Chomsky's Economics

There is a type of precision of recall, a scrupulousness of language, unremarkable in writing, which, however, becomes very impressive in oral testimony. Noam Chomsky's interviews have this quality. However, on examination, this is a false precision, or akribeia,  rather than the good faith testimony of witnessed alethia because, to paraphrase Aristotle, education is misused if it expresses itself as greater precision than the subject matter allows.

The ancient Greeks were aware that oral testimony may fail to hit the mark by reason of being too studied. After all, a precise and persuasive speech may have been written by a professional and then memorized by a nincompoop. Alternatively, the speaker may simply be a pedagogue who has been saying the same thing for many decades. One give away is the absence of a quality of oikonomia- a pragmatics of give and take, a fine balancing of authority and accommodation inculcated by habits of good judgement or effective administration- instead of which we find a paranoid prolixity and humorless rigidity of mind.

It is the latter type of akribeia we find in Noam Chomsky's economic views, which it must be said, are not unusual on the Left, but are nevertheless deeply racist and gender biased.

In an interview he gave 10 years ago, he says-

In my view, the breakdown of the Bretton Woods system in the early 1970s is probably the major international event since 1945, much more significant in its implications than the collapse of the Soviet Union.

The Bretton Woods system was a straitjacket imposed by the West upon the rest of the world such that it could retain the benefits of Colonialism without the trouble and expense of administering and defending Colonies. It broke down because the US financed its war in Vietnam by printing money.  Primary producers had previously experienced worsening terms of trade. Now they saw that their 'hard currency' reserves were taking a haircut. So, Iran and Venezuela and Nigeria and Saudi Arabia and so forth developed countervailing market power and created an 'offshore' Financial system where they could get a better return.

Floating exchange returns meant that Japan and then Korea and the 'Tigers' could see rapid improvements in living standards because countries were rewarded for what they exported not their previous Colonial or Financial standing.

Chomsky has a White Man's perspective. He does not see that the end of Bretton Woods was the end of the Financial aspect of Imperialism. Naturally, as 'rents' accruing to the West diminished, growth languished during a period of 'stagflation' as older savers found their real balances depleted while baby boomers paid off their mortgages on the cheap.

From roughly 1950 until the early 1970s there was a period of unprecedented economic growth and egalitarian economic growth.

Egalitarian only if you were a White Male. Wage differentials with African Americans diminished most during the Forties- not subsequently. However, the attempt to make race and gender based wage and service provision discrimination permanent during the Fifties and early Sixties failed. Some White Men might feel 'egalitarianism' had declined because they could no longer rape female subordinates or lynch 'niggers'. The elderly also started getting a better deal as did savers. Why should Chomsky object to this?

So the lowest quintile did as well — in fact they even did a little bit better — than the highest quintile. It was also a period of some limited but real form of benefits for the population. And in fact social indicators, measurements of the health of society, they very closely tracked growth. As growth went up social indicators went up, as you’d expect. Many economists called it the golden age of modern capitalism — they should call it state capitalism because government spending was a major engine of growth and development.

White Males and their dependents voted for this government spending because they monopolized the benefits that flowed from it. They didn't want to share this with women and blacks. That's why they stopped supporting 'Big Government'. In other words, once the prospect of genuine, color and gender blind egalitarianism was on the table, White Males wanted none of it.

In the mid 1970s that changed. Bretton Woods restrictions on finance were dismantled, finance was freed, speculation boomed, huge amounts of capital started going into speculation against currencies and other paper manipulations, and the entire economy became financialized.

A financialized economy is one where you can't discriminate on the basis of color or race or even nationality. Speculation reduces Uncertainty by itself. Things don't have to be run by a bunch of elite White Men who went to Prep School and College together. Kuwait and Singapore can rival New York or London.

The power of the economy shifted to the financial institutions, away from manufacturing.

Just as the economy had previously shifted away from agriculture which meant you didn't need to have a deferential class of share croppers or agricultural laborers whose kids must not get a decent education for fear that the supply of labor will collapse and food security will be lost.

Finance is a service which depends on other services like Education and Justice and Information Technology etc. Reducing uncertainty and improving allocative efficiency is the only way Society can be made more fair. Redistributing rents to a portion of the White, male, working class decreases Equality.

And since then, the majority of the population has had a very tough time; in fact it may be a unique period in American history.

Yes. The period is unique in that discrimination against Women, Blacks etc was made illegal and undermined by market processes. Prior to 1965, racist immigration rules made it very difficult for Indians to settle in the US. Forty years later, an Indian origin woman became President of Pepsi. Financial markets reacted favorably precisely because they were no longer dominated by White Men of a certain class. Only competence, not color, matters.

