Freefall: America, Free Markets and the Sinking of the World Economy, by Joseph Stiglitz

New York: W.W. Norton & Co., 2010, pp. 361.

As the title of the book makes clear, Joseph Stiglitz tells the story of the housing bubble's emergence and bursting.

Stiglitz points out now-familiar problems, and in particular runaway securitization in a lack of transparency, an excess of complexity, poor corporate governance, the "too big to fail" syndrome and the rest. He also notes the lax regulation that permitted such things as "questionable" accounting, massive information asymmetries, predatory lending and of course, the conflicts of interest in the inclusion of commercial banking and investment banking in the same firm-in cases a matter of regulation failing to keep up with innovation in the development of financial devices, though in others a matter of the financial community's effective resistance to and reversal of regulations, such as the Gramm-Leach-Bliley Act of 1999 which repealed Glass-Steagall), and the irresponsibility of the Federal Reserve as overseen by Alan Greenspan and Ben Bernanke. (Stiglitz also provides effective and accessible critiques of the intellectual background to the situation, in the orthodox teaching of economics.)

He then moves on to analyze the Federal government's response to the mess. Just as the Clinton administration continued along the economic course set under Reagan-Bush I (as Stiglitz noted in his earlier book, The Roaring Nineties), he finds continuity rather than rupture in the transition from the Bush administration to Obama's tenure-which symbolically saw the return of right-winger Larry Summers to the Treasury, but not more liberal figures like Robert Reich, or this book's author.

In the chapter titled "The Great American Robbery" he details the story of how the bail-outs essentially pumped money into the system with virtually no strings attached, and in the absence of the kinds of meaningful reform that would resulted in a sounder financial system over the long term, while the Federal Reserve massively expanded the money supply. (Showing how different things could have been, Stiglitz discusses alternative approaches to the problem, such as a "trickle-up" bail-out approach which would have helped the banks by helping homeowners meet their obligations. He also offers a wide array of ideas for reorganizing the financial system on a more sustainable basis, not least the restoration of Glass-Steagall "in some form," as well as the establishment of an Electronic Funds Transfer System that would enable everyday financial transactions to occur outside the banks, and a Financial Products Safety Commission to facilitate tighter regulation of activities like mortgage lending and the packaging and selling of derivatives.) Stiglitz also examines the stimulus program and finds it to be too slow in arriving, too small, too short-term and too poorly directed-especially in the parts going into tax cuts, and the others that are (incompletely) filling in the holes in state budgets rather than launching new initiatives-or doing anything meaningful about the mortgage problem.1

Stiglitz is a Keynesian, and the influence of Keynesian theory on his thought is not merely acknowledged but quite apparent. However, a prior knowledge of it is not essential for understanding the book, Stiglitz's concern being practical rather than theoretical, and Stiglitz quite ably explains the relevant concepts in what is overall a lucid and useful account of the story as it recently stood-as well as some real ideas about what might plausibly be done to avoid a repeat.

Still, at the end it struck me that Stiglitz provides rather modest grounds for optimism about corrective action to address the situation-certainly in contrast with Keynes's earlier confidence about the chances that ideas had against the power of vested interests (even as Keynes famously owned up to the influence those vested interests had on the "marketplace of ideas"). Stiglitz assumes the inevitability of change, given the alternatives, in fact comparing the collapse of Lehman Brothers to the fall of the Berlin Wall, what the latter spelled for Communism marking the same for neoliberalism. Nonetheless, it still seems to me that the latter still has rather a long life ahead of it.

NOTES
1. It may seem odd to describe an $800 billion stimulus as "too small." However, divided over two years, it pumped a mere $400 billion into a $14 trillion annual economy-equal to about 3 percent of GDP. The New Deal, even while falling far short of the initial vision, saw a much greater (and more sustained) rise in government spending, the size of the Federal government relative to GDP quadrupling between 1929 and 1940.

