School of Economic Science
OPPORTUNITY OUT OF CRISIS...the hopes of the new President

 
Post new topic   Reply to topic    School of Economic Science - Study Forums Forum Index -> Economics Forum
View previous topic :: View next topic  
Author Message
Leonie Humphreys



Joined: 23 Sep 2008
Posts: 216
Location: West Dorset, UK

PostPosted: Wed Jan 21, 2009 1:12 pm    Post subject: OPPORTUNITY OUT OF CRISIS...the hopes of the new President Reply with quote

I watched the inauguration of President Barack Obama on 100 TV’s in John Lewis in London yesterday! People stood watching and listening to the new President sensing the importance of the occasion.

Can Obama turn this time of crisis into an opportunity? His ‘Bob the Builder’ speech ‘can we do it? – yes we can!’ is now famous, but is the modern day orator a man with the right plan?

Under this topic you are invited to put comments, suggestions , questions or if you prefer a fully prepared ‘open letter’ to the President suggesting how he may bring his ideals into a plan of action which would actually work to achieve his aims.


Just a few minutes into his speech Obama reminded Americans that they are in the ‘midst of crisis’, ‘at war’ and that ‘the economy is weakened as a consequence of greed and irresponsibility on the part of some but also our collective failure to make hard choices and prepare the Nation for a new age.’

He provided the indicators of crises and talked also of a ‘sapping of confidence’. But he reassured Americans that the ‘crisis will be met’ through ‘hope over fear and unity of purpose over conflict and discord’. ‘The time has come’ he said ‘to set aside childish things. The time has come to reaffirm our enduring spirit, to choose our better history, to carry forward that precious gift, that noble idea, .... the God given promise that all are equal, all are free and all deserve a chance to pursue their full measure of happiness.’

This is ‘not a path for those that seek leisure over work’ but for those ‘risk takers, the doers, the makers of things...’ he said. On the ‘state of the economy’ he promised ‘we will act, not only to create new jobs but to lay a new foundation for growth, build roads and buildings...’ he spoke of using technologies and science and that he intends to ‘harness the sun, wind and soil to meet the demands of a new age’.

‘All this we can do, all this we will do’ he stated, and continued:

‘Now, there are some who question the scale of our ambitions – who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them – that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works – whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is Yes, we intend to move forward. Where the answer is No, programmes will end. Those of us who manage the public’s dollars will be held to account – to spend wisely, reform bad habits and do our business in the light of day – because only then can we restore the vital trust between a people and its government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye the market can spin out of control – and that a nation cannot prosper long when it favours only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product but on the reach of our prosperity, on our ability to extend opportunity to every willing heart – not out of charity, but because it is the surest route to our common good.

......

With hope and virtue, let us brave once more the icy currents and endure what storms may come.

Let it be said by our children’s children that when we were tested we refused to let this journey end, that we did not turn back, nor did we falter; and with eyes fixed on the horizon and God’s grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations. Thank you. God bless you. And God bless the United States of America.’

But, how will this be done? We can wait and see, but we can also put forward our own thoughts on how best to take this ‘opportunity out of crisis’. Obama's words echo those who have been working towards sustainable and equitable ways of living, now is also our opportunity to engage more fully in that hopeful future.
Back to top
View user's profile Send private message
Michael Shepherd



Joined: 07 Dec 2007
Posts: 1395
Location: London, UK

PostPosted: Sun Jan 25, 2009 12:14 pm    Post subject: Reply with quote

Leonie

Did Obama -- in that magnificent speech -- refer directly to unearned income ?

That would be a useful central point for an 'open letter'.


Michael
Back to top
View user's profile Send private message
Leonie Humphreys



Joined: 23 Sep 2008
Posts: 216
Location: West Dorset, UK

PostPosted: Mon Jan 26, 2009 8:19 pm    Post subject: Reply with quote

Dear Michael,

I did not spot it if he did, but he did say this:

This is ‘not a path for those that seek leisure over work’ but for those ‘risk takers, the doers, the makers of things...’