There’s no other period where real wages — wages adjusted for inflation — have more or less stagnated for so long for a majority of the population and where living standards have stagnated or declined.

Coz Arabs and Nigerians and so forth aren't being cheated out of their natural resources.           

If you look at social indicators, they track growth pretty closely until 1975, and at that point they started to decline, so much so that now we’re pretty much back to the level of 1960.

Life expectancy is a 'social indicator'. It is a decade higher than in 1960 despite great changes in attitudes to sex, drugs, guns and so forth.

There was growth, but it was highly inegalitarian — it went into a very small number of pockets.

Once White Male Americans had to compete with Women and Blacks on a more equal playing field, they lost the economic rent they previously enjoyed. Egalitarianism works that way- it erodes rents on color and gender and inherited power.

There have been brief periods in which this shifted, so during the tech bubble, which was a bubble in the late Clinton years, wages improved and unemployment went down, but these are slight deviations in a steady tendency of stagnation and decline for the majority of the population.

Technological change entails structural economic change- this means there are winners and losers because different people have different mobility rates between occupations.

Financial crises have increased during this period, as predicted by a number of international economists.

They decreased during the 'Great Moderation'- i.e. the mid Eighties and mid Oughties. The impact of the Financial Crisis on jobs in the US was very short-lived.

Once financial markets were freed up, there was expected to be an increase in financial crises, and that’s happened.

The opposite happened. There was a big hike in structural unemployment as a result of Thatcher & Reagan's inheritance of 'stagflation' which took a long time to dissipate. By contrast there has been rapid recovery of employment from every subsequent crisis.

This crisis happens to be exploding in the rich countries, so people are talking about it,

While China and the BRICs were surging ahead.

but it’s been happening regularly around the world — some of them very serious —

but very temporary

and not only are they increasing in frequency but they’re getting deeper.

Chomsky said this in 2009 when people did think there would be a big and lasting impact on Employment. It didn't happen. Instead, there was a continuation of the trend of low or negative real wage growth for jobs which will disappear anyway.

And it’s been predicted and discussed and there are good reasons for it.
About 10 years ago there was an important book called Global Finance at Risk, by two well-known economists John Eatwell and Lance Taylor.

These guys proposed a 'World Financial Authority' which would have been a White Man's club continually criticizing the Banks of developing countries so as to reduce their credit rating and divert global financial flows to London and New York.

In it they refer to the well-known fact that there are basic inefficiencies intrinsic to markets.

This is because there are 'missing markets'.

In the case of financial markets, they under-price risk.

In a credit crunch, they over-price it- or ration credit in a discriminatory fashion.

They don’t count in systemic risk — general social costs.

This is a separate point to do with externalities. However Pigouvian taxes replace the 'missing market'.

So for example if you sell me a car, you and I may make a good bargain, but we don’t count in the costs to the society — pollution, congestion and so on.

So, Carbon taxes, Congestion charges etc are required.

In financial markets, this means that risks are under-priced, so there are more risks taken than would happen in an efficient system.

Financial Markets can become incentive incompatible. If you get a bonus up front for doing a deal which will collapse in a years time, you go ahead and do it unless there is a reputational or penal cost.

The solution here is to have more financial centers so that arbitrage improves. Part of the problem with the crash was that you had stupid Germans financing crooked Americans because German financial centers were less developed. In other words, if Germany and other such countries were more 'financialised', then global contagion risk would go down.

And that of course leads to crashes. If you had adequate regulation,

You would have rent-seeking and a nice cozy White Man's club.

you could control and prevent market inefficiencies.

Nonsense! You'd have a flourishing black economy.

If you deregulate, you’re going to maximize market inefficiency.

Not if financialisation everywhere increases so global information asymmetry falls and arbitrage reduces Uncertainty and boosts growth the way it is supposed to.

This is pretty elementary economics.

It is too elementary and applies only to a closed Economy.

They happen to discuss it in this book; others have discussed it too. And that’s what’s happening. Risks were under-priced, therefore more risks were taken than should have been, and sooner or later it was going to crash.

The reason 2008 was believed to be a big crash was that Bush's Iraq War had been so mismanaged that the nightmare of 'peak oil' had revived. The Russians and Venezuelans and Saudis etc were laughing all the way to the bank while the people who elected Bush, or his poodle, Blair, realized that they'd be picking up the tab for the disaster for decades to come. Moreover, we also realized over the next couple of years that most College degrees were worthless. Thus our kids weren't all gonna be wearing sharp suits and appearing on the 'Apprentice' or working for white shoe Law firms or Hedge funds or running their own IT company. Instead they'd move back home and have to get jobs as Uber drivers.