The General Theory of Employment, Interest and Money by John Maynard Keynes

John Maynard Keynes's work has been receiving renewed attention these last two years. Much of what has been said about Keynes's work has, of course, been wildly inaccurate, and a reappraisal of Keynes's ideas as he expressed them himself only too timely.

Keynes's key book is, of course, The General Theory of Employment, Interest and Money, which I suspect is yet another of those old, large books routinely mentioned but rarely read--the more in as it has a reputation for difficulty. In the preface Keynes informs the reader that he is chiefly addressing his fellow economists, even if he hopes "that it will be intelligible to others." His intellectual starting point, in his presentation of his argument, and indeed, his thought process, is the neoclassical state-of-the-art as it stood in the 1930s, much of it recognizable to anyone acquainted with marginalism, but many of his references and much of his terminology is comparatively obscure now, especially to non-specialists.

Nonetheless, the difficulty of Keynes's manner of presentation is not a reflection of some great obscurity on the part of the book's ideas, which are actually fairly simple, and it should be noted, presented quite accessibly at a number of points inside the text itself (such as the outline offered in chapter three, and the summary in chapter eighteen).

Essentially, Keynes's argument is that the classical, "Ricardian," supply-side view of economics, is wrong. Consumption is the end of all economic activity, and without consumption--without "effective demand" (a concept Keynes borrows from Thomas Malthus)--there is no incentive to produce. Demand depends on income, but not only income, because of a crucial, previously unconsidered factor--that the "propensity to consume," both that of the community and the individual, declines with increasing wealth, making society vulnerable to shortfalls in this area. The money in the hands of working people is the money most completely and reliably spent on consumption, making effective demand dependent on employment, which in its turn is dependent on investment, while investment is dependent on the incentive to invest (i.e. purchase capital assets out of income). This, in turn, depends "on the relation between the schedule of the marginal efficiency of capital and the complex of rates of interest on loans of various maturities and risks."

In other words, businessmen have to expect that the return on their investment will be higher than the cost of the capital involved for investment to appear worthwhile--and this confidence a fickle thing because of two related aspects of life economics had previously tended to overlook in its fixation on the idea of unfailingly rational, utility-maximizing Economic Man. This is the reality that human beings make decisions in conditions of uncertainty, one result of which is "that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic." And that, in turn, means that "economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man," and also that "slumps and depressions are exaggerated in degree" as was the case with the Depression during which Keynes was writing.

This image of economic life naturally led to certain prescriptions, perhaps the most famous of which is the pursuit of a low interest rate, so that the marginal efficiency of capital, and with it, employment-creating investment, are attractive. (Indeed, Keynes specifically suggests in chapter twenty-two the path of remedying the trade cycle by lowering the interest rate, ideally "abolishing slumps and keeping us permanently in quasi-boom.") However, as he states in the final chapter (where he offers his most focused treatment of his theory's implications for policy), it also seems to him that merely tinkering with interest rates would be inadequate to attain that goal, and so he called for "a somewhat comprehensive socialisation of investment . . . [as] the only means of securing an approximation to full employment." (Indeed, a drastic redistribution of income is a step governments might take to stimulate consumption as booms go on--again, rather than putting an end to growth.)

Keynes makes very clear in his book that he did not anticipate the abolition of inequality or private initiative, let alone economic individualism (even if he viewed the reduction of inequality as an object that was both desirable and achievable). He also anticipated the socialization he described as coming about slowly, and still leaving the economy relatively decentralized.

Contrary to popular misconceptions, Keynes also recognized the limits of his ideas. There was, as he noted in chapter fifteen, limits to what the monetary authorities could do--cases where governments could do little to increase or decrease liquidity. Similarly, there is virtually no discussion of deficit spending in this book. (Indeed, this only gets one mention in chapter eight, where it is discussed as a situation in which governments might find themselves while providing unemployment relief in hard times, not as some cornerstone of his theory.) Given the emphasis on putting money into the hands of those who have least and therefore can be counted on to spend what they can get, it is also quite clear that upper-class income tax cuts are a dubious form of economic "stimulus" from the standpoint of his theory.