That pretty much covers it I think, what do you think? It's probably a bit too politically sensitive to actually say 'unearned' income, since frankly so many people live off it one way or another don't they?! So this needs to be put forward sensitively I suppose.

Leonie


Last edited by Leonie Humphreys on Thu Jan 29, 2009 8:05 pm; edited 1 time in total
Back to top
View user's profile Send private message
Leonie Humphreys



Joined: 23 Sep 2008
Posts: 216
Location: West Dorset, UK

PostPosted: Mon Jan 26, 2009 8:20 pm    Post subject: SOME THOUGHTS SO FAR.... Reply with quote

In considering the possibilities for taking the opportunities out of the current crises (in the UK, the USA and elsewhere) some fundamental things to consider may include the following:

1. Any ‘solutions’ need to be politically realistic.

2. Initially the most pressing problems need to be identified, these include the following:

Banks: after the recent tragic and absurd behaviour in the banking fraternity, regulation is now accepted as obviously essential – experts in banking will be able to put forward suggestions as to the details of such regulation to prevent a repeat of the catastrophes of recent months.

Public Debt: in the UK the government are simply 'bailing out' banks with tax payers money when alternative solutions exist such as those put forward by the Money Reform Party (see on this Forum under ‘CREDIT CRUNCH’).

Unemployment: double edged sword since those without an income cannot pay for any goods and services and the government have to pay people NOT to work out of taxes paid through the work of others.

Small (marginal) business vulnerability: Another double edged sword since these are the ones that are now failing as the real crisis caused by the banks hits the economy and this will lead to unemployment and hence to the spiral of negative effects as above.

Vulnerability of the developing world: The effects of this global credit crunch in developing countries are said to be devastating. Information is required urgently on this matter.

Potential collapse of the entire economic system – capitalism as we know it. The talk has been of a ‘credit crunch’ a ‘meltdown’ a ‘recession’ and maybe a ‘depression’ all symptoms we have seen before under capitalism. Yet few dare to breath the words ‘collapse’ the like of which we witnessed recently when communism fell. The result of which has been chaos, corruption and hardship the like of which we have not seen in the UK, since – well when??

Pretty much everything is a pressing problem really isn’t it?!

So, how do these relate to each other? Let’s look at the claims to wealth produced. The ‘new foundation for growth’ that Obama spoke of may be possible if the relationship between these ‘claims’ is understood. Then a shift can be applied so that instead of the economy feeding a ‘leisured’ class as Obama put it, it favours those that ‘work’. It’s simple really, currently it goes like this:

Land/natural resources: Obama talked of ‘harnessing the sun, wind and soil’ to meet human needs. And there are all the other ‘free gifts of nature’ and these are the mainspring of economics - the foundation for all human endeavour. Ownership of these natural resources is currently ‘outright’ whereas economic theory clearly illustrates how when this occurs those owners receive unearned income, the so-called ‘rent’, which arises from natural differences in fertility of soil in the case of agricultural production and from the presence of the community in the case of commercial production. This skews the distribution of wealth so that some receive more (much more in some cases) than others for no effort of their own, creating what Obama referred to as the ‘leisured’ class.

Labour: Labour receives the minimum a person will accept, which does not usually reflect the effort applied and the productive ability of those that work for a living. In other words taken in the round the ‘creators of things’ as Obama put it receive far less than their due.

Capital: Literally ‘wealth used to create more wealth’. According to economic theory capital assists in production and can make it much more efficient. However, other factors currently skew the conditions so that more capital is used where labour would be more efficient, due to the fact that labour is taxed (at roughly double the nett wage in the UK including direct and indirect taxes). Whereas capital is tax deductible. This creates conditions where a drive to use capital in the place of labour exists and results in unemployment as well as environmental problems due to various factors relating to the production and use of ‘capital’ in production.

