a well-developed plan than a finger in the air. For all their claims to scientific method, economists are working in a complex, constantly changing milieu which is difficult to treat with full rigour. Second, there is an ideological basis to his idea. Such a tax holiday inevitably benefits people and companies according to their hit - as such, it is a completely regressive proposal - that is, it benefits the high earners vastly more than the low earners. Third, as a counter to the fuelling of inflation, it is rather specious for two reasons: reserve banks these days use interest rates as a level to keep the lid on inflation; also, these are currently particularly deflationary times anyway.

The BBC radio programme on which I heard this carried a quote from Keynes from the 1930s about government counter-recessionary spending.

But I think what Keynes may not have appreciated, and what Laffer ignored, was that economics and economies evolve, and for that reason every recession is different from the last. In Keynes' day, the depression was deep and people were poor. Any financial benefits most people got would be spent fairly quickly. Nowadays, however, there is likely to be much more discretionary power in spending: in other words, the ability to save is stronger, so there is an inherent slowdown in the velocity of that stimulus money - so the effect of direct stimulus spends is weaker than it would have been in the 1930s. Ironic, because a direct feed of money to people is said to result in faster circulation than infrastructure spends. (I would suggest that a way out of this would be masses of small-scale infrastructure spends - on, say, measures that reduce carbon emissions, such as energy efficiency. This has in fact been happening.)

Changing circumstance is something economists usually don't account for: mostly, they cite past evidence - or counter-examples - as justification for advice. And that is only ever part of the story.

Two Hus, and China's hardball trade game

China's form of economic hardball is possibly unique in these times, a game that has emerged from a specific set of temporal factors, including their culture and their current global economic status.

The immediate context for this is the arrest in China of Stern Hu, an Australian executive of mining conglomerate Rio Tinto. Hu has been accused of, but not yet charged with, espionage. The Chinese government said Hu and three other Rio Tinto employees arrested "have already broken Chinese law and have violated international business ethics".

This was preceded by pricing negotiations that ended up being more favourable to Australian resource companies than had been generally expected. Further, on 5th June Rio Tinto backed out of a $AU25 billion deal with Chinalco, and instead joined forces with rival BHP Billiton. China's burning need for raw materials makes major dealings with resource companies extremely sensitive. Upon the deal's collapse the Chinese immediately convened a high-level political task force to "assess the political and economic risks" of large outgoing investment deals.

Yet: "This is certainly not 'revenge' for the Chinalco deal not going through," said a Chinese Government source. "It is part of a considered, all-of-government response to the general resources question that was made after considering the likely international response."

Maybe not specifically, but it could well be a tactical manoeuvre underpinning the Chinese government's overarching strategy on resourcing.

What happened is not clear yet. But it's obviously tied to the dangerously tricky nature of doing business in China.

The Sydney Morning Herald's John Garnaut noted : "Rio Tinto has strong rules and a strong corporate ethos that should mean that China's 'conclusive evidence' about the company paying bribes turns out to be unsubstantiated." But between Rio's official policy and China's "enormous system of laws that are seldom enforced", there is the traditional Chinese way of business. Another Herald journalist commented:"The immediate very public escalation of the arrest issue makes discreet high level use of guanxi - the uniquely Chinese concept of personal relationships - extremely difficult".

There is thus a wide chasm between the customary way of doing business, and how it should be done if legally enforced. That chasm constitutes an enormous manouvering space under the direct control of the Chinese government. So they are deciding when to enforce practices that would usually be seen to be corrupt or involving undue personal influence.

The deliberate revelation that President Hu Jintao personally approved the "investigation" that led to the arrest, signals an escalation in the politics of trade. Until the Chinese government becomes obliged to close the gap between customary practice and law in a uniform way, they control the playing field. Internation economic and political pressure will force the issue, but until then the Chinese government will be taking full advantage of it.


16-Jul-09 Update: Although PM Kevin Rudd's (public) response to the arrests has been characterised as lukewarm to date, as a sinophile ex-diplomat he is probably better versed than most in the intricacies of communication at that level. But his public words are now somewhat stronger: the world is watching. Meanwhile, a Chinese newspaper quoted an unnamed industry source that Rio had bribed executives of 16 steel mills to get access to industry data "which has become an unwritten industry practice" - which begs the question why those executives weren't also arrested. Lastly, the incident has caused a spike in the spot price for iron ore. Whilst economists can always give explanations for a sudden price jolt in either direction, in this case it could be said to reflect perception that the cost of doing business (with China) is higher than previously expected.

