By Henry C K Liu
Free-market fundamentalists have been operating in denial mode for more than a year, since the US financial sector imploded in a credit crisis from excessive debt in August 2007, claiming that the economic fundamentals were still basically sound, even within the debt-infested financial sector.
As denial was rendered increasingly untenable by unfolding events, champions of market fundamentalism began clamoring for increasingly larger doses of government intervention in failed free markets around the world to restore sound market fundamentals. For the market fundamentalist faithful, this amounts to asking the devil to save god.
Aside from ideological inconsistency, the real cause of the year-long credit crisis has continued to be misdiagnosed in official circles whose members had until recently tirelessly promoted the merit of small government, perhaps even purposely by those in the position to know better and in whom society has vested power to prevent avoidable disaster. The diagnosis misjudged the current credit crisis as only a temporary liquidity quandary instead of recognizing it as a systemic insolvency. (See Fed helpless in its own crisis, Asia Times Online, January 26, 2008.)
The misdiagnosis led to a flawed prognosis that the liquidity crunch could be uncorked by serial injections of more government funds into intractable credit and capital market seizure. This faulty rationale was based on the fantasy that distressed financial institutions holding assets that had become illiquid could be relieved by wholesale monetization of such illiquid asset with government loans, even if such government loans are collateralized by the very same illiquid assets that private investors have continued to shun in the open market.
It is not that government officials know more than market participants about the true value of these illiquid assets; it is only that government officials with access to taxpayers' money have decided to ignore market forces to artificially support asset overvaluation, the original root cause of the problem. Instead of being the solution, the government with flawed responses backed by the people's money has become part of the problem.
President George W Bush told the American people on October 10 that "the fundamental problem is this: As the housing market has declined, banks holding assets related to home mortgages have suffered serious losses. As a result of these losses, many banks lack the capital or the confidence in each other to make new loans. In turn, our system of credit has frozen, which is keeping American businesses from financing their daily transactions - and creating uncertainty throughout our economy."
Skipping over the basic fact that the housing market has been declining because of a burst credit bubble, the president went on to identify five problems, the first of which is that "key markets are not functioning because there's a lack of liquidity - the grease necessary to keep the gears of our financial system turning. So the Federal Reserve has injected hundreds of billions of dollars into the system. The Fed has joined with central banks around the world to coordinate a cut in interest rates. This rate cut will allow banks to borrow money more affordably - and it should help free up additional credit necessary to create jobs, and finance college education, and help American families meet their daily needs. The Fed has also announced a new program to provide support for the commercial paper market, which is freezing up. As the new program kicks in over the next week or so, it will help revive a key source of short-term financing for American businesses and financial institutions."
The market responded to the president's speech with a one-day rally before resuming its sharp downward spiral, continuing a response pattern to all previous government announcements of drastic but allegedly necessary measures in recent weeks to stop the financial hemorrhage once and for all. Stocks posted the biggest drop since the 1987 crash two days after the president and Treasury Secretary presented the government's new "comprehensive" program to arrest the financial crisis.
Four levels of the credit crisis
The current credit crunch takes form on four separate but interrelated market levels.
On the first level is the banking system which traditionally intermediates credit through deposit taking and conventional lending.
A second level is the non-bank credit market via which institutional and corporate borrowers issue commercial paper for short-term funding by borrowing directly from institutions with surplus cash to invest, bypassing banks and using banks only as standbys in case maturing commercial paper cannot be rolled over occasionally.
A third level is the structured finance market in which debt securitization provides liberal credit to large pools of high-risk borrowers, with pools of debt structured as unbundled debt instruments of varying but connected degrees of risk, financed by funds from institutional investors with varying appetite for risk commensurate with varying levels of return, thus enabling pension funds and money market funds to invest in the upper tranches of structured debt that are supposed to be safe enough to satisfy conservative fiduciary requirements, but in aggregate adds up to corresponding escalation of systemic risk should any one link in the interconnected system fails.
Finally, there is the capital market where companies go to raise new capital in times of need, where in times of sudden and severe need can turn into a market opportunity for vultures. (See The pathology of debt, a five-part series initiated on Asia Times Online, November 27, 2007.)
Central banks around the world, led by the US Federal Reserve, generally have the institutional authority, historical experience and monetary resources to keep the traditional regulated banking system from failing, by nationalization and eventual consolidation.
As currently structured, central banks are not in possession of ready authority, operational experience or financial resources to keep the now vastly larger non-bank credit and capital markets from failing. Under conditions of a liquidity trap, central banks do not even have the means to force banks to lend to credit-unworthy or unwilling borrowers. This is known as the Fed pushing on a credit string. Further, the Fed is approaching the lower end of interest rate cuts, with the Fed funds rate target already at 1.5%. It cannot go below zero.
According to free-market principles, a healthy banking system is supposed to be able to save itself from systemic collapse by allowing individual wayward banks to fail. The fact that increased number of mismanaged banks is threatened with failure does not normally add up to any threat of systemic failure in the banking system. It in fact testifies to the systemic resilience of a healthy banking system.
The current problem arises from intricate and close interconnection among financial institutions and markets, which has made too many financial institutions "too big to fail" because their individual failure can cause systemic collapse through widespread interconnected contagion throughout the market.
For example, the trigger point behind Bear Stearns's near failure came from the repo market, where banks and securities firms routinely extend and receive short-term loans, typically made overnight and backed by top grade securities. Hours before 7:30am on March 14, 2008, Bear Stearns was faced with the problem of not being able to roll over its huge repo debt because its high-rated collaterals had fallen in market value. If the firm did not repay the maturing debt on time with new funds from new repo contracts, its creditors could start selling at fire-sale prices the collateral Bear had pledged to them, to cause substantial loss to Bear Stearns.
The implications would go far beyond losses for Bear Stearns. The sale receipts might not repay all investors and cause losses to conservative institutional investors such as pension funds and money market funds. If investors begin to question the safety of loans collateralized by triple-A securities they make in the repo market that are now worth less than their face value, they could start to withhold funds from the credit market when other investment banks and companies need to roll over their maturing short-term debts.
Hundred of firms would default and fail from a seizure of the $4.5 trillion repo market, bringing down banks that have issued standby credit to them in a financial chain reaction.
The distressing part is that the $4.5 trillion repo market is not an untested novel financial innovation such as subprime-mortgage-backed collateralized debt obligations. It is a decades-old, plain-vanilla debt market where market risk is considered minimal. A major counterparty default in the repo market would have been unprecedented because the collateral accepted in a repo contract is generally considered as triple-A rated, and such a default could have systemic consequences for the entire credit market and even impair the ability of the central bank to maintain the Fed funds rate target, which it normally does by participating in the repo market.
As I wrote three years ago (see The repo time bomb, Asia Times Online, September 29, 2005):
As with other financial markets, repo markets are subject to credit risk, operational risk and liquidity risk. However, what distinguishes the credit risk on repos from that associated with uncollateralized instruments is that repo credit exposures arise from volatility (or market risk) in the value of collateral. For example, a decline in the price of securities serving as collateral can result in an under-collateralization of the repo. Liquidity risk arises from the possibility that a loss of liquidity in collateral markets will force liquidation of collateral at a discount in the event of a counterparty default, or even a fire sale in the event of systemic panic. Leverage that is built up using repos can exponentially increase these risks when the market turns. While leverage facilitates the efficient operation of financial markets, rigorous risk management by market participants using leverage is important to maintain these risks at prudent levels.
In general, the art of risk management has been trailing the decline of risk aversion. Up to a point, repo markets have offsetting effects on systemic risk. They can be more resilient than uncollateralized markets to shocks that increase uncertainty about the credit standing of counterparties, limiting the transmission of shocks. However, this benefit can be neutralized by the fact that the use of collateral in repos withdraws securities from the pool of assets that would otherwise be available to unsecured creditors in the event of a bankruptcy. Another concern is that the close linkage of repo markets to securities markets means they can transmit shocks originating from this source. Finally, repos allow institutions to use leverage to take larger positions in financial markets, which adds to systemic risk.
A crisis emerges
In the structured finance market, a separate crisis was emerging, exacerbated by problems in the repo market. In March 2008, the Federal Reserve created a new facility to swap up to $200 billion of its Treasury securities for hard-to-trade mortgage-backed securities held by investment banks. A week later, the Fed took over $29 billion of investment bank Bear Stearns' obligations to prevent a chaotic failure of the firm and to enable its takeover by JPMorgan Chase with loans from the Fed discount window and by limiting potential loss to JPMorgan Chase to $2 billion. The Fed also opened its discount window to investment banks, making it the first time since the Great Depression that non-banks had been allowed to borrow from that window.
And in July, the Fed agreed to lend to Fannie Mae and Freddie Mac from its discount window should it "prove necessary". In the same month, another government arranged "shotgun marriage" induced Bank of America to acquire Merrill Lynch at a fire sale price of $50 billion. On September 18, the Federal Reserve pumped another $105 billion into the banking system.
Credit rating agencies may play a key role in structured finance transactions. Unlike a "typical" loan or bond issuance, where a borrower offers to pay a certain return on a loan, structured financial transactions may be viewed as either a series of loans with different characteristics, or else a number of small loans of a similar type packaged together into different loans called "tranches". Credit ratings often determine the interest rate or price ascribed to a particular tranche, based on the quality of loans or quality of assets contained within that grouping.
Companies involved in structured financing arrangements often consult with credit rating agencies to determine how to structure individual tranches of debt so that each receives a desired credit rating to certify its risk exposure. For example, a firm may wish to borrow a large sum of money by issuing debt securities. However, the amount is so large that the return investors may demand on a single issuance would be prohibitive. Instead, it decides to issue three separate bonds, with three separate credit ratings: A (medium low risk), BBB (medium risk), and BB (speculative), using the rating system of Standard & Poor's. The firm expects that the effective interest rate it pays on the BB-rated bonds will be more than the rate it must pay on the A-rated bonds, but that, overall, the amount it must pay for the total capital it raises will be less than it would pay if the entire amount were raised from a single bond offering. This is the basic principle of structured finance: the squeezing of financial value out of unbundling of debt.
As the transaction is devised, the firm may consult with a credit rating agency to see how it must structure each tranche - in other words, what types of assets must be used to secure the debt in each tranche - in order for that tranche to receive the desired rating. The structure is such that the credit rate of any one tranche will change if the credit ratings of other tranches at the riskier end change. This could cause triple-A rated tranches to be down rated in a down market.
Criticism surfaced in the wake of large losses in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the credit rating agencies. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA or Aaa by Standard & Poor's, Moody's Investors Service and Fitch Group.
The rating agencies respond that their advice constitutes only a "point in time" analysis, that they make clear that they never promise or guarantee a certain rating to a particular tranche, and that they also make clear that any change in circumstance regarding the risk factors of any particular tranche will invalidate their analysis and result in a different credit rating. In order words, the risk structure is dynamic and systemic. In addition, most credit rating agencies do not rate bond issuances upon which they have offered rating structure advice, unless a firewall exists to avoid potential conflict.
Complicating matters for structured finance transactions, the rating agencies state that their ratings are opinions regarding the likelihood that a given debt security will fail to be serviced over a given period of time, and not an opinion on the volatility of that security and certainly not the wisdom of investing in that security.