Nobody predicted exactly when, and the depth of the crash is a little surprising. That’s in part because of the creation of exotic financial instruments which were deregulated, meaning that nobody really knew who owed what to whom.

Not a big problem as we subsequently discovered. The State taking on the down side risk did not have any inflationary effect. Instead a 'liquidity trap' prevailed.

It was all split up in crazy ways. So the depth of the crisis is pretty severe — we’re not to the bottom yet — and the architects of this are the people who are now designing Obama’s economic policies.
Dean Baker, one of the few economists who saw what was coming all along, pointed out that it’s almost like appointing Osama bin Laden to run the so-called war on terror. Robert Rubin and Lawrence Summers, Clinton’s treasury secretaries, are among the main architects of the crisis. Summers intervened strongly to prevent any regulation of derivatives and other exotic instruments. Rubin, who preceded him, was right in the lead of undermining the Glass-Steagall act, all of which is pretty ironic. The Glass-Steagall Act protected commercial banks from risky investment firms, insurance firms, and so on, which kind of protected the core of the economy. That was broken up in 1999 largely under Rubin’s influence. He immediately left the treasury department and became a director of Citigroup, which benefited from the breakdown of Glass-Steagall by expanding and becoming a “financial supermarket” as they called it. Just to increase the irony (or the tragedy if you like) Citigroup is now getting huge taxpayer subsidies to try to keep it together and just in the last few weeks announced that it’s breaking up. It’s going back to trying to protect its commercial banking from risky side investments. Rubin resigned in disgrace — he’s largely responsible for this. But he’s one of Obama’s major economic advisors, Summers is another one; Summer’s protege Tim Geithner is the Treasury Secretary.

These guys did a good job in the sense that Obama was re-elected. After all, that's what Presidents are interested in. One can pretend that money should have been given to the Rust belt while the Bankers should have been reduced to giving blowjobs at truck stops. But this would have hastened the collapse of the real economy. Welcome to Venezuela circa 2019!

None of this is really unanticipated. There were very good economists like say David Felix, an international economist who’s been writing about this for years.

Felix thought capital controls a good thing and praised Keynes for getting them written into the Bretton Woods system. But this meant that White Men with an inherited advantage derived from Colonialism were able to continue to extract a rent even though the Colonies were now free.

And the reasons are known: markets are inefficient; they under-price social costs. And financial institutions underprice systemic risk. So say you’re a CEO of Goldman Sachs. If you’re doing your job correctly, when you make a loan you ensure that the risk to you is low. So if it collapses, you’ll be able to handle it. You do care about the risk to yourself, you price that in. But you don’t price in systemic risk, the risk that the whole financial system will erode. That’s not part of your calculation.

What is Chomsky saying? Presumably that the lead banker will syndicate the loan or securitize it and sell it off as fast as he can. Only if there is information asymmetry- e.g. an elite Boy's Club- can this turn into systemic risk. So it's a good thing, globally, when elite centers screw up. This forces the rest of the world to develop their own financial centers. The system ceases to be oligopolistic. The Market becomes an open one of price takers. Arbitrage can do its job to reduce Uncertainty and increase allocative efficiency. But all this depends on the 'Rest' catching up with the financialisation of the 'West'.

Well that’s intrinsic to markets — they’re inefficient.

Open markets aren't inefficient at all. Anyway, what is the alternative? A bunch of elite White Men running things? Why would the rest of the World trust these guys?

Robin Hahnel had a couple of very good articles about this recently in economics journals.

Hahnel was a big fan of Hugo Chavez. A true friend to the Venezuelan people- I don't think.

But this is first year economics course stuff — markets are inefficient; these are some of their inefficiencies; there are many others. They can be controlled by some degree of regulation, but that was dismantled under religious fanaticism about efficient markets, which lacked empirical support and theoretical basis; it was just based on religious fanaticism. So now it’s collapsing.

Religion says all humans have a soul which is equally valuable. The Enlightenment disagreed. White Men are better than Women and Darkies. Regulation is about keeping Women and Darkies and Plebs in their place. Markets can't do it. So, Chomsky is right- they are inefficient in keeping White Men at the top of the food chain the way Kant and Hume intended.

People talk about a return to Keynesianism, but that’s because of a systematic refusal to pay attention to the way the economy works.

Has Chomsky been paying attention to the way the economy works? Perhaps. It is a full time job. Maybe that's why he is so shite in his own field.

There’s a lot of wailing now about “socializing” the economy by bailing out financial institutions. Yeah, in a way we are, but that’s icing on the cake. The whole economy’s been socialized since — well actually forever, but certainly since the Second World War.