Beatles songs and the translation of value

This is a tale of value transferrence: how creativity is transmuted to the base common demoninator that everything seems to get translated to: capital. Why will the copyright to most Beatles songs end up scattered to the winds, in the hands of anonymous - or big-capitalist - shareholders?

If you will, you could try blaming poor tax advice, Yoko Ono, or the extravagant lifestyle of Michael Jackson - plus a large host of minor players. But quintessentially, there were a lot of poorly-handled relationships, only some of which are detailed here.

In a publishing contract, a songwriter assigns copyright to a music publisher, a company that does the quotidian administrative work of collecting royalties for the song being recorded, played, or used in any context; the publishing company typically has control over licensing the song for use in other media. In return, the songwriter gets a certain percentage of the licensing fees as royalty. Most songwriters sign over publishing rights for a relatively paltry percentage. Some who are canny, or at the peak of their careers, command a good percentage, or contractually stipulate reversion of control at some point.

The Beatles set up their own publishing company (Northern Songs) in 1963, along with an existing publisher, Dick James (most famous as the owner of DJM, which made a fortune as Elton John's original record label).

In 1965, the owners decided to float Northern Songs, to save on capital gains tax. This left Lennon and McCartney each with 15% of their publishing rights. In 1968 they signed on for a further five years - the lucrative early years of their respective solo careers. However, their relationship with James deteriorated (as subsequently happened with James and Elton John), so in 1969 James sold off to ATV Publishing for a good profit, without giving Lennon and McCartney a chance to buy him out. Since ATV threatened to take a controlling share which they didn't manage to buy out, Lennon and McCartney sold their shares in 1969 for £3.5 million.

When ATV Publishing was up for sale in 1985, McCartney tried to get Lennon's widow to unite to buy it up, but Ono preferred it to go to Michael Jackson, to avoid ongoing bickering between her and McCartney. It has been noted that at this point McCartney could easily have bought out on his own. But he didn't, for whatever reason, and it has since been said with some justification that Jackson had a better eye for business than McCartney.

In 1995, Jackson sold 50% into a joint venture with Sony which, with other major catalogue, became the third biggest music publisher in the world.

Sony/ATV's Beatles rights are currently estimated to be worth $30-45m per year. I saw one estimate saying Jackson's assets were about $400m, debts being about $200m; however, that didn't seem to square with Jackson's estimated holding in Sony/ATV: $450m alone.

That is likely to end up on the capital markets, simply because it is more prized as a capital asset than for its sentimental - or creative - value.

Economics and politics asks too much of us

Today's column from Herald Economics editor Ross Gittens:

"After being paid to study the performance of politicians for the past 35 years it finally occurs to me that the problem with democracy is the same problem we have with competition in markets: for it to work well requires more effort and attention on the part of voters (or customers) than they're prepared to devote to it." [my emphases]


Read the rest here.

Irrationality in economics and housing

Orthodox economics is often assumed - by both lay people and economists - to be a bastion of rationalism, where 'free markets' dictate optimal outcomes.

Of course, this rationality is not true, and the optimality begs the question of what or who a given free market outcomes favours. And whether we, as a society, want - 0r know - all of the ramifications of a particular outcome. This is one reason we legislate.

In economics as in all human endeavours, there is a frequently-hidden lack of rationality in human behaviour. With some experience with economics, it becomes apparent that 'free markets' lie at the intersection of rational determinism and irrational human psychology. Those at the libertarian end of the spectrum who favour removing the shackles of legislation are often ignorant of, or concealing, the full implications of such action.

Ross Gittens, the Sydney Morning Herald's Economics Editor, is fond of exposing the oddities of economic outcomes due to human behaviour. His latest commentary pertains to the effects of the government's First Home Owners Grants. On the face of it, the grants might sound laudible: with a housing market that is increasingly beyond the reach of new owners, taxpayers subsidise new entrants; and at the moment the economic stimulation would be a good thing.

However. The grants have been entrenched since 2000, well before the economy needed stimulating. Although they are now being treated as stimulation, the nett effect in this sense is that removing the grant would depress activity. Yet it has also been claimed that a cost to the government of $200m has blown out property prices by $3b.


Gittens argues the case that the raw appeal of free money has been responsible for a good number of the new housing entrants. His point is that this housing activity has been greatly exacerbated by the psychological effect of touting the grant as a 'limited offer' (which it currently is) of 'free money' - so grab it now. As a result, so many new players at entry level have been driven up the price of an entry-level home by more than the value of the grant. He suggests the best action is to wait for the grant to finish, and buy in when prices fall by more than the grant's value.