Tax: Currently in the UK tax is levied mainly on employment (PAYE & NI). It is also levied on production in other ways through VAT and corporate tax on NORMAL profits. These all increase the costs of production and therefore prices. Furthermore as mentioned above since labour is taxed and capital is tax deductible, firms are driven to seek out methods of production that are capital intensive. It is a shift in taxation that could radically redress the situation leading to a fairer balance between Obama’s ‘leisured’ and ‘working’ classes.

Money & debt: Regulation of the banking system is now obviously essential and a radical rethink of the money supply being almost entirely privately provided through charging of interest on money loans, is also required. Other commentators have addressed this issue, such as the Money Reform Party (www.moneyreformparty.org.uk).

If Obama means what he says that ‘all deserve a chance to pursue their full measure of happiness.’ And that this is ‘not a path for those that seek leisure over work’ but for those ‘risk takers, the doers, the makers of things...’ it could go like this (and not just in America, but the UK, and anywhere that is prepared to take up the challenge):

Land/natural resources: Here is the source of the ‘unearned’ income upon which Obama’s ‘leisured class’ thrives. The powers of nature and combined efforts of the community - the ‘surplus’ or ‘rent’ - can be used as the source for public revenue (through Land Value Taxation for example) instead of private revenue, allowing taxation on labour and production to be reduced, maybe eliminated. A gradual shift in this way could indeed provide the ‘new foundations for growth’ of which he speaks.

Labour: Freed of burdensome taxation would be in demand and moreover could compete with capital investments (currently tax deductible) leading to increased employment and reducing the drive to capitalise where labour is more efficient.

Capital: The incentive to capitalise as mentioned above would diminish except where it is more efficient than labour.

Tax: With ‘rent’ from land/natural resources providing the source for public revenue (through Land Value Taxation for example) the claim on employment and production from taxation would diminish as mentioned above. This would free both labour and small/marginal business to flourish in particular encouraging self-employment.

Money & Debt: The money supply could be provided by government and interest on money loans restricted/reduced so that we do not witness again the indiscretions of banks which are currently leading to the potential collapse of the whole economic system. This option is outlined under the topic ‘CREDIT CRUNCH’ on this Forum.

Overall Effects: These shifts from private to public benefits in the cases of ‘rent’ of land/natural resources and the creation of the money supply, together with the freeing of labour from taxation and encouragement of small/marginal business, could provide the foundations for a more equitable balance in the distribution of income and wealth. Thus favouring those that ‘work’ rather than the ‘leisured’ class. Hence the ‘new foundation for growth’ Obama spoke of, could be one that does not lead to consumerism and debt, but to environmentally benign and socially equitable development of the economy.

These ideas are outlined in more detail in my paper ‘Reforming Capitalism: principles and steps for transformation’ which I have attached below.

Discussion of these ideas and further ideas are most welcome!



REFORMING CAPITALISM.doc
 Description:
REFORMING CAPITALISM: Principles and steps for transformation

Download
 Filename:  REFORMING CAPITALISM.doc
 Filesize:  67.5 KB
 Downloaded:  472 Time(s)

Back to top
View user's profile Send private message
Peter Bowman



Joined: 02 Nov 2008
Posts: 27
Location: London, UK

PostPosted: Sun Feb 01, 2009 4:56 pm    Post subject: Reply with quote

Here is a go at a response to "opportunity out of crisis". It is based on the assumption that the cause of the present crisis is not just due to human weakness - greedy bankers etc but due to systemic failure. If this is true then what is needed is more than regulation, it is a fundamental re-assessment of the market system.

I think it supports Leonie's approach.

The most helpful tool in this would be a model or framework that is capable of fulfilling three functions:
(1) provide a framework for analysing the basic faults in the present system that have led to the present destructive crisis,
(2) to provide a basis for a better system, one that is fairer, more stable and sustainable and
(3) to provide a "roadmap" to take us from the former to the latter.

