A Strong State vs. The Market Mechanism in China

Under Marxist ideology, the Chinese economy was a command-and-control economy eschewing the market mechanism. Mao's collective farms provide us with a good example. The economy of the U.S.S.R., also Marxist, was based on production quotas and fixed prices. They changed by fiat rather than by changes in demand. State owned, or socialist, productive enterprises were given quotas based on the prior year's production (plus more). This push replaced that of producing more to sell more. Any hint of a market brought with it the stench of Capitalism. So one would suppose that China marked a significant departure when the government announced in 2013 that it would expand the range in which the yuan currency would float. Yet in 2019 in the midst of a trade tussle with the United States, the Chinese state demonstrated just how dominant the state still was relative to any market system.  

The full essay is at "Strong State vs. The Market Mechanism."

Is Modest Growth vs. Full Employment a False Dichotomy?

As Summer slid into Autumn in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separated expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Was the Chinese government really just one giant tease? I submit that the false dichotomy of moderate economic growth and full employment was in play. In short, the Chinese government did not want to over-heat even a stagnant economy even though the assumption was that full employment would thus not be realizable.

The full essay is at "Economic Growth and Full Employment in China." 

An Empire's Economic Scale Demands a Market System: The Case of China

A trend of increased-scale economies can be observed through history as city-states have given way to the increased military power of centralized Medieval kingdoms. Many of those expanded into Early Modern kingdoms as advances in military technology make it possible for kings to extend the territory under their control. Even empires have gotten bigger. Modern-day Germany was once considered an empire, as were Switzerland and the Netherlands. Today these polities are states in a modern form of empire, the EU. Similarly, the emergent United Colonies of America was considered to be an empire within the British Empire, with the individual colonies being viewed on both sides of the Atlantic as Early Modern kingdom-level polities on par with the states of the E.U. in the twentieth century. Similarly in China, as kingdoms were added, an old form of empire took shape. Because these enlargements came about gradually over centuries, it has been difficult for the human mind to recalibrate how the modern large empire-scale economies should be designed to take into effect the distinct challenges of the scale. We can see such an adjustment in the case of China as economic centralization came to be replaced by regulated markets, albeit with a sizeable involvement still of the government in the economy. 

The Emperor Kangxi of the Qing Dynasty. He ruled for 60 years, greatly expanding the size of the empire. (Source: Chinahighlights.com)

The full essay is at "The Case of China."

Is God the Invisible Hand?

A Baylor University survey on religion and economics in 2011 revealed something that may be distinctly American, culturally speaking. The results indicated that about “one in five Americans combine a view of God as actively engaged in daily workings of the world with an economic conservative view that opposes government regulation and [advocates] the free market as a matter of faith.”[1] Specifically, those Americans believed that the “invisible hand” of a competitive market is actually God at work. Put another way, the assumption is that the economy “works” because God wills it to by intervening directly in the market mechanism itself. Government regulation, in diverting economic supply and demand from “the invisible hand,” is thus sinful. Regulating the economy challenges God’s omnipotence (i.e., power) by interfering with God’s intervention in our daily lives via the operation of the market mechanism. 

The full essay is at "Is God for Regulation?"

1. Cathy Lynn Grossman, “Religion Colors Money Views,” USA Today, September 20, 2011. 

Addressing Systemic Risk: Beyond the Dodd-Frank Act of 2010

After the financial crisis in September 2008 in the U.S., the former chairman of the Federal Reserve, Alan Greenspan, admitted to a Congressional committee that his free-market notion that a market will automatically self-correct itself had a major flaw. He had come to this realization because the financial market for mortgage-backed bonds had failed to correct in terms of price for the dramatic increase in risk. Instead, that market, and that of overnight commercial paper, had seized up rather than simply adjust price to the decreased demand. Fear had paralyzed what had hitherto been thought to be a self-correcting market. The failures of Bear Stearns and Lehman Brothers introduced us to the concept of systemic risk, wherein the failure of a bank (or company) causes a market to collapse. Such a bank is thus too big to fail. If actualized, such risk interferes with even the basic operation of a market, not to mention its self-correcting feature. One question is whether banks that are too big to fail should merely be more adequately regulated or broken up, as the U.S. Supreme Court broke up Standard Oil in 1911.