Of course, the other side of the coin is the creation of a property bubble that can induce a lot of defaults by people who have over-committed and whose situation then changes (usually through the reduced income of unemployment). This may well coincide with falling house prices once the grant comes off - and higher interest rates kicking in. This potentially risks affecting any economic recovery - making it much weaker and slower, or collapse altogether. Yes, interest rates are at their lowest since 1968. But the average Sydney house price in number of years of average earnings has shot up to nine times average annual income - more than the seven times average of the US and UK when their property bubbles burst (see here). It was three times the average annual earnings from the 1950s through the 1970s, which gives an idea why housing was more affordable for previous generations.

Gittens also gives as example a limited-time offer of $1m superannuation contributions being made tax-free, which induced people to borrow to take advantage of the tax windfall, only to see the investment crash by a far greater amount (than the tax benefit) when the sharemarket crashed. He reports advice - a general truism - not to get so carried away as to buy assets that weren't needed, nor take on more debt than could be handled. In these times of uncertainty, due caution helps.

Climate change: losing the pivotal moment

The Australian government's Carbon Pollution Reduction Scheme is deeply flawed, and in fact discourages individual pollution-saving measures by individuals - the benefits gained will be captured by polluting industries under this proposed emission trading scheme.


Legislation reached the Senate, which has sent it off to enquiry. Public submissions are called.


On current evidence of government and global response, I am very pessimistic about turning back this tide. There are three ironies here:

1) At a time where there is great willingness on the part of governments and electorate to spend large re-stimulating the economy, the government is not grasping the opportunity to target spending and industry incentives to avoid significant climate change;

2) When the sums are done, warming will be seen to slow down (albeit a temporary blip) specifically because of the global economic downturn - and this will lead to greater complacency about the urgency of the problem.

3) The confluence of crises reaches us just at the point where there is broad consensus that global warming is real and serious. Any student of history reading up to this point might make the automatic assumption that action would be taken, because the way forward is so clear.


Via GetUp, I put together a quick submission for the Senate enquiry, as follows:

Current Australian climate change targets truly do not reflect the gravity of the situation.
1) Human-induced change would be more catastrophic than any in history;
2) Upfront economic costs alone are trifling compared to later costs - verified by international reports;
3) Requisite change calls for economic upheaval; it is currently an ideal time to introduce change, for governments to back economic and industry restructure - at no other time will there be such opportunity and willingness for governments to invest - so this investment can be made in meeting both challenges at once;
4) Governments need to display leadership; show the electorate that long-term stability and prosperity is the aim, rather than short-term attempts at propping up dying industries.

It is clear to all that the government's climate change map is both weak and insufficient to effect the necessary change.

Why are we not taking action at the very best point where change can be achieved?

Economic stimulus can achieve both the long-term and short-term goals if it is specifically and entirely directed at initiatives - and industry-adjustment incentives - that protect the environment, species, and biodiversity that we currently have stewardship over.

Generations will otherwise remember this time as a pivotal moment of lost opportunity.


Regards
Stephen Simmonds

There is no recession in Australia

Economics is a funny ol business. It's all about confidence, which is what the G20 group of world leaders has been trying to do in London. That is, instill confidence in the rest of the world to spend, spend, spend. Consumers: buy stuff. Capital owners: invest. Reporter: "what would it take for this conference to be a success". World Leader: "for you to report it as a success".

For some reason, France and Germany have a different agenda. They want to develop a new economic order. Which is laudable, but the world is currently in panic mode, and first things need to come first. Meanwhile, America and China are working on that new order anyway at the highest level (at the London talks, Obama and Hu Jintao got together, releasing a joint communique twice the length of that of the US and Russia). Which is about what you'd expect, given the changing nature of global economics over the past 15 years.

Confidence took a tumble courtesy of the unstable nature of capitalism. That and a frenzy of unviable home lending in the US (subprime) which was subsequently wrapped into little-understood securities to spread poison thorought the world's financial institutions, which subsequently took a tumble, refused to trust one another, refused to lend to businesses, which business subsequently started laying off staff, which meant those that went stopped spending and those that stayed were too scared of layoffs to spend. Enough of them anyway.

Australia's a bit different: if you can't make the mortgage repayments, you still owe: you can't leave an empty house as complete settlement of debt. Further, the banks have greater asset-backing requirements, so are in good shape. Still, the global market downturn has greatly affected Australia's resource exports, and subsidiaries of foreign companies - such as GM-Holden - are not immune.

Confidence. Australia is not officially in recession yet. The government and other authorities have been at pains to point that out, trying to prop up confidence. But it has been as good as admitted that when the next quarterly figures are released, Australia will officially be in recession.