The analysis of the free market system given by Karl Polanyi in his classic work "The Great Transformation" written 60 years ago. This author identified the critical weakness that would inevitably lead to the self-destruction of the system. The only thing he got wrong was to underestimate by 60 years how long it would take before the collapse came. In its essence Polanyi's argument is very simple. The market system, which is inherent in human society, has the function of facilitating the exchange of commodities by which he meant man-made goods from raw materials through to finished goods. What happened to sow the seeds of self-destruction was a deception. This is the pretence that the primary elements of the economy, namely labour, land and credit, are commodities that can be traded in the market in the same way that real commodities can when they are patently not. Markets in labour, land (the key aspect of property) and credit are artificial inventions which are not viable in the real world. This is the heart of the problem with the old market system and the unsustainability of this pretence is now evidenced by the credit crisis which consists primarily in the self-destruction of the credit market, the stagnation of the closely connected property (i.e. land) market shortly to be followed by mass unemployment. By itself taking up the pretence the subject of economics has rendered itself impotent to describe the real working of the economy and to predict and explain the recurring cycles of boom and bust that frustrate it.

Why is it fundamentally wrong to have markets in these basic elements?

Consider land. By definition it is the part of the market that is not man-made. It is the free-gift of nature (Alfred Marshal). Because it is not man-made its supply is inelastic. It cannot respond to the law of supply and demand in the way manufactured goods do. To be traded it must first be claimed. Taking the Lockian view of property the basis of a claim to a property in anything lies in the work done to acquire it. There can be no such claim for land. However the tendency to claim it as private property is difficult to resist. Because it is such an essential pre-requisite to all human activity and has an inelastic supply it is one of the most valuable of assets. In addition there is the fact that on this planet at this time land of quality good enough to sustain a high level of human well-being is scarce. As such it becomes an irresistable object of speculation and because it is so important - since everyone needs somewhere at lest to live - the "asset" bubble has to follow.

Credit is almost as fundamental to economic production. Its essential function is to provide the bridge to cross the time gap between the start of any economic activity and the point of completion when this can provide a return. The farmer has to sustain himself between the time he plants his crop and when he harvests it, the craftsman and builder must purchase their materials before they can even start their work, even the shopkeeper must purchase his goods before he can sell them on to his customers. All these depend upon credit.

In the hands of the banking system this essential function has become privatised and monopolised. It has been distorted into a method of making huge profits for its owners. Credit is directed not where it is usefully needed but where it can gain the biggest returns. Where it is for productive purposes these are usually of a large scale and of questionable use - like new runways for airports and nuclear missile systems, nuclear power stations. More often than not the credit is for speculation on assets or consumption rather than productive activity. Credit has been changed from an essential economic service to a commodity whose price is the interest rate. Like land it does not obey the law of supply and demand. As it is essentially created out of thin air its supply is infinitely elastic and as this crisis unfolds the vast extent of the banks' creativity, and the disconnection of the credit market from the real economy continues to emerge.

The existence of a "labour market" where human beings are themselves treated as little different from other costs of production is largely a result of the monopolies of privatised land and credit. The relative bargaining power of employers and employees is so uneven that the latter have little choice but to accept what is offered. The effect of globalisation has been for multi-national companies to take the opportunity to continually move thier production to where lower and lower wages can be paid. This has generally depressed earnings of labour everywhere.

If Polanyi's analysis is correct than as well as indicating the underlying cause of the present disaster it does point to an alternative, namely a proper market economy in which the market is limited only to commodities and the primary elements are left out constrained by good government to perform a more natural role. This would be a true free market, with free credit, free land and economically free people. Furthermore the analysis indicates the way forward - the primary elements need to be taken out of the market. They need to be "de-commoditised".

How can this be done?

