Understanding the Crisis - Markets, the State and Hypocrisy
February 18, 2009
By Noam Chomsky and Sameer Dossani
Source: Foreign Policy In Focus
February 10, 2009 -- Noam Chomsky is a noted linguist, author, and foreign policy expert. Sameer Dossani interviewed him about the global economic crisis and its roots.
SAMEER DOSSANI: In any first year economics class, we are taught that markets have their ups and downs, so the current recession is perhaps nothing out of the ordinary. But this particular downturn is interesting for two reasons: First, market deregulation in the 1980s and 1990s made the boom periods artificially high, so the bust period will be deeper than it would otherwise. Secondly, despite an economy that's boomed since 1980, the majority of working class
NOAM CHOMSKY: Well I basically agree with your picture. 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
From roughly 1950 until the early 1970s there was a period of unprecedented economic growth and egalitarian economic growth. 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.
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. The power of the economy shifted to the financial institutions, away from manufacturing. 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. 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. 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. There was growth, but it was highly inegalitarian — it went into a very small number of pockets. There have been brief periods in which this shifted, so during the tech bubble, which was a bubble in the late
Financial crises have increased during this period, as predicted by a number of international economists. Once financial markets were freed up, there was expected to be an increase in financial crises, and that's happened. This crisis happens to be exploding in the rich countries, so people are talking about it, but it's been happening regularly around the world — some of them very serious — and not only are they increasing in frequency but they're getting deeper. 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. In it they refer to the well-known fact that there are basic inefficiencies intrinsic to markets. In the case of financial markets, they under-price risk. They don't count in systemic risk — general social costs. 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. In financial markets, this means that risks are under-priced, so there are more risks taken than would happen in an efficient system. And that of course leads to crashes. If you had adequate regulation, you could control and prevent market inefficiencies. If you deregulate, you're going to maximize market inefficiency.
This is pretty elementary economics. 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. 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. 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,
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. 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.
Well that's intrinsic to markets — they're inefficient. Robin Hahnel had a couple of very good articles about this recently in economics journals. 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.
People talk about a return to Keynesianism, but that's because of a systematic refusal to pay attention to the way the economy works. 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. 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.
The state sector is innovative and dynamic. It's true across the board from electronics to pharmaceuticals to the new biology-based industries. 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. If you had to encapsulate the economy in one sentence, that would be the main theme. When you look at the details of course it's a more complex picture, but that's the major 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.
DOSSANI: As we consider the picture of the collapse of some of these major financial institutions we would do well to remember that some of these same market fundamentalist policies have already been exported around the globe. Specifically, the International Monetary Fund has forced an export-oriented growth model onto many countries, meaning that the current slowdown in
CHOMSKY: 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. 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. 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. So yes, there's one set of rules for the weak and a different set of rules for the powerful. There's nothing novel about that.
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.
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. 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. 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
What you said about the Southern Cone is exactly right. For the last several years they've been trying to extricate themselves from this whole neoliberal disaster. One of the ways was, for example
It's also true that countries are driven to commodity export; that's the mode of development that's designed for them. Then they will be in trouble if commodity prices fall. It's not 100% the case, but in the Southern Cone, the countries that have been doing reasonably well do rely very heavily on commodity export, actually raw material export. That's even true of the most successful of them,
One major exception to this is
DOSSANI: Do you think the current crisis will offer other countries the opportunity to follow the example of South Korean and
CHOMSKY: Well, you could say the example of the
Let's take my own institution, MIT. I've been here since the 1950s, and you can see it first hand. In the 1950s and 1960s, MIT was largely financed by the Pentagon. There were labs that did classified war work, but the campus itself wasn't doing war work. It was developing the basis of the modern electronic economy: computers, the Internet, microelectronics, and so on. It was all developed under a Pentagon cover. IBM was here learning how to shift from punch-cards to electronic computers. It did get to a point by the 1960s that IBM was able to produce its own computers, but they were so expensive that nobody could buy them so therefore the government bought them. In fact, procurement is a major form of government intervention in the economy to develop the fundamental structure that will ultimately lead to profit. There have been good technical studies on this. From the 1970s until today, the funding of MIT has been shifting away from the Pentagon and toward the National Institute of Health and related government institutions. Why? Because the cutting edge of the economy is shifting from an electronics base to a biology base. So now the public has to pay the costs of the next phase of the economy through other state institutions. Now again, this is not the whole story, but it's a substantial part.
There will be a shift towards more regulation because of the current catastrophe, and how long they can maintain the paying off banks and financial institutions is not very clear. There will be more infrastructure spending, surely, because no matter where you are in the economic spectrum you realize that it's absolutely necessary. There will have to be some adjustment in the trade deficit, which is dramatic, meaning less consumption here, more export, and less borrowing.
And there's going to have to be some way to deal with the elephant in the closet, one of the major threats to the American economy, the increase in healthcare costs. That's often masked as "entitlements" so that they can wrap in Social Security, as part of an effort to undermine Social Security. But in fact Social Security is pretty sound; probably as sound as its ever been, and what problems there are could probably be addressed with small fixes. But Medicare is huge, and its costs are going way up, and that's primarily because of the privatized healthcare system which is highly inefficient. It's very costly and it has very poor outcomes. The
DOSSANI: Will the current crisis open up space for other countries to follow more meaningful development goals?
CHOMSKY: Well, it's been happening. One of the most exciting areas of the world is
So when the U.S. and the traditional ruling elites in Bolivia started moving towards a kind of secessionist movement to try to undermine the democratic revolution that's taken place there, and when it turned violent, as it did, there was a meeting of UNASUR last September in Santiago, where it issued a strong statement defending the elected president, Evo Morales, and condemning the violence and the efforts to undermine the democratic system. Morales responded thanking them for their support and also saying that this is the first time in 500 years that
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