The government's financial stimulation packages (effectively giving away money) have had some effect. Consumer spending over the past quarter hasn't really sunk - as it has in other countries. But people have to a fair extent been squirrelling away the bounty. All it has really shown is that it can have an effect, but to have the desired affect needs a substantially greater sum than has been spent so far. So even if the World Bank and OECD can laud Australia's initiatives and give a tick to the (relative!) robustness of the economy, there is a lot further to sink before enough confidence returns.


* A note related to the title: OECD data confirms New Zealand has been experiencing negative GDP growth since the beginning of last year (and thus almost a year into recession). Quite a surprise to hear that on the radio yesterday. Australia, by comparison, has yet to hit the second quarter of contraction which officially defines recession.

Financial crisis (#2 of 2008)

The second-biggest event of 2008 may not have much long-term impact.

It's salient to note that the most severe global financial crisis ever has not brought about significant innovation in ideas or in actions. It's likely that the effects will not last as long as the Great Depression, for a couple of reasons - both related to lessons learnt from the 1929 crash.

First, international response has centred around large-scale Keynesian increases in public spending, to counter the widespread retreat of private capital. Second, the Depression was prolonged by trade protectionist policies, which isolationism is not being practiced today to any great degree.

But the world's leaders and policy-influencers are too busy reacting to the crisis to re-think their approach to financial systems. Certainly, there is a long-overdue recognition of the need to return to diligent regulation and monitoring of financial markets. It's quite plausible that financial regulation will become tougher than ever - which will make capitalists squeal, as not only is regulation anathema to "free" markets, but it also imposes transaction costs. Yet at the very minimum, regulation should force a far greater transparency to the financial instruments that are traded - which is one of the roots of the crisis: that is, trade in little-understood financial instruments into which were wrapped toxic unsustainable "low-doc" housing loans.

"If you don't fully understand an instrument, don't buy it" - Emilio Botin, chairman of Santander, Spain's largest lender.

But that is typically abrogated by the philosophy that

"If you look for high profits, you have to face higher risk".

Botin clearly didn't follow his own advice. The trouble is, if "everyone is doing it", the risk doesn't seem so great - it's spread around. That's one of the reasons Bernard Madoff got away with the largest financial fraud in history (just the same old pyramid - or Ponzi - scheme where dividends were paid from capital, not from investments, and more and more people were sucked in). Nobody understood how his instruments could make money, but the return was good and Madoff was "reputable". Financial regulation has to go far enough so as to prove or disprove any such scheme before the size gets into the tens of millions, let alone billions.

In the end, risks that were spread around were so great that they spread globally.


Last but most importantly, a very large opportunity has been missed - so far - by governments around the world. In attempting to revive capital formations with large injections of government money, it is the ideal time to foster - force - change in investment patterns to greatly favour lower carbon emissions. Instead, the financial crisis looks to be derailing the cause of remission of global warming in the crucial years in which the environmental crisis is now fully admitted.

World: The structure of capital, part 1: demutualisation

I'm reminded of my thesis work in economics. The topic was demutualisation, but it threatened to blow out, because there was a very interesting strand to chase down.

The most successful organisational structure, from the point of view of capital, is the joint-stock company. It's unparalled in its success in accumulation, that is, raising more capital. In this sense, profit distribution can be seen as the bait, a necessary cost of accumulation. Some might call this view a little topsy-turvy - isn't the prime aim of capital agglomerations to generate profit? Hmm, it's all a matter of perspective.

Mutual organisations were largely formed in the 19th century, for particular purposes - largely social and benevolent. Over the latter half of the 20th century (in particular) there was a great rush of demutualisation for a number of reasons. The main two that I saw were: managerial bias in favour of joint stock companies (in this "managerial" category I also include corporate advisors); and a far greater ability to raise capital - particularly through share issues.


That was largely my thesis. The deviant strand was an interest in the changing structure of capital formation over time: the forces involved, the mechanisms, and in particular the implications. There's a lifetime of research in this, and I still have some ambitions.


One important aspect that cannot escape me is the control of these capitals. This control is shared between managers and shareholders. Large shareholdings are sometimes favoured, in that their degree of influence provides clarity. Rupert Murdoch, for example. This clarity can also be achieved by consistent managerial vision. But in the competitive world, this consistency is seldom achieved, as managers change tack, absorb fads, try something different to get that competitive edge.

At this time and this place, I'm just ruminating. Next up will be a countervailing, almost contradictory perspective, on the rise of superannuation funds.