In the past, most highly rated (AAA or Aaa) debt securities had characteristics of low volatility and high liquidity - in other words, the price of a highly rated bond did not fluctuate greatly day-to-day, and sellers of such securities could easily find buyers. However, structured transactions that involve the bundling of hundreds or thousands, or even millions, of similar (and similarly rated) securities tend to concentrate similar risk in such a way that even a slight change on a chance of default can have an enormous effect on the price of the bundled security.
This means that even though a rating agency could be correct in its opinion that the chance of default of a structured product is very low under normal market conditions, even a slight change in the market's perception of, and aversion to the risk of that product can have a disproportionate effect on the product's market price, with the result that an ostensibly AAA or Aaa-rated security can collapse in price even without there being any actual default or changes in significant chance of default. This possibility raises significant regulatory issues because the use of ratings in securities and banking regulation assumes incorrectly that high ratings correspond with low volatility and high liquidity.
Fed supports money market mutual Funds
The US Federal Reserve on October 21 announced it would create a Money Market Investor Funding Facility (MMIFF) to support a private-sector initiative designed to provide liquidity to US money market investors. MMIFF will finance up to $540 billion in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.
MMIFF will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include US dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include US money market mutual funds and over time may include other US money market investors.
The implosion of Enron eight years ago was caused by "special purpose vehicles" which were early incarnations of present-day "conduits" backed by phantom collaterals. Enron's collapse was a high-profile event that briefly brought credit risk to the forefront of concern in the financial services industry. Collateral management rose briefly from the Enron ashes as a critical mechanism to mitigate credit risk and to protect against counter-party default. Yet in the recent liquidity boom, collateral management has again been thrown out the window and rendered dysfunctional by faulty ratings based on values "marked to theoretical models" that fall apart in disorderly markets. (See The rise of the non-bank financial system, Asia Times Online, September 6, 2007).
Money market funds are facing severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper. This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds.
The Fed move on October 21 highlights the extent to which policymakers are concerned about US money markets, even as inter-bank lending rates dropping slightly. Policymakers are also worried that moves to prop up US banks may have undermined money funds, which compete with bank savings accounts.
"The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs," the Fed said.
Under the Fed scheme, the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.
The creation of an extra liquidity facility on October 21 was seen as complementing a move the Fed announced two weeks earlier to create a vehicle aimed at purchasing potentially unlimited amounts of three-month debt from banks and non-financial companies. The size of the Fed's balance sheet has nearly doubled.
Each of the five vehicles may purchase paper from 10 financial institutions. The overall size of the program is capped at $600 billion - with the Fed funding 90% and the funds, which sell assets, taking the first 10% of losses. The Fed announced its plan even as money markets showed signs of easing. Overnight dollar Libor (London Interbank Offered Rate) declined 23 basis points to 1.28%, below the Fed's target rate of 1.5%. Three-month dollar Libor eased to 3.83%, its lowest fix in nearly a month. Three-month Libor was fixing about 2.80% prior to upheavals and has yet to reflect the Fed's rate cut on October 8 of 50 basis points.
Strategy ignores asset overvaluation
Although each step by the government in reaction to the credit crisis was a logical, targeted response to new systemic financial upheavals, the result was to prop up select distressed firms deemed too big to fail and support failing markets as they occurred, hoping in vain that it would be the last move needed to resolve the systemic crisis to put the economy on a path of recovery. The Fed and the Treasury appeared to be rushing from emergency to emergency without a strategic plan to deal with the fundamental problem of a debt bubble collapse.
The disjointed interventions appeared designed to keep a collapsing debt bubble from collapsing, a hopeless task that even former Fed chairman Alan Greenspan, the bubble wizard par excellence, was not naive enough to try. Greenspan merely replaced a burst bubble with a new bigger bubble, never trying to stop a collapsing bubble in mid course. Greenspan's approach was that of a post-disaster cleanup crew, not rushing into a collapsing structure as the current bailout team appears to be trying to do. Throwing good money after bad merely makes good money into bad. Spending good money after the collapse would infinitely buy more in the cleanup task.
Added to the mix was the political problem of government credit allocation. In April, Chris Dodd, chairman of the Senate Banking Committee, demanded that the Fed permit top-rated securities backed by student loans that now had uncertain market value and anemic liquidity to qualify for its $200 billion swap program. "If the Fed and the Treasury can commit $30 billion of taxpayer money to enable the takeover of Bear Stearns by JPMorgan Chase, then surely they can step in to enable working families to achieve the dream of a higher education for their children," the senator declared.
Two weeks later, the Fed said it would accept any AAA-rated securities as collateral, including those backed by student loans. The Fed has forced to move from its traditional role of neutral macro policy of stabilization to direct specific credit allocation, albeit in this particular case for a worthy cause, for where is the logic of saving the banking system to save tax payers' homes and not save the education of the nation's youths. As a matter of national policy, all education should be financed by public funds since education is the most rewarding social investment a society can make. Another is universal health care.
The economies of New York and New Jersey are also now severely impacted by the financial crisis on Wall Street. These states normally derive up to 30% of their revenue from the financial sector. The governors of the two states are calling for further stimulative aid from Washington. California is also saying it needs low-interest loans from the federal government to help with its budgetary shortfalls. The problem will spread to all states as the problems in financial sector spread to the economy.
The Fed floods Europe with dollars
On Monday, October 13, the Federal Reserve opened up the dollar spigot to European central banks to support the European dollar credit markets by agreeing to provide unlimited dollars, up from its previous $620 billion in currency swaps, to the three major central banks: the European Central Bank, the Bank of England and the Swiss National Bank, to allow them to relieve liquidity pressure on commercial banks across their respective regions.
Dollars had become elusive in recent weeks in the European banking system as short-term money markets around the world deteriorated. Domestic and foreign banks in Europe had been frozen out of loans beyond a day as institutions hoarded dollar resources amid concerns about counterparty default. Around the world, central banks were forced to move from the traditional role of monetary rule-makers to that of money and currency market players.
Meanwhile, to offer vastly more operational space to expand its liquidity facilities during the credit crisis, the Fed received authority from the Treasury in early October to start paying interest on reserves that commercial banks are required to deposit at the Fed.
Prompted by the US, governments across Europe took action to bail out their respective banks and protect their separate banking systems after the meeting of the Group of Seven leading industrialized countries in Washington during the weekend of October 11.
France extended state guarantees to $435 billion of senior bank debt to help jumpstart that country's credit markets. It created a state company with up to $54 billion in capital to recapitalize distressed French banks. The UK guaranteed $434 billion of bank debts and injected $64 billion into Royal Bank of Scotland Group, HBOS, a banking/insurance group in the UK, and Lloyds TSB Group, as part of its already announced ฃ400 billion (US$651 billion) bail-out plan.
Germany guaranteed up to $544 billion inter-bank debts, setting aside $27 billion for potential losses and injected up to $109 billion equity in German banks. Italy announced it will recapitalize Italian banks and guarantee bonds on a case-by-case basis. Spain will guarantee $136 billion in Spanish bank debts, set up a preventive facility to inject new capital into distressed Spanish banks until 2009 and establish up to $68 billion to buy Spanish bank assets.
The Netherlands is injecting 10 billion euros (US$13.4 billion) into ING Group, the banking and insurance giant which just weeks earlier was the white knight to bail out troubled Fortis. Austria, Portugal and Norway joined the effort, committing a total of 501 billion euros in guarantees and capital for banks in their respective jurisdiction.
Iceland banking crisis and geopolitics
Iceland's banking system meanwhile collapsed in September causing losses to non-Icelandic European depositors who were attracted by higher interest rates paid by Icelandic banks. The tiny country over the past decade had embraced neoliberal free-market capitalism and built a financial sector that brought unprecedented but unsustainable prosperity to its 300,000 people and won temporary favor with foreign savers and investors.
Iceland's financial crisis cannot be solved by bank nationalization, currency de-pegging and stock market suspension because its central bank, unlike the US Federal Reserve, which can produce dollars at will, must either earn or borrow euros and dollars. Failing to access International Monetary Fund loans because it is not yet part of the EU, Iceland turned to Russia for help. Commenting on the possibility of a 4 billion euro loan from Russia, Icelandic journalist Omar Valdimarsson ridiculed the value of 50 years of "special relationship" with the US by quoting Deng Xiaoping's famous saying: "It does not matter if the cat is black or white as long as it catches mice." The fat cat is Russia, although at the time of writing agreement with Moscow had yet to be reached.
Various reports, including in Business Week, on October 21 indicated Iceland "was likely" to receive a $6 billion rescue package "tailored by the International Monetary Fund (IMF), Nordic countries and Japan".
Crisis in East European banks
Banks in emerging economies in post-communist Eastern Europe, such as Hungary and Ukraine, were also hard hit. Ukraine, whose economy has been badly hurt from falling steel prices, may be unable to quickly accept a loan offered by the International Monetary Fund because the fund is seeking assurances on next year's budget from the cabinet, and the cabinet was recently dissolved by the president in a political shakeup.
While, with Iceland and Hungary, one of three European nations seeking aid from the IMF, Ukraine has complex political problems, being a country of 46 million culturally and politically divided between historical affinity towards Russia and new orientation towards the West.
Members of the Ukrainian parliament have filed an appeal to the country's top court, contesting an order by President Viktor Yushchenko to disband parliament and the cabinet and hold new elections on December 7, subsequently postponed to December 14. Until that case is decided, it is unclear whether the current cabinet holds power. Prime Minister Yulia Tymoshenko says it does, while the president's office is contesting that assessment. The IMF delegation has been meeting with both sides. The fund is offering a loan of as much as $15 billion to shore up Ukraine's finances as foreign investors flee for safe havens. As a condition for the loan, the IMF is asking that Ukraine run a balanced budget
in 2009, a condition that the Federal Reserve did not impose on the US government.
The Fitch rating agency downgraded Ukraine's sovereign debt rating on October 17 and issued a negative outlook for the country. A Ukrainian shipping company, Industrial Carriers, has collapsed. The government has frozen rail tariffs for steel companies, and as foreign investment dries up, speculators are betting on a decline in the national currency. In response, Ukraine plans to nationalize some commercial banks, which are suffering liquidity problems.
In Hungary, the authorities agreed to a loan of 5 billion euros ($6.7 billion) from the European Central Bank to allow banks to continue to loan to one another and businesses. In Iceland, officials said they would decide within a week whether to take out an IMF loan.
Crisis in Asian banks
In Asia, South Korea announced a $100 billion government guarantee on foreign currency loans and a $30 billion infusion into the Korean banking system. Malaysia and Singapore announced government guarantees of all deposits in their nations' banks through the end of 2010, mirroring a move made earlier by Hong Kong, Australia and others in the region.
Hong Kong's bank deposit guarantee channeled capital flows into its banks and away from the rest of the region, as depositors shifted funds to seek out safety. Similar moves by Australia, Indonesia and others have increased pressure for hold-outs to make guarantees of their own. A joint statement by Singaporean fiscal and monetary authorities acknowledged the need to respond to other countries' deposit guarantees: "The announcement by a few jurisdictions in the region of government guarantees for bank deposits has set off a dynamic that puts pressure on other jurisdictions to respond or else risk disadvantaging and potentially weakening their own financial institutions and financial sectors," adding it would guarantee a total of 150 billion Singapore dollars (US$102 billion).
Financial nationalism
While this wave of government intervention was billed as a positive sign of international coordination, the fact remains that such government measures were really driven by financial nationalism to prevent funds from leaving one national banking system for safer havens in another national banking system that offers better government guarantee.