First consider credit. In the UK the private banking cartel has collapsed. It has created vast amounts of credit for speculation and consumption and this has disappeared. It cannot now carry out its basic function of providing credit for the real economy. Government intervention to prop up the system has been of limited effect. Firm action is needed. The banks need to be fully nationalised as Vince Cable, the MP with probably more understanding of the situation than any other now suggests. They are already part nationalised and only extend credit with government guarantees. The banks are incapable of creating credit. This function needs to be (temporarily) taken of by the Government. A department of credit management needs to be set up. Credit needs to be re-instated as a public service. In needs to be directed with discrimination to productive economic activity including infrastructure development. There would be no need to charge interest, only service charges. The system should be extended to local authorities following the example of the Bank of Essex and small scale micro-credit facilities be extended. The nationalisation of the banks is an emergency measure it need not be permanent. What really needs to be nationalised is the monetary system. A core failing of the old system was that Government issued money had been replaced by privatised debt-based money. The crisis provides the opportunity for the Government to reclaim its natural function of controlling money. The detailed procedure for this has recently been supplied to the Treasury Select Committee by James Robertson.

Redirection of credit away from speculation would be a first step in the de-commoditisation of land. Here nationalisation is not necessary. It could be achieved as a consequence of fiscal reform. This is presently being advocated by the Coalition for Economic Justice. The mechanism is not obvious. To appreciate it requires taking a fresh look at what the basis of the value of a plot of land is, particularly in an urban environment. The main point is that it is not the land itself that has value but the access to public goods and services, infrastructure, markets, and a propitious environment, that having property in that site provides. In the present system of privatised property all these are effectively provided free of charge to the owner. The public parts are actually paid for by burdensome taxation on others, mostly levied on labour and the private parts as the externalities of the sites neighbours.

On this analysis the value of these services can be equated with the rental value of the site (stressing strongly that for any building this is only site component, not the full market rent for the premises.) If the landowners were asked to pay the market rate for these services the site related component of their unearned rental income would be now matched by this expense. There would be no unearned income from merely having property in land. It would be particularly disadvantageous to hold land out of use as the service expenses would still have to be met but without any corresponding income. The only reason for having property in land would be to actively make the best use of any advantages a given location offered. The best sites, would be available at a premium, but with the payments now going to the suppliers of the services, whereas marginal sites would be available at very low cost.

Here is the second step of reform, the charging for public services by location using land rentals as a means of evaluating the overall value. The overall effect of this would be do de-commoditise land. It would no longer be worthwhile to treat it as a good that can be bought and sold.

There would be an additional advantage that the burden of taxation would be shifted off labour and enterprise.

The combined effect of de-commoditised credit directed towards productive economic activity, de-commoditised land freed from speculative valuation and the burden of taxation removed from production would have a huge impact on what is called the labour market. With the possibility of self-employment so much easier there would be a shift in bargaining power from the employer to the employee. An alternative to wage slavery would be much more realistic. More and more of the workforce could start making employment a means of utilising their innate talents rather than just earning enough to keep body and soul together. There would be the possibility of a move away from cheap. low quality manufactured goods that the circumstance of the debt based economy forced back towards quality goods that actually provide the purchaser with some satisfaction..

An additional factor, which is considered all too little would greatly help with the change described and that is the method of accounting. The present system does not reflect economic actualities and has had a huge distorting effect with the economy effectively becoming a servant of the accounting system. A major step forward would be a change from a profit and loss based system to a value added system. This would have a massive effect on the stature of the employee by changing wages from a cost of production, to be kept as low as possible (or, in the case of the bonus culture an unhealthy excess), to a just share of the added value, a just return for the contribution made.
Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic    School of Economic Science - Study Forums Forum Index -> Economics Forum All times are GMT
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
You can attach files in this forum
You can download files in this forum
This forum is sponsored by the School of Economic Science for use by its members; members of its branches; members
of affiliated schools worldwide and by all other Internet users interested in the study subjects presented.
Powered by phpBB Copyright © FSES, 2007. All Rights Reserved