By whom? The Elders of Zion? The Lizard People from Planet X?

This mythology that the economy is based on entrepreneurial initiative and consumer choice, well ok, to an extent it is. For example at the marketing end, you can choose one electronic device and not another. But the core of the economy relies very heavily on the state sector, and transparently so. So for example to take the last economic boom which was based on information technology — where did that come from? Computers and the Internet. Computers and the Internet were almost entirely within the state system for about 30 years — research, development, procurement, other devices — before they were finally handed over to private enterprise for profit-making. It wasn’t an instantaneous switch, but that’s roughly the picture. And that’s the picture pretty much for the core of the economy.

Where were Computers and the Internet before they came within the state system? They were within the minds of private individuals. These individuals saw their country was in danger from ruthless dictators and thus took employment with the State so as to defeat those vile enemies. Indeed, the State has always burgeoned only because individuals saw some clear and present danger and banded together under its banner to scotch that threat.

The state sector is innovative and dynamic.

Nonsense! Individuals within it may be- or, more often, they may be rent-seekers simply.

It’s true across the board from electronics to pharmaceuticals to the new biology-based industries.

All were originated by individuals, not the State.

The idea is that the public is supposed to pay the costs and take the risks, and ultimately if there is any profit, you hand it over to private tyrannies, corporations.

This is better than letting them pool in the pockets of the King or President-for-life and his own hereditary minions. The public does not pay the costs nor assumes the risks of innovation- unless it buys shares for that specific purpose. It is not the case that we vote for Governments which claim to do so on our behalf. Why? Because we don't believe our elected politicians are great scientists or industrialists. Suppose the Govt. said- we'll do R&D. Then we'd vote for inventors not folksy demagogues. You'd have to have a PhD in a relevant discipline before being allowed to participate in a Legislative debate. This would be Technocracy- not Democracy.

If you had to encapsulate the economy in one sentence, that would be the main theme.

'The economy is the state' is such a sentence. Nobody would vote for it coz if the business of Government is business, then no Governance will ever take place. Civil servants and politicians will be too busy baking bread or driving milk trucks to do anything else.

When you look at the details of course it’s a more complex picture, but that’s the major theme.

A foolish theme!

So yes, socialization of risk and cost (but not profit) is partially new for the financial institutions, but it’s just added on to what’s been happening all along.

Very true! The state produced nice continents and rivers and mountains. Then the fucking private sector came along and just grabbed that land for themselves! Who made Fruits? It was the Dept. of Agriculture not the United Fruit Company! What about Water? It was invented by the Dept. of Water and Sanitation. Now it is being sold by Perrier! Who puts the pepperoni on the pizza and puts it into a nice box and delivers it to your door? It is the Dept. of Pizzas. Yet Domino's gets all the profits!

As is well known, Money was created by the International Monetary Fund. Yet my Bank is charging me money for my overdraft!

It’s rather striking to notice that the consensus on how to deal with the crisis in the rich countries is almost the opposite of the consensus on how the poor countries should deal with similar economic crises.

Very true! When a rich guy needs money, he can borrow it easily coz off all the cool stuff he owns. When a poor guy needs money real bad, he can't coz he hasn't got a pot to piss in.

So when so-called developing countries have a financial crisis, the IMF rules are: raise interest rates, cut down economic growth, tighten the belt, pay off your debts (to us), privatize, and so on.

Right! My Bank Manager said I needed to tighten my belt. I explained that I couldn't coz of my morbid obesity. He said I should stop ordering so much takeout food and like maybe get a job or summat.

That’s the opposite of what’s prescribed here. What’s prescribed here is lower interest rates, pour government money into stimulating the economy, nationalize (but don’t use the word), and so on.

Why? Expansionary measures of this sort lower the real exchange rate and thus living standards which are based on 'the terms of trade'. Your stuff gets cheaper so  the demand for it rises and you get more work. It's like my Bank Manager telling me I can get work if I stop charging £1,000 per hour for sitar lessons and settle for £50 per hour teaching Econ. This is because I don't know how to play the sitar but do know how to teach Econ and will find a ready market at this price point.

So yes, there’s one set of rules for the weak and a different set of rules for the powerful.

Very true. If you are weak, the rule is don't get into a fight. Run away or, if you are morbidly obese, soil yourself and cry your eyes out. On the other hand, if you are strong, kick the shit out of anyone who tries to molest you.