Even the US Treasury dropped its earlier opposition to sovereign guarantees for funding, as such guarantees spreading across Europe to put US banks at a competitive disadvantage with their European rivals. Under the US plan, deposit guarantees will be provided by the Federal Deposit Insurance Corporation at higher limits. The US shift on sovereign guarantees makes it very likely that Canada, and possibly Japan, will follow suit out of self interest.
Once sovereign bank loan guarantees spread across Europe, the US had no choice but to follow suit, despite concerns among senior US policymakers that this could put added stress on the larger non-bank financial sector that competes with bank lenders. This development will prolong the seizure of the much larger non-bank credit market and possibly hasten its final collapse.
Non-bank financial system out in the cold
By yielding to the need to save the banking system as a first priority, the US has in fact abandoned its more advanced but complex and diverse non-bank financial system and reverted back to one based on a relatively small number of large universal banks on the traditional European model. By nationalizing the banking system with sovereign capital at a stage earlier than in past financial crises around the world, US policymakers hope to halt a credit market meltdown in mid-stream and engineer a quick turnaround of the the faltering economy before it reaches full momentum.
Unfortunately, it is a strategy similar to amputating the limbs of a patient to relieved circulatory pressure on the heart. The fact of the matter is that the US financial system has transformed into one in which banks get no respect from the non-bank sector. Banks have been relegated to a supportive role rather than their traditional prime role of intermediating of credit for the economy. The terms of the US sovereign recapitalization plan are much more favorable to the banks and bank shareholders than the UK proposal. The US terms favor weak banks by establishing the same terms for all, regardless of varying capital strength. It is directing needed medicine to the wrong organ.
To offer favorable terms to get the core group of nine top US banks to sign up immediately for half the $250 billion nationalization program was an essential part of US strategy. It removed uncertainty over uneven share prices of these banks that presented "co-ordination" problems, destabilizing swings in relative capital strength, and the "stigma" problem as a sign of weakness for participating banks. Most importantly, it eased the risk that the $125 billion would be too thinly spread across the vast US banking sector to make a real difference to the core group of financial institutions.
Questions remain in the market as to whether $250 billion will be enough for the gargantuan task. Measured against the size of capital injections in Europe and the larger scale of the US banking system, the fund appears visibly undersize. Also, diverting up to $250 billion to recapitalize banks, away from the $700 billion fund created to finance the purchase of illiquid toxic assets raises doubts of curative efficiency. The US Treasury has better ways to transfer assets from bank balance sheets to the government balance sheet with less cost.
The focus of the US rescue effort is now on the recapitalization and loan guarantee in the banking system. In effect, the US has decided to build a defensive wall around a core group of nine banks. These banks will not be allowed to fail, and the US government will rely on them to provide the bedrock of ongoing lending in the economy while trying to avoid any of them gaining dominant market share, as JP Morgan did in the 1907 crash. (See THE ROAD TO HYPERINFLATION, Part 2: A failure of central banking, Asia Times Online, June 30, 2008).
But in taking extreme measures to ensure the core banks will survive, the government appears to be abandoning the vast non-bank financial sector to its fate. The Fed will try to offset the enormous competitive advantage gained by banks by buying commercial paper from non-bank financial firms such as GE Capital and GMAC. However, this will not come close to balancing the full benefits of the guarantees for the banks provided by the Federal Deposit Insurance Corporation.
Still, these radical measures to guarantee inter-bank loans and to provide backstops for the commercial paper market do not address the structured finance problem, which few market participants fully understand, and no one alive knows its full extent in terms of who owns what and owes to whom and how much. Bank of International Settlement (BIS) data show that in June 2007, two months before the current credit crisis broke out, total over-the-counter (OTC) derivative contracts notional value outstanding was $516 trillion, with gross market value of $11 trillion; $347 trillion in interest rate derivative contracts with gross market value of $6 trillion; $43 trillion in credit default swaps (CDS) with $741 billion in gross market value. Notional value is not the amount at risk - only market value is at risk. Still, on a notional value of $516 trillion, a fluctuation of 1% in interest can cause market movements of $5.16 trillion, making the government's $700 billion rescue package look like a garden hose in a forest fire. It is true that many of the contracts are mutually canceling in a normal market. But in a market dominated by one sided sell off, the mutual canceling can turn into a receding tide that lowers all boats.
By December 2007, the total notional amount of outstanding derivatives in all categories rose to $596 trillion. Two-thirds of contracts by volume or $393 trillion were interest rate derivatives. Credit default swaps had a notional volume of $58 trillion, up from $43 trillion a year earlier. Currency derivatives reached a volume of $56 trillion. Unallocated derivatives had a notional amount of $71 trillion.
The non-bank financial sector in the US is already under even more severe stress than its banking system. US sovereign aid for banks could intensify the non-bank collapse, unless more steps are taken to aid non-bank institutions in coming days. Contraction of the non-bank sector and failure of non-bank institutions could lead to more distressed sales of assets and firms, frenzied scrambles by non-banks for bank licenses and an accelerated shift of both assets and liabilities into the banking sector. The recent movement of investment banks, such as Morgan Stanley and Goldman Sachs, to transform themselves as regulated banks, is a direct response to new government policy.
The problem is that if the core banks have not only to fill the "capital hole" left by their trading losses and to fund de-leverage moves but also must absorb a wave of illiquid toxic assets liabilities coming into the banking system from the wider non-bank financial sector, banks will need a lot more than their half-share of the $250 billion in government capital, perhaps in multiples of trillions of dollars. No one knows exactly how much.
For example, bankruptcy hearings revealed that Lehman needs to unravel more than 1.5 million contracts, mostly derivative swaps, before it can even to begin dealing with creditor requests for information on the bank's financial situation. Lehman's restructuring advisor is hiring 300 financial specialists for the challenging task, which will take between 45 and 60 days for Lehman merely to get its records in order. It is not clear if the final value of these contracts can be determined before they work themselves out at maturity.
Bank nationalization and private capital
The US plan to nationalize the banking system to save market capitalism will only work if it succeeds in attracting much larger amounts of private capital to the banking system. If not, geometric
multiples of the $250 billion of new government capital may be needed. And market response in days following the government announcement of drastic action suggests that private capital is not likely to be attracted because the value of the toxic assets have been kept at unrealistic levels by government intervention.
Two of the nine core banks being rescued, Citigroup and Merrill Lynch, reported fresh multibillion dollar losses on October 16 that essentially wiped out all profit of recent years. Since mid-2007, when the credit crisis first broke out, the nine core banks have written down the value of the troubled assets by $323 billion, more than double the government's bank rescue package of $125 billion. It is highly unlikely that the core banks can resist the temptation to hoard the new government capital to protect their individual solvency rather taking on new risk of unlocking the flow of credit through the economy, particularly when the credit crunch contagion is spreading to auto finance, credit cards, commercial real estate and corporate finance.
The trading pattern in the stock markets in recent weeks is ominous, with massive selling pressure concentrated in the final hour of trading. This means that traders are unwilling to hold securities overnight for fear of new bad news while they are sleeping. Technically, such trading patterns are a clear signs of a protracted bear market.
Ten days after Congress passed and President Bush signed into law the Emergency Economic Stabilization Act of 2008, the US Treasury announced on October 13 a comprehensive update on progress in implementing the $700 billion Troubled Asset Relief Program (TARP) as authorized by the new law. The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the secretary, in consultation with the Federal Reserve chairman, deems necessary to stabilize financial markets - including equity securities.
The Treasury worked hard with Congress to build in this flexibility because, it said, "the one constant throughout the credit crisis has been its unpredictability". In other words, the Treasury is not certain what the real problem is, or where it lies, or what the total dimension is and how to go about defusing it. It reserves the legislative fexibility of adopting new approaches as the new situation develops overnight, with announcements of new measures before the market opens the next morning.
The new law empowers the Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: which the Treasury characterizes as "the capital hole created by illiquid troubled assets". The term "capital hole" signifies that the credit crisis is more than a passing problem of liquidity. A capital hole is a physical description of systemic insolvency.
The Treasury statement asserts that "addressing this problem should enable our banks to begin lending again." Yet bank lending is only part of the problem. The banking system as currently constituted covers only a fraction of the total credit market, with the non-bank financial sector covering the lion share. (See Credit bust bypasses banks, Asia Times Online, September 6, 2007.)
The US Treasury describes its strategy as "to achieve one simple goal - to restore capital flows to the consumers and businesses that form the core of the US economy by employing multiple tools to help financial institutions remove illiquid assets from their balance sheets, and attract both private and public capital."
Left unsaid is that fact that public capital of course leads to nationalization, and nationalization crowds out private capital unless public capital sells at a loss to private capital. In other words, the government's plan appears to be relying on an ultimate massive transfer of wealth from US taxpayers to holders of surplus private capital, some of whom may be foreigners.
Treasury said that in building the foundation for a strong, decisive and effective TARP, it is working very closely with both domestic and international regulators to "understand" how best to design tools that will be most effective in dealing with the challenges in the US and presumably the global financial system. For example, regulators are helping the Treasury to identify the quickest and most efficient method to purchase equity in financial institutions so they can resume lending. Throughout this process, the Treasury said it has kept in mind one clear priority: "to protect taxpayers by making the best use of their money."
Left unsaid is the certainty that taxpayers will have to take a haircut, and that by bailing out wayward banks, taxpayers may get by with a crew cut instead of a shaved bald head. Unsavory bankers appear to raking the taxpayers over hot coals by first wiping out their savings and then laying an inescapable claim on taxpayer future tax liabilities. On top of a trickling down of prosperity during the boom phase of the bubble in which wealth stayed mostly at the top, there will be a pouring down of the hot oil of loss on taxpayers with the bursting of the bubble.
Investigations of criminal fraud
Prosecutors in three New York area jurisdictions are trying to determine whether top managers at the now-bankrupt Lehman Brothers misled the public about its financial condition and some of the securities it sold during the past nine months. Dick Fuld, Lehman Brothers chief executive, is among 12 executives who have received subpoenas related to federal investigations into the events leading up to the company's bankruptcy filing last month. Other former Lehman executives known to have received subpoenas include Joe Gregory, chief operating officer, Erin Callan, chief financial officer, and Ian Lowitt, chief accounting officer, who replaced Callan as CFO. Grand jury investigations have been launched by federal prosecutors in Manhattan, Brooklyn and New Jersey.
The federal probes had been widely anticipated since Lehman entered bankruptcy protection in September in what became the biggest such filing in US history. Lawsuits filed against the firm allege that its top executives misled investors about Lehman's financial health in 2008. The US attorney in Manhattan, Andrew Cuomo, is reportedly looking at whether Lehman executives marked the firm's commercial real estate properties accurately on its balance sheet, and the US attorney in Brooklyn is investigating Lehman's sale of auction-rate securities, as well as what the company presented at an analysts conference call held by management on September 10, five days before the bankruptcy filing. The US attorney in New Jersey is believed to be investigating disclosures surrounding the sale of securities by Lehman in June.
In addition to the Lehman probes, federal investigators have opened investigations into at least 25 other companies, including AIG, the insurer, and mortgage financiers Fannie Mae and Freddie Mac. The US attorney in Seattle has announced an investigation into the collapse of Washington Mutual, the biggest bank failure in US history.
In September, prosecutors indicted two former Credit Suisse brokers for allegedly lying to clients about what kind of auction-rate securities they were being sold. They also indicted two former Bear Stearns hedge fund managers in June on charges that they intentionally misled investors about the financial conditions of the funds that collapsed in 2007. The Federal Bureau of Investigation has been working closely with the Securities and Exchange Commission and the Department of Justice on many of these cases.