Alan Greenspan, former chairman of the U.S. Federal Reserve Bank

   The full essay is at "Addressing Systemic Risk: Alan Greenspan."

Alan Greenspan on the Self-Regulatory Market

Two days after the LTCM bailout was agreed to in 1998, a worried Alan Greenspan, leaning toward raising rates at the time, cut the federal funds rate. It was not enough to calm the markets, and he cut it again three weeks later. . . . It was not the self-correcting powers of the markets but aggressive central bank intervention plus a new round of irrational speculation that provided a floor under the downward financial prices and the calamitous consequences of bad Wall Street decisions. It was not even the LTCM rescue alone by private banks that saved Wall Street” Madrick, p. 281). “Alan Greenspan learned no lessons from these events about the inherent instability of a completely free market in finance. He still insisted markets regulate themselves” (Madrick, p. 282).

For analysis, see the full essay at "The Self-Regulatory Market."

Source:

Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

See also Skip Worden, Essays on the Financial Crisis, available at Amazon.

The Market Mechanism: Complicit in E.U. Debt Crisis

According to The New York Times in late 2011, “How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.” In going through these culprits and how they interrelated, it should not be lost that the market mechanism itself can be held as suspect, for at the very least it enabled the furtive games to be played for far too long. Indeed, the market itself did not do a good job for years in providing accurate risk-return relationships.

The full essay is in, "Essays on the E.U. Political Economy," available at Amazon. 

A Weak Economy as a Competitive Advantage to the Largest Corporations

Size matters, at least in the business world. Richard Fuld, the last CEO and Chairman of Lehman Brothers, overextended "his" bank with risky real-estate and financial derivatives in part so Lehman Brothers would be as big as Goldman Sachs. 

Empire-building (and ego) aside, the largest corporations can indeed perform differently than smaller firms in an economy. In April 2013, it was clear that the biggest companies were outpacing smaller ones. Analysts estimated profits for the 100 largest companies in the Standard & Poor’s 500 stock-index to rise 6.6% in the second quarter, while earnings for the bottom 100 were expected to fall by 1.6 percent. Of all the profits earned by the companies in the S&P 500, 22% would be coming from the 10 largest companies, enabling them relatively more wherewithal with which to gain still more market share. Put another way, beyond a certain point, organizational size can protect or buffer a company in the midst of a languid economy. It is not only the market mechanism that accounts for this phenomenon.

The full essay is at "A Weak Economy as a Bonus for Large Companies."

Paul Volcker on the Market and Regulation

Paul Volcker, former Chairman of the Federal Reserve, may strike the conventional "wisdom" as an oxymoron regarding the market mechanism and government regulation. I contend that he could have taught that "wisdom" a lesson or two.

The full essay is at "Paul Volcker on the Market and Regulation."

Market or Government: Which Should Reduce Systemic Risk in the Banking Industry?

If the five largest banks—JP Morgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—are too big to fail and yet substandard operationally on account of their respective complexities (e.g., investment banking added to commercial banking), might it be that the market-based decisions of investors will relegate the giants, which by the way had price-to-book value ratios of between .37 to .77 in May 2012, thereby solving the problem of systemic risk?

The full essay is at "Reducing Systemic Risk: The Market or Government?"

Paul Samuelson: The Model 20th Century Economist

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died at the end of 2009 at 94.  Samuelson was credited with changing the academic discipline of economics, according to The New York Times,  ”from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.”  Essentially, he redefined twentieth century economics. Mathematics had already been employed by social scientists, but Dr. Samuelson brought the discipline into the mainstream of economic thinking. His early work, for example, presented a unified mathematical structure for predicting how businesses and households alike would respond to changes in economic forces, how changes in wage rates would affect employment, and how tax rate changes would affect tax collections.  He developed the rudimentary mathematics of business cycles with a model, called the multiplier-accelerator, that captured the inherent tendency of market economies to fluctuate.  Mathematical formuli that Wall Street analysts use to trade options and other complicated securities (derivatives) have come from his work (FYI: derivatives too complicated for outsiders such as the government to understand/regulate were at the center of the financial crisis in 2008).

The full essay is at "20th Century Economist."

Democratic Protests in the Middle East: A Conflagration of Historic Proportions amid a Constancy in Human Nature?