Why all the confusion, then? Given how often ideas like these are received secondhand, a measure of distortion was inevitable, especially given the hostility they have attracted in some quarters. This would seem to have been exacerbated by the broader inattention to macroeconomics common in the field, the fact that the "synthesis" of Keynes's thought with the neoclassical thinking he set up his theory against became so pervasive, and the subsequent evolution of Keynesianism into successor schools (some quite far removed from the initial theories). When all that is taken into account, the errors seem tiresomely predictable rather than surprising.

"How Long Till Human-Level AI?"

H+ magazine recently carried an article regarding a small-scale survey of experts (twenty-one of the attendants at the 2009 Artificial General Intelligence conference) on the question of when general artificial intelligence will arrive, and specifically when it will attain four milestones-Turing-level intelligence, the intelligence of a third-grader, the intelligence needed to do Nobel Prize-quality work, and finally the key Singularitarian outcome of superhuman intelligence. Interestingly, fifteen of the twenty-one-seventy percent-of them predict a computer will pass the Turing test by the 2040s. A significant percentage answered "never," however, particularly in regard to the question of when a computer would achieve superhuman intelligence-nine of the twenty-one answering in this way, the greatest unanimity the survey finds on any point. However, that still leaves the doubters of that particular outcome in the minority, eleven of the twenty-one predicting this actually happening by the 2040s. (Incidentally, the second most popular guess was that computers would be doing Nobel-quality science by the 2020s, with a full third of the respondents giving that answer.) Of course, this is a limited examination of the views of a small, pre-selected group (these all being AI specialists rather than a more general sampling of computer scientists), and this is a particularly tricky kind of prognostication, so that my guess would be a likelihood on their part to err on the side of overoptimism rather than the reverse. Nonetheless, that such a view is common is well worth noting, and the discussion (as well as the magazine more generally) well worth a look from those interested in the issue.

The Return of Neo-Medievalism?

A piece by Parag Khanna in Foreign Policy magazine (which came to my attention by way of Bruce Sterling, through Paul Raven of Futurismic) makes the case for a "neo-Medieval" vision of the "future that looks like nothing more than a new Middle Ages, that centuries-long period of amorphous conflict from the fifth to the 15th century when city-states mattered as much as countries," with all the disorder such a state of affairs may entail.

Khanna points to the long list of dysfunctional states; the weight of corporations, the absorption of states by international institutions like the European Union-as well as the concentrations of wealth in major cities that may be independent actors for all practical purposes; and the privatization of security implicit in gated communities "from Bogota to Bangalore."

This is quite a lot to think about, of course. Khanna, however, offers little that is new. There was a lot of this sort of talk back in the 1990s, for instance, and not just in post-cyberpunk science fiction novels like Neal Stephenson's Snow Crash and The Diamond Age, or Ken MacLeod's The Star Fraction (and of course, a good bit of Sterling's own writing). Robert Kaplan penned a couple of pieces about the key trends, his well-known "The Coming Anarchy" and his worthwhile but less often cited "Was Democracy Just a Moment?", while Martin Van Creveld penned a book titled The Rise and Decline of the State. And of course, two decades earlier, Hedley Bull raised the point (and used that terminology) in his classic study of international relations, The Anarchical Society (1977).

Still, reading the piece, I wonder: might this sort of talk be making a comeback, along with the declinist rhetoric which also happened to be popular in the early '90s (a fairly fresh example of which Paul Krugman has just given us in the New York Times), shades of the decline of Rome in stark contrast with the "New Rome" triumphalism of the neocons earlier in this decade (not unquestioned, some seeing the seeds of Roman-style decline in Roman-style imperium, but still a predominant note then in a way that it is not today)?