In China's Special Administrative Region of Hong Kong, banks have agreed to buy back complex investment products guaranteed by Lehman Brothers, known as mini-bonds, after public complaints by investors, many elderly, prompted government investigation into bank sales practices for the financial products, which entered into default due to the Lehman bankruptcy in New York. Most investors said that they were led to believe they were buying high-yield bonds, while in reality the mini-bonds were a form of credit default swap with Lehman acting as counterparty.
The Hong Kong Monetary Authority, the bank regulator, referred 24 complaints of alleged misconduct by two unnamed local banks in the sale of Lehman-linked financial products to the watchdog Securities and Futures Commission. The HKMA has received 12,901 complaints concerning mini-bonds days after the Lehman bankruptcy filling. More than 33,000 Hong Kong investors purchased a total HK$11.2 billion (US$1.44 billion) of the mini-bonds from about 20 banks.
Singapore, meanwhile, said it would examine possible inadequate internal controls by financial institutions and suggested some banks would have to take responsibility for compensating investors for allegedly providing misleading information. The Monetary Authority of Singapore estimates that nearly 10,000 people in Singapore invested S$501 million in the products.
Next: Treasury's Assets Relief Program in trouble
Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.
“Blessed is the nation that doesn’t need heroes" Goethe. “Hero-worship is strongest where there is least regard for human freedom.” Herbert Spencer. "My 80% friend isn't my 20% enemy" Ronald Reagan.
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Thursday 23 October 2008
Wednesday 22 October 2008
It's all poor people's fault, isn't it?
Mark Steel
All economists know that banking crashes are caused by Somalian fishermen
I'm not sure what makes it official that the recession's started, but one way of measuring the start is when the government first insists there ARE lots of vacancies, but the unemployed need to be more flexible, and better at applying for jobs, as Gordon Brown stated this week.
This must have been the problem in the 1930s. Millions of people became too fussy, until they perked up around 1940 when some cushy jobs came up, such as marching through the North African desert with a machine gun.
Brown assured us there are 600,000 vacancies, just as Major in 1991 and Tebbit in 1982 told us there were plenty of jobs, if only people would look for them. But even if these vacancies were magically all filled, a minister would tell us, "The unemployed must be prepared to develop new skills, such as murdering people who have a job, then applying to take their place. My granddad taught me those values, often recalling how, rather than sit around whining, he poisoned his way into the Post Office for nine and six a week. It's time we revived the old saying, 'Assassinate, don't beg off the state'."
Another sign that we're in recession is the government blames immigrants. So Phil Woolas, the immigration minister, has said the numbers allowed to come here must be cut, given the economic problems. This is even cleverer than blaming the unemployed, as in effect it's saying, "I'll tell you who's brought this on – people who've never been here." As any economist knows, banking crashes are caused by Somalian fishermen.
This is all in the recession handbook – to ensure governments and banks don't get the blame by blaming the victims. If the criminal system worked the same way, judges would spend all day telling people who'd been burgled, "You have been found guilty of being burgled. You appear to have no sense of how much a burden to the rest of us you've become. Maybe you need lessons in how to make an effort in life, such as the fine example shown by the man who burgled you. You don't catch him sitting around grumbling about his missing CDs, do you?"
Or the government could set up its own counselling service, at which a counsellor leans gently forward and says reassuringly, "You've told me how you were beaten up by your stepfather, and locked in a cupboard, and made to eat mouthfuls of insects, so the important point for you is to tell yourself at all times, especially in your most fragile moments, that this was your fault. There might be occasions when you feel someone else was to blame, but no, it was all down to you. Next."
With similar sensitivity Peter Mandelson has announced that, to help business survive the recession, there will be a postponement of new regulations allowing flexible working for parents. And Mandelson's only been back a week. Give him another fortnight and he'll announce, "Working parents have a variety of options available to them, such as selling their children to China to work in a clothing factory or train as a gymnast. I, for example, had to make myself available at all hours to lounge on a Russian billionaire's yacht. I don't go around saying, 'I'm sorry Mr Oligarch, I can only lounge until four in the afternoon'. I'm prepared to make sacrifices."
So perhaps anyone who finds themselves unemployed, or homeless or otherwise broke as a result of this recession, should march to the House of Commons and announce "I demand to be nationalised. Bail me out for a million and I can carry on, because if I go under, who knows WHAT I might bring down with me."
This must have been the problem in the 1930s. Millions of people became too fussy, until they perked up around 1940 when some cushy jobs came up, such as marching through the North African desert with a machine gun.
Brown assured us there are 600,000 vacancies, just as Major in 1991 and Tebbit in 1982 told us there were plenty of jobs, if only people would look for them. But even if these vacancies were magically all filled, a minister would tell us, "The unemployed must be prepared to develop new skills, such as murdering people who have a job, then applying to take their place. My granddad taught me those values, often recalling how, rather than sit around whining, he poisoned his way into the Post Office for nine and six a week. It's time we revived the old saying, 'Assassinate, don't beg off the state'."
Another sign that we're in recession is the government blames immigrants. So Phil Woolas, the immigration minister, has said the numbers allowed to come here must be cut, given the economic problems. This is even cleverer than blaming the unemployed, as in effect it's saying, "I'll tell you who's brought this on – people who've never been here." As any economist knows, banking crashes are caused by Somalian fishermen.
This is all in the recession handbook – to ensure governments and banks don't get the blame by blaming the victims. If the criminal system worked the same way, judges would spend all day telling people who'd been burgled, "You have been found guilty of being burgled. You appear to have no sense of how much a burden to the rest of us you've become. Maybe you need lessons in how to make an effort in life, such as the fine example shown by the man who burgled you. You don't catch him sitting around grumbling about his missing CDs, do you?"
Or the government could set up its own counselling service, at which a counsellor leans gently forward and says reassuringly, "You've told me how you were beaten up by your stepfather, and locked in a cupboard, and made to eat mouthfuls of insects, so the important point for you is to tell yourself at all times, especially in your most fragile moments, that this was your fault. There might be occasions when you feel someone else was to blame, but no, it was all down to you. Next."
With similar sensitivity Peter Mandelson has announced that, to help business survive the recession, there will be a postponement of new regulations allowing flexible working for parents. And Mandelson's only been back a week. Give him another fortnight and he'll announce, "Working parents have a variety of options available to them, such as selling their children to China to work in a clothing factory or train as a gymnast. I, for example, had to make myself available at all hours to lounge on a Russian billionaire's yacht. I don't go around saying, 'I'm sorry Mr Oligarch, I can only lounge until four in the afternoon'. I'm prepared to make sacrifices."
So perhaps anyone who finds themselves unemployed, or homeless or otherwise broke as a result of this recession, should march to the House of Commons and announce "I demand to be nationalised. Bail me out for a million and I can carry on, because if I go under, who knows WHAT I might bring down with me."
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India's Puzzled Vendors of Washington Consensus
October, 22 2008
By Girish Mishra
Ever since the crisis originating on Wall Street has spread far and wide like a contagion, the clamour for state intervention to save the global economy in general and financial institutions in particular has become vociferous. Those who, till the other day, were decrying the role of state in the running of economy and were singing the virtues of the Washington Consensus-based globalization have gone into hibernation. Nobody now talks of 'the magic of the marketplace' and of great sermons by Hayek and Milton Friedman. In India, Gurcharan Das, Surajit Bhalla, Raghuram Rajan, Kaushik Basu and company seem so demoralized that they are no longer thundering against rural loan waiver, NREGS (National Rural Employment Guarantee Scheme), the so-called Hindu rate of growth, 'disastrous acts' like nationalization of commercial banks by Mrs. Indira Gandhi and the initiation of economic planning by Nehru. Strangely enough, the recommendations by the Raghuram Rajan Committee like privatization of nationalized banks and bringing in convertibility of the rupee on capital account and making pension funds available to the players on the bourse are no longer talked about. Nobody is cautioning against moral hazard when the government is announcing one measure after another for rescuing financial institutions while, till the other day, it was frequently being mentioned for mobilizing opposition to rural loan waiver. Please recall how Kaushik Basu was pontificating in the columns of The Hindustan Times that NREGS would encourage laziness.
It seems strange that most of these gentlemen who have been lambasting economic strategy of the Nehru-Indira Gandhi regimes have become suddenly speechless. Had banks and other financial institutions not been nationalized and state-regulated, India would have been in a miserable plight. India escaped in the 1990s and has largely escaped now from the contagion, thanks to Nehru-Indira Gandhi strategy of economic development, loudly decried by Gurcharan Das in his book which has been lauded by the corporate-controlled press. Thanks to the much abused Left, reforms like capital account convertibility of the rupee, privatization of public sector financial institutions, smashing the organized labour movement and making pension funds available to casino players could not go ahead. Thus it was not without reason that a great relief was felt by the corporate world and the media controlled by it when the Left parted company with the UPA government and it was hoped that the chariot of reforms would go ahead at a break-neck speed without any hindrance. Alas! this has not happened nor is any possibility of its happening in the near future.
Most of these vendors have their hawking confined only to the English-knowing middle class. The only person that has been effectively peddling the Washington Consensus-based globalization among the poor and the downtrodden in India has been Chandrabhan Prasad, a smart journalist from the most populous state of India, Uttar Pradesh. He writes in both English and Hindi with seemingly logical arguments. He takes part in discussions on both electronic media and other public forums. It goes to his credit that leaders and people, cutting across the ideological divide, are enchanted with him. He writes regularly for the pro-BJP daily The Pioneer and was recently taken to America by, Ram Vilas Paswan, a minister in the central government, who claims to be secular.
Chandrabhan Prasad's importance as a vendor of the Washington Consensus-based globalization has been underlined by The New York Times (August 30) correspondent Ms Somini Sengupta in her article entitled "Crusader Sees Wealth as Cure for India Caste Bias". The same piece has been carried by its global edition, The International Herald Tribune (IHT), in its September 1 issue, under a new heading, "Even untouchables get a taste of the New India: Economic growth shatters caste order". The IHT is printed in Hyderabad and reaches the doorsteps of its Indian readers every morning.
The dispatch filed by Ms Sengupta is from his native village, Gaddopur, of Azamgarh district in U.P. with two large photographs, one of them prominently displaying his picture. Chandrabhan Prasad holds that, Dalits (formerly untouchables, comprising the lowest rung of the Hindu society) can better their lot and get rid of their age-old social and economic sufferings, exploitation and neglect by embracing the Washington Consensus-based globalization as this will lead to a decisive improvement in their educational, cultural and economic position. Very soon they will be able to come on par with non-Dalits.
Whenever he "visits his ancestral village in ... feudal badlands of northern India," he tells "his fellow untouchables: Get rid of your cattle, because the care of animals demands children's labor. Invest in your children's education instead of jewelry or land. Cities are good for Dalit outcastes like us, and so is India's new capitalism." A chain-smoking Chandrabhan Prasad, now in his forties, was once a Maoist, always carrying a pistol and recruiting followers always ready to kill upper caste landlords, but now he is a completely changed man. He has now come to the conclusion that the salvation of the Dalits does not lie in Maoism but in "new capitalism" that has been growing in India since 1991 and he firmly believes that "economic liberalization in India is about to do the unthinkable: Destroy the caste system." It has already enabled a large number of Dalits who have migrated to urban areas since 1991 to "escape hunger and humiliation." Thus Ms Sengupta of The New York Times comments: "At a time of tremendous upheaval in India, Prasad is a lightning rod for one of the country's most wrenching debates: Has India's embrace of economic reforms really uplifted those who were consigned for centuries to the bottom of the social ladder?"