Perhaps by looking back on one's own time as though it were already historical, it is possible to assess whether what one is witnessing on the global stage is truly significant from the standpoint of human history or merely of that which history is replete. In the context of the popular protests in the Middle East in early 2011, the question is perhaps whether the world was witnessing a Hegelian burst of freedom or merely more of the same in terms of political revolutions.

The full essay is at "Democratic Protests in the Middle East."

Über “Surge-Pricing”: There’s a Mobile App for Price-Gouging!

A week into 2012, The New York Times ran a piece on Ubur (as in Übermench?), a taxi and livery company founded in 2009. As Curtis Lanoue aptly describes in his essay on the company, its novelty consists of a unique mobile app that passengers, drivers and the company’s managers use to bring demand and supply into equilibrium by means of differential pricing including “surge pricing.”[1] The price of a taxi or livery depends on temporal and geographic demand and supply levels. That is to say, the pricing increases as more people request rides. Theoretically, the pricing should go back down even in situations in which the demand is high as drivers are enticed to continue driving a few more hours. Hence, the wait time for an Uber cab after a concert or sporting event should be reduced even if the first people out have to wait until the price goes down or pay more than they expected. In this essay, I suggest that such “stickiness” in even such a small-scale market mechanism as a mobile app can give rise to some formidable ethical problems.

Price-gouging primped up as a mobile app?  (Image Source: thevirge.com)

The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

Human Weakness Enables Market Bubbles: A Nietzschean Perspective

As a young idealist in business school, I believed in the efficient market hypothesis; an efficient market based on perfect competition would obviate excess profits (e.g., monopoly rents) while keeping prices as low as possible. I assisted a professor with his article on the NASD (National Association of Securities Dealers) as a stellar example of industry self-regulation. The ideology cutting off the far left of my peripheral vision, I dismissed the possibility that an industry would look the other way on a miscreant firm as executives of other companies fear accountability from the industry association. Moreover, the business practitioners may profit, at least in the short term, from foisting on the general public the illusion of industry self-regulation, which can serve as a front protecting a squalid underbelly.

The full essay has been incorporated into (or swallowed up by) On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management, available in print and as an ebook at Amazon.

Political Risk in Systemic Risk: Finnish Pensions Err in Debt Crisis

Finland became a state in the European Union in 1995 and adopted the euro at its birth in 1999. In terms of population, the state is between Wisconsin and Minnesota, both of which are states in the United States. The Finnish culture prizes saving as well as paying-off debt on time. As the Wall Street Journal put it, the Finns are more German in this sense than are the Germans themselves. It is easy to understand, therefore, why the Finns would not have been excited about the write-offs in Greek government in 2012. The Finnish cultural attribute here is an ideological proclivity. Such a value-system so deeply held can even eclipse or interfere with an otherwise unfettered risk-return trade-off presumed to be part of the market mechanism. Just as the risk-return investment-pricing froze rather than adjusted upward with the leap in risk in CDOs and the related insurance swaps that occurred on Wall Street in 2007 and 2008, the decisions of Finnish pension fund officers in the wake of the European debt crisis to pull out of Greek and Spanish bonds rather than simply to demand a higher rate of return, given the higher risk, likely means that the market mechanism itself freezes rather than functions at levels of high risk (or when risk is increasing dramatically). In other words, the theory of the laissez-faire market, which Adam Smith never advocated, has a serious flaw that is reflected in the mechanism in operation when there is a spike in risk. Un prix ne marche pas quand il y a beaucoup du risque. The free market mechanism in the investment market tends to freeze up rather than re-price instruments whose risk is quickly increasing to a significant degree.

The full essay is in Essays on the E.U. Political Economy, available at Amazon. 

On the Irrational Exuberance of a Market's Bubble: The Tech Industry

I contend that the degree of uncertainty related to the expectation of future profits in the social media companies means that that industry ought to be treated by investors as if it were in a bubble, even if it turns out that the expectations were spot on. That is to say, investors should buy in lightly, and supported by a diversified portfolio. So perhaps the question of whether the industry is in a bubble is not as vital as the media may suppose; the extent of uncertainty, which was clearly evident for instance in LinkedIn's trading at 540 times its prior year's profit, is itself a factor not to take lightly. So call it bubble or not, the difference between known and expected revenues is itself worthy of consideration, and when that difference is significant, the wise and prudent investor naturally treads lightly, even if it seems that others may make out like bandits.

The full essay is at "On the Irrational Exuberance."