As for the IMF, it is not an independent institution. It’s pretty much a branch of the U.S. Treasury Department — not officially, but that’s pretty much the way it functions. The IMF was accurately described by a U.S. Executive Director as “the credit community’s enforcer.” If a loan or an investment from a rich country to a poor country goes bad, the IMF makes sure that the lenders will not suffer. If you had a capitalist system, which of course the wealthy and their protectors don’t want, it wouldn’t work like that.

There is already a capitalist system within which risk-pooling and contract enforcement is done collectively so as to lower transaction costs. The I.M.F is only useful coz that's its day job.

For example, suppose I lend you money, and I know that you may not be able to pay it back. Therefore I impose very high interest rates, so that at least I’ll get that in case you crash. Then suppose at some point you can’t pay the debt. Well in a capitalist system it would be my problem. I made a risky loan, I made a lot of money from it by high interest rates and now you can’t pay it back? Ok, tough for me. That’s a capitalist system.

A country that defaults can still get loans of this type. But they are very expensive. Similarly, if I go bankrupt, I could still get money of a loan-shark. But, I'd get my head kicked in and end up as drug mule with a kilo of coke up my ass to repay the debt.

But that’s not the way our system works. If investors make risky loans to say Argentina and get high interest rates and then Argentina can’t pay it back, well that’s when the IMF steps in, the credit community’s enforcer, and says that the people of Argentina, they have to pay it back. Now if you can’t pay back a loan to me, I don’t say that your neighbors have to pay it back. But that’s what the IMF says. The IMF says the people of the country have to pay back the debt which they had nothing to do with, it was usually given to dictators, or rich elites, who sent it off to Switzerland or someplace, but you guys, the poor folks living in the country, you have to pay it back.

A good example of this was Suharto's Indonesia. The I.M.F, much to Stiglitz's disgust, played hard-ball. The upshot was that the Indonesians decided they couldn't afford Suharto. They got shot off him and prospered as never before.

And furthermore, if I lend money to you and you can’t pay it back, in a capitalist system I can’t ask my neighbors to pay me, but the IMF does, namely the US taxpayer.

But the US taxpayer elects legislators who insist that the Banking sector pay for this 'risk pooling' though their collective profits. There's nothing sinister in all this.

If my house burns down, 'my neighbors' pay to put it back up. That's not unfair. They knew that's the way an insurance scheme works. True if I burned down my house on purpose then I may be arrested and prosecuted and sent to jail. That's a different matter.

They help make sure that the lenders and investors are protected. So yes it’s the credit community’s enforcer.

But he doesn't break legs nor does he take it out of your ass in trade. Why pretend otherwise?

It’s a radical attack on basic capitalist principles, just as the whole functioning of the economy based on the state sector is, but that doesn’t change the rhetoric.

My getting fire insurance is not a 'radical attack on basic capitalist principles'. On the contrary, the possibility of risk-pooling and collective insurance is what makes Capitalism viable.

People can decide to pool their endowments under the banner of the State to achieve a particular target. This does not mean that the State achieved it. The People did. They may then decide to keep the resultant gains in private hands. This is not a sinister development. Indeed, it may be highly salutary. If the State can make profits without having to levy taxes, it feels less and less need for democratic and judicial legitimacy. A 'resource curse' can lead to Despotism. The masses are bought off with 'bread and circuses' while a Ruling Elite gets away with murder.

There is a pattern to Chomsky's thinking- one which involves an Adamic fall from an evanescent Paradise. Thus he believes 'internal language' appeared miraculously and uniquely. Then it started getting exteriorised and everything turned to shit coz 'Consent' could be 'Manufactured' because words can be used hypocritically or strategically.

In Politics, he thinks there was a brief moment when everything was just right coz POUM had the upper hand in Republican Spain. Then they fucked up or where fucked over, so everything turned to shit.

In Economics, Keynes is the hero coz there were no Bankers at Bretton Woods and, had Keynes got his way, Capital controls would have been multi-laterally enforceable- i.e. Rich White Men could rule the world for ever and ever on the basis of their inheritance of ill gotten gains. Then Nixon had to resile from the Bretton Woods system and everything turned to shit- even though many more darker people could climb out of poverty and cities like Dubai and Singapore and Shanghai started to look as good, or better, than London or New York.

'Mystery' is a favorite word for Chomsky. But it is linked, in theology, to Economia, which is the reverse of rigid rule following 'Akrebia' and which is about uncoerced coordination, risk pooling, contract enforcement and disaggregated  'parallel processing' decision making upon an Uncertain fitness landscape.

In particular, Chomsky is allergic to the role of co-evolved processes- like those which drive Financialization or the spread of a new Technology. The result is that he sees things as ab ovo evil save if they represent some unique pre-lapsarian event- though that event must have been evanescent.