He does not attach much value to the government-run welfare programmes aimed at ameliorating the conditions of the Dalits nor is the affirmative action going to be effective in getting many jobs to them. He wants them to have devotion to "the Dalit goddess," i.e., English language which can go a long way to help their liberation. He looks down upon socialism and "has moved to the right" and is vociferously "contemptuous of leftists, and delights in taunting them."
As a sign of progress by the Dalits under the new dispensation, he points out that in his own district now almost all Dalit bridegrooms ride cars rather than horses to their weddings as compared to just 27 per cent in 1990, a year before the era of Washington Consensus-based globalization was heralded by Narasimha Rao-Manmohan Singh duo. Only a few decades ago, the upper caste-dominated Hindu society would not have allowed Dalit bridegrooms to ride even horses to their weddings. The credit for this change goes largely to a booming economy. In his own words, "It has pulled them out of the acute poverty they were in and the day-to-day humiliation of working for a landlord."
There are around 200 million Dalits in India. Chandrabhan Prasad, with a generous financial grant from the University of Pennsylvania, is conducting a sample survey of 20,000 Dalit households in order to know how their daily life has been impacted by economic liberalization since 1991. The preliminary results, he says, indicate that the change is for the better and Dalits are giving up their traditional caste occupations.
The horde of both Indian and foreign journalists taken by Chandrabhan Prasad, just a few weeks before the global financial melt down set in, to show the changing face of the Dalit society under Washington Consensus-based globalization was not convinced. To quote Ms Somini Sengupta, "On a journey across these villages with Prasad, it is difficult to square the utter destitution of his people with Dalit empowerment. The government health center has collapsed into a pile of bricks. Few homes have toilets. Children run barefoot."
In his own village itself, "the Dalit neighborhood still sits on the edge of the village—so as not to pollute the others, the thinking goes—and in the monsoon, when the fields are flooded, the only way to reach the Dalits' homes is to tramp ankle deep in mud. The land that leads to the Dalit enclave is owned by intermediate castes, and they have not allowed for it to be used to build a proper brick lane."
Thus, obviously, there is a divergence between the reality and the myth propagated by him. There is no doubt that substantial benefits of economic development since the 1950s have trickled down to Dalits but they have been cornered largely by the upper segments of the Dalits that include newly-emerged politicians, bureaucrats and businessmen.
If Dalits follow the advice of Chandrabhan Prasad and sell off whatever meager property they have and migrate to urban areas, most of them will be compelled to live in slums and work as casual labourers. In the absence of any movable or immovable property they will not be able to raise funds to set up and carry on their own enterprises. In the present state of the slums, it will not be easy for most of their children to get proper education and training to secure good jobs nor will they live a healthy life. As the Australian journalist, Gregory David Roberts has in his widely read novel Shantaram has depicted, the slums are dens of crimes and once a person lands in them, it is difficult for him to get out. In fact, Chandrabhan Prasad is trying to encourage a new enclosure movement whereby Dalits and other lower class people leave their villages to migrate to urban areas to provide a pool of cheap unorganized labour without any protection as regards terms and conditions of work. In the villages deserted by them contract farming and SEZs (Special Economic Zones) by the corporate sector can prosper without any local resistance. It is needless to say whose interests he intends to serve.
Ever since neo-liberal globalization has started taking roots in India, people like him have been singing its praise. He, as compared with others, has seemingly greater credibility because he comes from Dalit community and this is the reason that he has become an icon for the corporate-controlled media and gullible intellectuals. Theodore Dreiser in his novel An American Tragedy and Arthur Miller in his play Death of A Salesman, long ago, demonstrated that the much touted American dream was more of a myth than reality. In recent times, Joseph Stiglitz, Nobel prize winning economist, has underlined that American dream is nothing but a mirage. Rarely a person goes up in socio-economic hierarchy mainly by dint of his intelligence, hard work and efficiency.
In Indian cities only a tiny proportion of Dalit children are able to go beyond primary schools. Every morning one finds a large number of children from slums collecting garbage or begging in the name of some god or goddess. For them Chandrabhan Prasad's prescription is meaningless. Even in America, as Nobel laureate Saul Bellow's son Adam Bellow in his book In Defense of Nepotism has demonstrated, family background and connections are big factors in the rise of a person in socio-economic hierarchy. Washington Consensus-based globalization is not for equitable distribution of the gains but advocates only the "trickle-down strategy". Obviously, Chandrabhan Prasad's expectations are misplaced. The recent turn of events has put a big question mark before Washington Consensus-based globalization, thus rubbishing all the assertions of Chandrabhan Prasad.
gmishra@girishmishra.com
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Monday 20 October 2008
TOWARDS A NEW ECONOMICS: Questioning Growth
by Herman E. Daly
Any discussion of the relative merits of a stationary, no-growth economy, and its opposite, the economy in which wealth and population are growing, must recognize some important quantitative and qualitative differences between rich and poor countries and social classes. Consider the familiar ratio of gross national product (GNP) to total population (P). This ratio per capita annual product (GNP/P), is the measure usually employed to distinguish rich from poor countries. In spite of its many shortcomings, it does have the virtue of reflecting in one ratio the two fundamental life processes of production and reproduction. Two questions must be asked of both numerator and denominator for both rich and poor nations: namely, what is the quantitative rate of growth, and qualitatively, exactly what is it that is growing?
The rate of growth in the denominator P is much higher in poor countries. While mortality is tending to equality at low levels throughout the world, fertility in poor nation is roughly twice that of rich nations. No other social or economic index divides the world so clearly and consistently into "developed" and "undeveloped" as does fertility.
Qualitatively, the incremental population in poor countries consists largely of hungry illiterates, while in rich countries it consists largely of well-fed members of the middle class. The incremental person in poor countries contributes negligibly to production, but makes few demands on world resources. The incremental person in a rich country adds to his country's GNP, but his high standard of living contributes greatly to depletion of the world's resources and pollution of its spaces.
The numerator, GNP, is growing at roughly the same rate in rich and poor countries—around 4 or 5 percent annually, with the poor countries probably growing slightly faster. Nevertheless, because of their more rapid population growth, the per capita income of poor countries is growing more slowly than that of rich countries. Consequently the gap between rich and poor widens over time.
Incremental GNP in rich and poor nations has very different qualitative significance. At some point, probably already passed in the United States, an extra unit of GNP costs more than it is worth. Extra GNP in a poor country, assuming it does not go mainly to the richest class of that country, represents satisfaction of relatively basic wants (food, clothing, shelter, basic education, etc,) while extra GNP in a rich county, assuming it does not go mainly to the poorest class, represents satisfaction of relatively trivial wants (more electric toothbrushes, yet another brand of cigarettes, more force-feeding through advertising, etc.).
The upshot of these differences is that for the poor, growth in GNP is probably still a good thing, while for the rich it is probably a bad thing. Growth in population, however, is a bad thing for both; for the rich because it makes growth in GNP less avoidable, and for the poor because it makes growth in GNP, and especially per capita GNP, more difficult. The following discussion is concerned exclusively with a rich, affluent-effluent economy such as that of the United States, and will seek to define more clearly the concept of a stationary-state economy, see why it is necessary, consider its economic and social implications, and finally, comment on an emerging political economy of finite wants and non-growth.
THE ART OF GETTING ON
Over a century ago John Stuart Mill, the great synthesizer of classical economics, spoke of the stationary state in words that could hardly be more pertinent today: It must always have been seen, more or less distinctly, by political economists, that the increase in wealth is not boundless; that at the end of what they term the progressive state lies the stationary state, that all progress in wealth is but a postponement of this, and that each step in advance is an approach to it.
I cannot...regard the stationary state of capital and wealth with the unaffected aversion so generally manifested towards it by political economist of the old school. I am inclined to believe that it would be, on the whole, a very considerable improvement on our present condition. I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels which forms the existing type of social life, are the most desirable lot of human kind.
....The northern and middle states of America are a specimen of this stage of civilization in very favorable circumstances...and all that these advantages seem to have yet done for them...is that the life of the whole of one sex is devoted to dollar-hunting, and the other to breeding dollars-hunters...
I know not why it should be a matter of congratulations that persons who are already richer than anyone needs to be, should have doubled their means of consuming things which give little or no pleasure except as representative of wealth...It is only in the backward countries of the world that increased production is still an important object; in those most advanced, what is economically needed is a better distribution, of which one indispensable means is a stricter restraint on population...the density of population necessary to enable mankind to obtain, in the greatest degree, all the advantages both of cooperation and of social intercourse, has in all the most populous countries, been attained...It is not good for a man to be kept perforce at all times in the presence of his species...Nor is there much satisfaction in contemplating the world with nothing left to the spontaneous activity of nature...If the earth must lose that great portion of its pleasantness which it owes to things that the unlimited increase of wealth and population would extirpate from it, for the mere purpose of enabling it to support a larger, but not a happier or better population, I sincerely hope, for the sake of posterity, that they will be content to be stationary, long before a necessity compels therm to it.
It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much and much more likelihood of it being improved, when minds cease to be engrossed by the art of getting on. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labor.
The direction in which political economy has evolved in the last hundred years is not along the path suggested in the quotation. In fact, most economists are hostile to the notion of stationary state and dismiss Mill's discussion as "strongly colored by his 'social views "'(as if the neo-classical theories were not so colored! ); "nothing so much as a prolegomenon to Galbraith's Affluent Society"; or "hopelessly dated." The truth of the matter, however, is that Mill is even more relevant today than in his own time.
DISCOVERING AN INVISIBLE FOOT
Stationary state signifies a constant stock of physical wealth (capital), and a constant stock of people (population). Naturally these stocks do not remain constant by themselves. People die and wealth is physically consumed (worn out, depreciated). Therefore the stocks must be maintained by a rate of inflow (birth, production) equal to the rate of outflow (death, consumption). But this equality may obtain, and stocks remain constant, with high rate of throughput (inflow equal to outflow) or with a low rate.
This definition of stationary state is not complete until the rates of throughput by which the constant stocks are maintained are specified. For a number of reasons the rate of throughput should be as low as possible. For an equilibrium stock the average age at "death" of its members is the reciprocal of the throughput. The faster the water flows through the tank, the less time an average drop spends in the tank. For the population, a low rate of throughput (low birth and death rates) means a high life expectancy and is desirable for that reason alone—at least within limits. For the stock of wealth, a low rate of throughput (low production and low consumption) means greater life expectancy or durability of goods and less time sacrificed to production. This means more "leisure" or non job time to be divided into consumption time, personal and household maintenance time, culture time, and idleness. This too seems socially desirable.
But to these reasons for the desirability of a low rate of maintenance throughput, must be added some reasons for the impracticability of high rate. Since matter and energy cannot be created, production inputs must be taken from the environment, leading to depletion. Since matter and energy cannot be destroyed, an equal amount of matter and energy in the form of waste must be returned to environment, leading to pollution. Hence lower rates of throughput lead to less depletion and pollution, higher rates to more. The limits regarding what rates of depletion and pollution are tolerable must be supplied by ecology. A definite limit to the size of maintenance flows of specific materials is set by ecological thresholds that, if exceeded, cause system breaks. To keep flows below these limits we can operate on two variables; the size of the stocks and the durability of the stocks. As long as we are well below these thresholds, economic cost-benefit calculations regarding depletion and pollution can be relied upon as a guide. But as these thresholds are approached, "marginal cost" and "marginal benefits" become meaningless, and Alfred Marshall's motto, "nature does not make jumps," and most of neoclassical marginalist economics becomes inapplicable. The "marginal" cost of one more step may be to fall into the precipice.