Writing in the Summer 2009 Parameters, P. Michael Phillips, in the article "Deconstructing Our Dark Age Future," argued for a connection, with the worries about a new dark age coming from a link-up of anxiety about American decline with an exaggerated view of the influence of non-state actors.

Phillips struck me as overly sanguine in his assessment, but at the same time, it is easy to exaggerate the sense of rupture (and Bull's discussion, ultimately dismissive of the idea, made plenty of good points about this).

For a start, state dysfunctionality and private violence do not really translate to neo-Medievalism unless power and to some extent, authority and legitimacy, clearly devolve from the state unto actors below its level-a relatively rare and aberrant occurrence today, even if not unknown. Additionally, while private military corporations are justly grabbing headlines, it may be quite a stretch to picture them playing lead combat roles in conventional military operations (though admittedly this may not matter much if such operations are regarded as a thing of the past, with "real" warfare the "low-intensity" stuff where the PMCs can be big players), or exercising primary control over really large tracts of territory. At the same time the "Greater Chinese Co-Prosperity Sphere" and the North American Union of which Khanna writes would seem a long way away from approaching the European Union, an institution which I think will prove more robust than its critics expect, but which also has real limitations. Meanwhile, state capitalism made a big comeback as the resource politics game heated up (natural resources, because of their "placeness," lend themselves to territorial control, and have certainly given statism in nations like Russia more room for maneuver), while those giant corporations came hat in hand to-who else?-the state for trillions of dollars in bail-out money amid the duress of the 2008 crisis.

In short, we're not quite living out Snow Crash. But it's also a mistake to overlook many of the trends (economic privatization, regional economic inequalities, state vulnerability, etc.) involved, which could translate to exactly that if the going gets tough enough-and are already far from trivial.

$123 trillion by 2040?

Robert Fogel writing in Foreign Policy magazine, makes a case for a $123 trillion (that's actually the piece's title) Chinese GDP by 2040. This gives it an incredible $85,000 per capita GDP.

Spectacular claims like this naturally grab my attention, but the article predictably struck me as falling far short of that promise. His supporting arguments contain little that is really new-he points simply to improvements in education and labor productivity, while pointing to ways in which Chinese output, private initiative and consumerist tendencies may have been underestimated. Interesting, to be sure, but hardly a convincing case that China will repeat its performance over the last thirty years in the three decades to come-a questionable proposition given the evidence seen to date, as well as China's considerable internal problems (ecological, social, political) and a little thing called the law of diminishing returns, all of which suggest the curve flattening long before that point (even if China is left with a relatively high standard of living).

However, it is far from the only questionable stat on offer. Fogel estimates that this would give China forty percent of a Gross World Product of $300 trillion (which would make today's First World income levels the average)-which presumes the sustenance of a scorching hot 5 percent a year global growth rate for the next thirty years.

Fogel offers even less explanation for this more subtly introduced, but almost equally spectacular claim. The world sustained something like this through the 1960s, admittedly, but that was a different and much briefer period, and even before "the Great Recession," the prospects for a repeat were dim. Indeed, he offers at least one good argument against it. While the U.S. also does well in his projection (tripling its GDP to some fourteen percent of the global total he predicts, a feat requiring it to reenact its spectacular post-World War II boom), he predicts European stagnation, actually wasting a quarter of his space rehashing the familiar claims of Euroskeptic conservatism, denigrating Europe's relatively labor-friendly economic policies, and heaping disdain on the Europeans for their preference of leisure time to the more extreme forms of consumerism, and their low birth rates (though to his credit he acknowledges China's demographic issues as well).

For a corrective, one should probably check out Minxin Pei's "Think Again" article, which offers a lucid refutation of the kind of hype Fogel promotes. (Also recommended to those willing to consider Pei's argument is a 2006 piece in the same magazine by Pei on corruption, waste and elite irresponsibility in China.)