Of the two variables, size of stocks and durability of stocks, only the second requires further clarification. Durability here means more than just how long a commodity lasts. It also includes the number of times that the waste output can be reused as input in the production of something else. Nature has furnished the ideal model of a closed-loop system of material cycles powered by the sun. To the extent that our technology can imitate nature's solar-powered closed-loop, then our stock of wealth will tend to become as durable as our water, soil, and air which are the real sources of wealth since it is only through their agency that plants are able to capture vital solar energy. The ideal is that all physical outputs should be usable either as inputs in some other man-made process, or as non-disruptive inputs into natural material cycles.
The stationary state of wealth and population is maintained by an inflow of low entropy matter energy and outflow of an equal quantity of high entropy matter-energy. (Low entropy matter-energy is highly structured, organized matter and easily usable free energy. High entropy matter-energy is randomized, useless bits of matter, and latent, unusable energy.) Stocks of wealth and people feed on low entropy. Low entropy inputs are received from the environment in exchange for high entropy outputs to the environment. In this overall sense there can be no closed loop or recycling of both matter and energy because of the second law of thermodynamics. However, within the overall system there can be subsystems of individual processes arranged so that their material input-output links form a closed loop. Conceivably all processes in the stationary state could be arranged to form a material closed loop. But the recycling of matter through this closed-loop "world engine" requires energy, part of which becomes irrevocably useless as it is dissipated into heat. Actually, industrial material cycles cannot be 100 per cent closed as this would require an uneconomical, if not impossible expenditure of energy. Thus some of the high entropy output takes the form of randomized bits of matter, and some takes the form of heat.
The limit to using energy to reduce material pollution is the resulting localized thermal pollution, not the very long run, universal thermodynamic heat death. Thus it is important to bear in mind that the expenditure of energy needed for recycling necessarily pollutes.
The mere expenditure of energy is not sufficient to close the material cycle, since energy must work through the agency of material implements. To recycle aluminum beer cans requires more trucks to collect the cans as well as more energy to run the trucks. More trucks require more steel, glass, etc., which require more iron ore and coal, which require still more trucks. This is the familiar web of inter-industry interdependence reflected in an input-output table.
All of these extra intermediate activities required to recycle beer cans involve some inevitable pollution as well. If we think of each industry as adding recycling to its production process, then this will generate a whole chain of direct and indirect demands on matter and energy resources that must be taken away from final demand uses and devoted to the intermediate activity of recycling. It will take more intermediate products and activities to support the same level of final output. The advantage of recycling is that it allows nations to choose the least harmful combination of material and thermal pollution.
The classical economists thought that the stationary state would be made necessary by limits on the depletion side, but the main limits now seem to be in fact occurring on the pollution side. In effect, pollution provides another foundation for the economic law of increasing costs, but has received little attention in this regard since pollution costs are social while depletion costs are usually private. On the input side the environment is partitioned into spheres of private ownership. Depletion of the environment coincides, to some degree, with depletion of the owner's wealth, and inspires at least a minimum of stewardship. On the output side, however, the waste absorption capacity of the environment is not subject to partitioning and private ownership. Air and water are used freely by all and result is a competitive, profligate exploitation—what biologist Garrett Hardin calls the "commons effect," what welfare economists call "external diseconomies," and what I like to call the "invisible foot."
Adam Smith's "invisible hand" leads private self-interest unwittingly to serve the common good. The "invisible foot" leads private self-interest to kick the common good to pieces. Private ownership and private use under a competitive market give rise to the invisible hand. Public ownership with public restraint on use gives rise to the invisible hand (and foot) of the planner. Depletion has been partially restrained by the invisible foot. It is therefore not surprising to find limits occurring mainly on the pollution side.
MINI VS. MAXI
The economic and social implications of the stationary state are enormous and revolutionary. The physical flows of production and consumption must be minimized, not maximized, subject to some agreed upon minimum standard of living and population size. The central concept must be the stock of wealth, not as presently, the flow of income and consumption. (Kenneth Boulding has been making this point since 1949, but with no effect on his fellow economists.) Furthermore, the stock must not grow. The important issue of the stationary state will be distribution, not production. The argument that everyone should be happy as long as his absolute share of the wealth increase, regardless of his relative share, will no longer be available. The arguments justifying inequality in wealth as necessary for saving, investment, and growth will lose their force. With income flows kept low, the focus will be on the distribution of income. Marginal productivity theories and "justifications" pertain only to flows and therefore are not available to explain or justify the distribution of stock ownership.
It so hard to see how ethical appeals to equal shares can be countered. Also, even though physical stocks remain constant, increased income in the form of leisure will result from continued technological improvements. How will it be distributed if not according to some ethical norm of equality? The stationary state would make fewer demands on our environmental resources, but much greater demands on our moral resources. In the past a good case could be made that leaning too heavily on scarce moral resources, rather than relying on abundant self-interest, was the road to serfdom. But in an age of rockets, hydrogen bombs, cybernetics, and genetic control, there is simply no substitute for moral resources and no alternative to relying on them, whether they prove sufficient or not.
With constant physical stocks, economic growth must be in non-physical goods, particularly leisure. Taking the benefits of technological progress in the form of increased leisure is a reversal of the historical practice of taking the benefits mainly in the form of goods and has extensive social implications. In the past, economic development has increased the physical output of a day's work while the number of hours in a day has, of course remained constant, with the result that the opportunity cost of a unit of time in terms of goods has risen. Time is worth more goods, and a good is worth less time. As time becomes more expensive in terms of goods, fewer activities are "worth the time." We become goods-rich and timepoor. Consequently we crowd more activities and more consumption into the same period of time in order to raise the return of non-work time, thereby maximizing the total time. This gives rise to what Staffan Linder has called the "harried leisure class."
Not only do we use work time more efficiently, but also personal consumption time, and we even try to be efficient in our sleep by attempting subconscious learning. Time-intensive activities (friendships, care of the aged and children, meditation and reflection) are sacrificed in favor of commodity-intensive activities (consumption). At some point people will feel rich enough to afford more time-intensive activities even at the higher price. But advertising, by constantly extolling the value of commodities, postpones this point.
From an ecological view, of course, this is exactly the reverse of what is called for. What is needed is a low relative price of time in terms of commodities. Then time-intensive activities will be substituted for material-intensive activities. To become less materialistic in our habits, we must raise the relative price of matter. Keeping physical stocks constant and using technology to increase leisure time will do just that. Thus a policy of non-material growth or leisure-only growth, in addition to being necessary for keeping physical stocks constant, has the further beneficial effect of encouraging a more generous expenditure of time and a more careful use of physical goods. A higher relative price of material intensive goods may, at first glance, be thought to encourage their production. But material goods require material inputs, so costs as well as revenues would increase, eliminating profit incentives to expand.
In the 1930's the late Bertrand Russell proposed a policy of leisure growth rather than commodity growth and viewed the unemployment question in terms of the distribution of leisure. The following words are from his essay, "In Praise of Idleness:"
Suppose that, at a given moment, a certain number of people are engaged in the manufacture of pins. They make as many pins as the world needs, working (say) eight hours a day. Someone makes an invention by which the same number of men can make twice as many pins as before. But the world does not need twice as many pins. Pins are already so cheap that hardly any more will be bought at a lower price. In a sensible world, everybody concerned in the manufacture of pins would take to working four hours instead of eight and everything else would go on as before. But in the actual world this would be thought demoralizing. The men still work eight hours, there are too many pins, some employers go bankrupt, and half the men previously concerned in making pins are thrown out of work. There is in the end just as much leisure as on the other plan, but half the men are totally idle while half are still overworked. In this way it is insured that the unavoidable leisure shall cause misery all round instead of being a universal source of happiness. Can anything more insane be imagined.
In addition to this strategy of leisure-only growth, we can internalize some pollution costs by charging effluent taxes. Economic efficiency requires only that a price be placed on environmental amenities, it does not tell us who should pay the price. The producer may claim that the use of the environment to absorb waste products is a right that all organisms and firms must of necessity enjoy, and whoever wants air and water to be cleaner than it is at any given time should pay for it. Consumers may argue that whoever makes the environment dirtier than it otherwise would be should be the one to pay. Again the issue becomes basically one of distribution—not what the price should be, but who should pay it. The fact that the price takes the form of a tax automatically decides who should receive the price—the government. But this raises more distribution issues, and the solutions to these problems are ethical, not technical.
Another possibility of non-material growth is to redistribute wealth from the low marginal utility uses of the rich to the high marginal uses of the poor, thereby increasing total social utility. Joan Robinson has noted that this egalitarian implication of the law of diminishing marginal utility was "sterilized mainly by slipping from utility to physical output as the object to be maximized." As we move back from physical output to non-physical utility, the egalitarian implications become unsterilized.
Traditional Keynesian full employment policies will no longer be available to palliate the distribution question since they require growth. By allowing full employment, growth permits the old principles of distribution (income-through jobs) to continue in effect. But with no growth in physical stocks and policy of using technological progress to increase leisure, full employment is no longer a workable principle of distribution. Furthermore, we add a new dimension to the distribution problem—how to distribute leisure.
A stationary population, with low birth and death rates, would imply a greater percentage of old people than in the present growing population, although hardly a geriatric society as some youth worshippers claim. Since old people do not work, the distribution problem is further accentuated. However, the percentage of children will diminish, so in effect there will be mainly a change in direction of transfer payments. More of the earnings of working adults will be transferred to the old and less to children.
What institutions will provide the control necessary to keep the stocks of wealth and people constant, with the minimum sacrifice of individual freedom? It would be far too simpleminded to blurt out "socialism" as the answer, since socialist states are as badly afflicted with growth mania as capitalist states. The Marxist eschatology of the classless society is based on the premise of complete abundance; consequently economic growth is exceedingly important in socialist theory and practice. And population growth, for the orthodox Marxist, cannot present problems under socialist institutions. This latter tenet has weakened a bit in recent years, but the first continues in full force. However, it is equally simpleminded to believe that our present big capital, big labor, big government, big military type of private profit capitalism is capable of the required foresight and restraint, and that the addition of a few effluent and severance taxes here and there will solve the problem. The issues are much deeper and inevitably impinge in the distribution of income and wealth.
Why do people produce junk and cajole other people into buying it? Not out of any innate love for junk or hatred of the environment, but simply in order to earn an income. If—with the prevailing distribution of wealth, income, and power-production governed by the profit motive results in the output of great amounts of noxious junk, then something is wrong with the distribution of wealth and power, the profit motive, or both. We need some principle of income distribution independent of and supplementary to their income-through jobs link. A start in this direction was made by Oskar Lange, who attempted to combine some socialist principles of distribution with the allocative efficiency advantages of the market system. However, at least as much remains to be done here as remains to be done in designing institutions for stabilizing population. But before progress can be made on their issues we must recognize their necessity and blow the whistle on growth mania.
STUNTING growth mania
Although the ideas expressed by Mill have been totally dominated by growth mania, there are an increasing number of economists who have frankly expressed their disenchantment with the growth ideology. Arguments stressing ecological limits to wealth and population have been made by Kenneth Boulding and Joseph Spengler, both past presidents of the American Economic Association. Recently E.J. Mishan, Tibor Scitovsky, and Staffan Linder have made penetrating antigrowth arguments. There is also much in Galbraith that is anti-growth—at least against growth of commodities whose desirability must be manufactured along with the product.
In spite of these beginnings, most economists are still governed by the assumption of infinite wants, or the postulate of non satiety as the mathematical economists call it. Any single want can be satisfied, but all wants in the aggregate cannot be. Wants are infinite in number if not in intensity, and the satisfaction of some wants stimulates others. If wants are infinite, growth is always justified—or so it would seem.
Even while accepting the above hypothesis, one could still object to growth mania on the grounds that given the completely inadequate definition of GNP, "growth" simply means the satisfaction of ever more trivial wants, while simultaneously creating even more powerful externalities that destroy ever more basic environmental amenities. To defend ourselves against these externalities, we produce even more, and instead of subtracting the purely defensive expenditures, we add them. For example, the medical bills paid for treatment of cigarette-induced cancer and pollution-induced emphysema are added to GNP, when in a welfare sense they clearly should be subtracted. This should be labeled swelling, not growth. The satisfaction of wants crated by brainwashing and "hog washing" the public over the mass media also represents mostly swelling.
A policy of maximizing GNP is practically equivalent to a policy of maximizing depletion and pollution. This results from the fact that GNP measures the flow of a physical aggregate. Since matter and energy cannot be created, production is simply the transformation of raw material inputs extracted from the environment; consequently, maximizing the physical flow of production implies maximizing depletion. Since matter and energy cannot be destroyed, consumption is merely the transformation into waste of GNP, resulting in environmental pollution. One may hesitate to say "maximal" pollution on the grounds that the production inflow into the stock can be greater than the consumption outflow as long as the stock increases as it does in a growing economy.
To the extent that wealth becomes more durable, the production of waste can be kept low by expanding the stock. But is this in fact what happens? If one wants to maximize production, one must have a market. Increasing the durability of goods reduces the replacement demand. The faster things wear out, the greater can be the flow of production, one must have a market. Increasing the durability of goods reduces the replacement demand. The faster things wear out, the greater can be the flow of production. To the extent that consumer reaction and weakening competition permit, there is every incentive to minimize durability. Planned obsolescence, programmed self-destruction, and other waste making practices so well discussed by Vance Packard are the logical result of maximizing a marketed physical flow. If we must maximize something it should be the stock of wealth, not the ecological limits that constrain this maximization.
But why this perverse emphasis on flows, this flow fetishism of standard economic theory? Again the underlying issue is distribution. There is no theoretical explanation, much less justification, for the distribution of the stock of wealth. It is a historical datum. But the distribution of the flow of income is at least partly explained by marginal productivity theory, which at times is even misinterpreted as a justification. Everyone gets a part of the flow—call it wages, interest, rent or profit—and it all looks rather fair. But not everyone owns a piece of the stock, and that does not seem quite so fair. Looking only at their flow helps to avoid disturbing thoughts.
But even if wants were infinite, and even if we redefine GNP to eliminate swelling, infinite wants cannot be satisfied by maximizing physical production. As people grow richer they will want more leisure. Physical growth cannot produce leisure. As physical productivity increases, leisure can be produced by working fewer hours to produce the same physical output. Even the common-sense argument for infinite wants—that the rich seem to enjoy their high consumption—cannot be generalized without committing the fallacy of composition. If all earned the same high income, a consumption limit occurs sooner than if only a minority had high incomes. The reason is that a large part of the consumption by plutocrats is consumption of personal and maintenance services rendered by the poor, which would not be available if everyone were rich. By hiring the poor to maintain and even purchase commodities for them, the rich devote their limited consumption time only to the most pleasurable aspects of consumption. The rich only ride their horses—they do not clean, comb, saddle, and feed them, nor do they clean the stables. If all did their own maintenance work, consumption would perforce be less. Time sets a limit.
The big difficulty with the infinite wants assumption, however, is pointed out by Keynes, who in spite of the use made of his theories in support of growth, was certainly no advocate of unlimited growth, as seen in the following quotation:
Now it is true that the needs of human beings seem to be insatiable. But they fall into two classes—those needs which are absolute in the sense that we feel them whatever the situation of our fellow human begins may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still they are. But this is not so true of the absolute needs—a point may soon be reached, much sooner perhaps than we are all of us aware of, when those needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.
Lumping these two categories together and speaking of infinite wants in general can only muddy the waters. The same distinction is implicit in Mill, who spoke despairingly of "consuming things which give little or no pleasure except as representative of wealth..."
The source of growth lies in the use made of surplus, the controllers of surplus may be a priesthood that controls physical idols made from the surplus and used to extract more surplus in the form of offerings and tribute. Or there may be feudal lords, who through the power given by possession of the land extract a surplus in the form of rent and the corvee. Or they may be capitalists (state or private) who use the surplus in the form of capital to gain more surplus in the form of interest and quasi-rents.
If growth must cease, the surplus becomes less important and so do those who control it. If the surplus is not to lead to growth, then it must be consumed, and ethical demands for equal surplus could not be countered by productivity arguments for inequality as necessary for accumulation. The surplus would eventually enter into the customary standard of living and cease to be recognized as a surplus. Accumulation in excess of depreciation, and the privileges attached thereto, would not exist.
We no longer speak of worshipping idols. Instead of idols we have an abomination called GNP, large parts of which, however, bear such revealing names as Apollo, Poseidon, and Zeus. Instead of worshipping the idol, we maximize it. The idol has become rather less concrete and material, while the mode of adoration has become technical rather than personal. But fundamentally, idolatry remains idolatry.
This article was excerpted from an article entitled "Toward a Stationary-State Economy," in Patient Earth, edited by John Harte and Robert Socolow. New York: Holt, Rinehart and Winston, Inc., 1971.
Any discussion of the relative merits of a stationary, no-growth economy, and its opposite, the economy in which wealth and population are growing, must recognize some important quantitative and qualitative differences between rich and poor countries and social classes. Consider the familiar ratio of gross national product (GNP) to total population (P). This ratio per capita annual product (GNP/P), is the measure usually employed to distinguish rich from poor countries. In spite of its many shortcomings, it does have the virtue of reflecting in one ratio the two fundamental life processes of production and reproduction. Two questions must be asked of both numerator and denominator for both rich and poor nations: namely, what is the quantitative rate of growth, and qualitatively, exactly what is it that is growing?
The rate of growth in the denominator P is much higher in poor countries. While mortality is tending to equality at low levels throughout the world, fertility in poor nation is roughly twice that of rich nations. No other social or economic index divides the world so clearly and consistently into "developed" and "undeveloped" as does fertility.
Qualitatively, the incremental population in poor countries consists largely of hungry illiterates, while in rich countries it consists largely of well-fed members of the middle class. The incremental person in poor countries contributes negligibly to production, but makes few demands on world resources. The incremental person in a rich country adds to his country's GNP, but his high standard of living contributes greatly to depletion of the world's resources and pollution of its spaces.
The numerator, GNP, is growing at roughly the same rate in rich and poor countries—around 4 or 5 percent annually, with the poor countries probably growing slightly faster. Nevertheless, because of their more rapid population growth, the per capita income of poor countries is growing more slowly than that of rich countries. Consequently the gap between rich and poor widens over time.
Incremental GNP in rich and poor nations has very different qualitative significance. At some point, probably already passed in the United States, an extra unit of GNP costs more than it is worth. Extra GNP in a poor country, assuming it does not go mainly to the richest class of that country, represents satisfaction of relatively basic wants (food, clothing, shelter, basic education, etc,) while extra GNP in a rich county, assuming it does not go mainly to the poorest class, represents satisfaction of relatively trivial wants (more electric toothbrushes, yet another brand of cigarettes, more force-feeding through advertising, etc.).
The upshot of these differences is that for the poor, growth in GNP is probably still a good thing, while for the rich it is probably a bad thing. Growth in population, however, is a bad thing for both; for the rich because it makes growth in GNP less avoidable, and for the poor because it makes growth in GNP, and especially per capita GNP, more difficult. The following discussion is concerned exclusively with a rich, affluent-effluent economy such as that of the United States, and will seek to define more clearly the concept of a stationary-state economy, see why it is necessary, consider its economic and social implications, and finally, comment on an emerging political economy of finite wants and non-growth.
THE ART OF GETTING ON
Over a century ago John Stuart Mill, the great synthesizer of classical economics, spoke of the stationary state in words that could hardly be more pertinent today: It must always have been seen, more or less distinctly, by political economists, that the increase in wealth is not boundless; that at the end of what they term the progressive state lies the stationary state, that all progress in wealth is but a postponement of this, and that each step in advance is an approach to it.
I cannot...regard the stationary state of capital and wealth with the unaffected aversion so generally manifested towards it by political economist of the old school. I am inclined to believe that it would be, on the whole, a very considerable improvement on our present condition. I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels which forms the existing type of social life, are the most desirable lot of human kind.
....The northern and middle states of America are a specimen of this stage of civilization in very favorable circumstances...and all that these advantages seem to have yet done for them...is that the life of the whole of one sex is devoted to dollar-hunting, and the other to breeding dollars-hunters...
I know not why it should be a matter of congratulations that persons who are already richer than anyone needs to be, should have doubled their means of consuming things which give little or no pleasure except as representative of wealth...It is only in the backward countries of the world that increased production is still an important object; in those most advanced, what is economically needed is a better distribution, of which one indispensable means is a stricter restraint on population...the density of population necessary to enable mankind to obtain, in the greatest degree, all the advantages both of cooperation and of social intercourse, has in all the most populous countries, been attained...It is not good for a man to be kept perforce at all times in the presence of his species...Nor is there much satisfaction in contemplating the world with nothing left to the spontaneous activity of nature...If the earth must lose that great portion of its pleasantness which it owes to things that the unlimited increase of wealth and population would extirpate from it, for the mere purpose of enabling it to support a larger, but not a happier or better population, I sincerely hope, for the sake of posterity, that they will be content to be stationary, long before a necessity compels therm to it.
It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much and much more likelihood of it being improved, when minds cease to be engrossed by the art of getting on. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labor.
The direction in which political economy has evolved in the last hundred years is not along the path suggested in the quotation. In fact, most economists are hostile to the notion of stationary state and dismiss Mill's discussion as "strongly colored by his 'social views "'(as if the neo-classical theories were not so colored! ); "nothing so much as a prolegomenon to Galbraith's Affluent Society"; or "hopelessly dated." The truth of the matter, however, is that Mill is even more relevant today than in his own time.
DISCOVERING AN INVISIBLE FOOT
Stationary state signifies a constant stock of physical wealth (capital), and a constant stock of people (population). Naturally these stocks do not remain constant by themselves. People die and wealth is physically consumed (worn out, depreciated). Therefore the stocks must be maintained by a rate of inflow (birth, production) equal to the rate of outflow (death, consumption). But this equality may obtain, and stocks remain constant, with high rate of throughput (inflow equal to outflow) or with a low rate.
This definition of stationary state is not complete until the rates of throughput by which the constant stocks are maintained are specified. For a number of reasons the rate of throughput should be as low as possible. For an equilibrium stock the average age at "death" of its members is the reciprocal of the throughput. The faster the water flows through the tank, the less time an average drop spends in the tank. For the population, a low rate of throughput (low birth and death rates) means a high life expectancy and is desirable for that reason alone—at least within limits. For the stock of wealth, a low rate of throughput (low production and low consumption) means greater life expectancy or durability of goods and less time sacrificed to production. This means more "leisure" or non job time to be divided into consumption time, personal and household maintenance time, culture time, and idleness. This too seems socially desirable.
But to these reasons for the desirability of a low rate of maintenance throughput, must be added some reasons for the impracticability of high rate. Since matter and energy cannot be created, production inputs must be taken from the environment, leading to depletion. Since matter and energy cannot be destroyed, an equal amount of matter and energy in the form of waste must be returned to environment, leading to pollution. Hence lower rates of throughput lead to less depletion and pollution, higher rates to more. The limits regarding what rates of depletion and pollution are tolerable must be supplied by ecology. A definite limit to the size of maintenance flows of specific materials is set by ecological thresholds that, if exceeded, cause system breaks. To keep flows below these limits we can operate on two variables; the size of the stocks and the durability of the stocks. As long as we are well below these thresholds, economic cost-benefit calculations regarding depletion and pollution can be relied upon as a guide. But as these thresholds are approached, "marginal cost" and "marginal benefits" become meaningless, and Alfred Marshall's motto, "nature does not make jumps," and most of neoclassical marginalist economics becomes inapplicable. The "marginal" cost of one more step may be to fall into the precipice.
Of the two variables, size of stocks and durability of stocks, only the second requires further clarification. Durability here means more than just how long a commodity lasts. It also includes the number of times that the waste output can be reused as input in the production of something else. Nature has furnished the ideal model of a closed-loop system of material cycles powered by the sun. To the extent that our technology can imitate nature's solar-powered closed-loop, then our stock of wealth will tend to become as durable as our water, soil, and air which are the real sources of wealth since it is only through their agency that plants are able to capture vital solar energy. The ideal is that all physical outputs should be usable either as inputs in some other man-made process, or as non-disruptive inputs into natural material cycles.
The stationary state of wealth and population is maintained by an inflow of low entropy matter energy and outflow of an equal quantity of high entropy matter-energy. (Low entropy matter-energy is highly structured, organized matter and easily usable free energy. High entropy matter-energy is randomized, useless bits of matter, and latent, unusable energy.) Stocks of wealth and people feed on low entropy. Low entropy inputs are received from the environment in exchange for high entropy outputs to the environment. In this overall sense there can be no closed loop or recycling of both matter and energy because of the second law of thermodynamics. However, within the overall system there can be subsystems of individual processes arranged so that their material input-output links form a closed loop. Conceivably all processes in the stationary state could be arranged to form a material closed loop. But the recycling of matter through this closed-loop "world engine" requires energy, part of which becomes irrevocably useless as it is dissipated into heat. Actually, industrial material cycles cannot be 100 per cent closed as this would require an uneconomical, if not impossible expenditure of energy. Thus some of the high entropy output takes the form of randomized bits of matter, and some takes the form of heat.
The limit to using energy to reduce material pollution is the resulting localized thermal pollution, not the very long run, universal thermodynamic heat death. Thus it is important to bear in mind that the expenditure of energy needed for recycling necessarily pollutes.
The mere expenditure of energy is not sufficient to close the material cycle, since energy must work through the agency of material implements. To recycle aluminum beer cans requires more trucks to collect the cans as well as more energy to run the trucks. More trucks require more steel, glass, etc., which require more iron ore and coal, which require still more trucks. This is the familiar web of inter-industry interdependence reflected in an input-output table.
All of these extra intermediate activities required to recycle beer cans involve some inevitable pollution as well. If we think of each industry as adding recycling to its production process, then this will generate a whole chain of direct and indirect demands on matter and energy resources that must be taken away from final demand uses and devoted to the intermediate activity of recycling. It will take more intermediate products and activities to support the same level of final output. The advantage of recycling is that it allows nations to choose the least harmful combination of material and thermal pollution.
The classical economists thought that the stationary state would be made necessary by limits on the depletion side, but the main limits now seem to be in fact occurring on the pollution side. In effect, pollution provides another foundation for the economic law of increasing costs, but has received little attention in this regard since pollution costs are social while depletion costs are usually private. On the input side the environment is partitioned into spheres of private ownership. Depletion of the environment coincides, to some degree, with depletion of the owner's wealth, and inspires at least a minimum of stewardship. On the output side, however, the waste absorption capacity of the environment is not subject to partitioning and private ownership. Air and water are used freely by all and result is a competitive, profligate exploitation—what biologist Garrett Hardin calls the "commons effect," what welfare economists call "external diseconomies," and what I like to call the "invisible foot."
Adam Smith's "invisible hand" leads private self-interest unwittingly to serve the common good. The "invisible foot" leads private self-interest to kick the common good to pieces. Private ownership and private use under a competitive market give rise to the invisible hand. Public ownership with public restraint on use gives rise to the invisible hand (and foot) of the planner. Depletion has been partially restrained by the invisible foot. It is therefore not surprising to find limits occurring mainly on the pollution side.
MINI VS. MAXI
The economic and social implications of the stationary state are enormous and revolutionary. The physical flows of production and consumption must be minimized, not maximized, subject to some agreed upon minimum standard of living and population size. The central concept must be the stock of wealth, not as presently, the flow of income and consumption. (Kenneth Boulding has been making this point since 1949, but with no effect on his fellow economists.) Furthermore, the stock must not grow. The important issue of the stationary state will be distribution, not production. The argument that everyone should be happy as long as his absolute share of the wealth increase, regardless of his relative share, will no longer be available. The arguments justifying inequality in wealth as necessary for saving, investment, and growth will lose their force. With income flows kept low, the focus will be on the distribution of income. Marginal productivity theories and "justifications" pertain only to flows and therefore are not available to explain or justify the distribution of stock ownership.
It so hard to see how ethical appeals to equal shares can be countered. Also, even though physical stocks remain constant, increased income in the form of leisure will result from continued technological improvements. How will it be distributed if not according to some ethical norm of equality? The stationary state would make fewer demands on our environmental resources, but much greater demands on our moral resources. In the past a good case could be made that leaning too heavily on scarce moral resources, rather than relying on abundant self-interest, was the road to serfdom. But in an age of rockets, hydrogen bombs, cybernetics, and genetic control, there is simply no substitute for moral resources and no alternative to relying on them, whether they prove sufficient or not.
With constant physical stocks, economic growth must be in non-physical goods, particularly leisure. Taking the benefits of technological progress in the form of increased leisure is a reversal of the historical practice of taking the benefits mainly in the form of goods and has extensive social implications. In the past, economic development has increased the physical output of a day's work while the number of hours in a day has, of course remained constant, with the result that the opportunity cost of a unit of time in terms of goods has risen. Time is worth more goods, and a good is worth less time. As time becomes more expensive in terms of goods, fewer activities are "worth the time." We become goods-rich and timepoor. Consequently we crowd more activities and more consumption into the same period of time in order to raise the return of non-work time, thereby maximizing the total time. This gives rise to what Staffan Linder has called the "harried leisure class."
Not only do we use work time more efficiently, but also personal consumption time, and we even try to be efficient in our sleep by attempting subconscious learning. Time-intensive activities (friendships, care of the aged and children, meditation and reflection) are sacrificed in favor of commodity-intensive activities (consumption). At some point people will feel rich enough to afford more time-intensive activities even at the higher price. But advertising, by constantly extolling the value of commodities, postpones this point.
From an ecological view, of course, this is exactly the reverse of what is called for. What is needed is a low relative price of time in terms of commodities. Then time-intensive activities will be substituted for material-intensive activities. To become less materialistic in our habits, we must raise the relative price of matter. Keeping physical stocks constant and using technology to increase leisure time will do just that. Thus a policy of non-material growth or leisure-only growth, in addition to being necessary for keeping physical stocks constant, has the further beneficial effect of encouraging a more generous expenditure of time and a more careful use of physical goods. A higher relative price of material intensive goods may, at first glance, be thought to encourage their production. But material goods require material inputs, so costs as well as revenues would increase, eliminating profit incentives to expand.
In the 1930's the late Bertrand Russell proposed a policy of leisure growth rather than commodity growth and viewed the unemployment question in terms of the distribution of leisure. The following words are from his essay, "In Praise of Idleness:"
Suppose that, at a given moment, a certain number of people are engaged in the manufacture of pins. They make as many pins as the world needs, working (say) eight hours a day. Someone makes an invention by which the same number of men can make twice as many pins as before. But the world does not need twice as many pins. Pins are already so cheap that hardly any more will be bought at a lower price. In a sensible world, everybody concerned in the manufacture of pins would take to working four hours instead of eight and everything else would go on as before. But in the actual world this would be thought demoralizing. The men still work eight hours, there are too many pins, some employers go bankrupt, and half the men previously concerned in making pins are thrown out of work. There is in the end just as much leisure as on the other plan, but half the men are totally idle while half are still overworked. In this way it is insured that the unavoidable leisure shall cause misery all round instead of being a universal source of happiness. Can anything more insane be imagined.
In addition to this strategy of leisure-only growth, we can internalize some pollution costs by charging effluent taxes. Economic efficiency requires only that a price be placed on environmental amenities, it does not tell us who should pay the price. The producer may claim that the use of the environment to absorb waste products is a right that all organisms and firms must of necessity enjoy, and whoever wants air and water to be cleaner than it is at any given time should pay for it. Consumers may argue that whoever makes the environment dirtier than it otherwise would be should be the one to pay. Again the issue becomes basically one of distribution—not what the price should be, but who should pay it. The fact that the price takes the form of a tax automatically decides who should receive the price—the government. But this raises more distribution issues, and the solutions to these problems are ethical, not technical.
Another possibility of non-material growth is to redistribute wealth from the low marginal utility uses of the rich to the high marginal uses of the poor, thereby increasing total social utility. Joan Robinson has noted that this egalitarian implication of the law of diminishing marginal utility was "sterilized mainly by slipping from utility to physical output as the object to be maximized." As we move back from physical output to non-physical utility, the egalitarian implications become unsterilized.
Traditional Keynesian full employment policies will no longer be available to palliate the distribution question since they require growth. By allowing full employment, growth permits the old principles of distribution (income-through jobs) to continue in effect. But with no growth in physical stocks and policy of using technological progress to increase leisure, full employment is no longer a workable principle of distribution. Furthermore, we add a new dimension to the distribution problem—how to distribute leisure.
A stationary population, with low birth and death rates, would imply a greater percentage of old people than in the present growing population, although hardly a geriatric society as some youth worshippers claim. Since old people do not work, the distribution problem is further accentuated. However, the percentage of children will diminish, so in effect there will be mainly a change in direction of transfer payments. More of the earnings of working adults will be transferred to the old and less to children.
What institutions will provide the control necessary to keep the stocks of wealth and people constant, with the minimum sacrifice of individual freedom? It would be far too simpleminded to blurt out "socialism" as the answer, since socialist states are as badly afflicted with growth mania as capitalist states. The Marxist eschatology of the classless society is based on the premise of complete abundance; consequently economic growth is exceedingly important in socialist theory and practice. And population growth, for the orthodox Marxist, cannot present problems under socialist institutions. This latter tenet has weakened a bit in recent years, but the first continues in full force. However, it is equally simpleminded to believe that our present big capital, big labor, big government, big military type of private profit capitalism is capable of the required foresight and restraint, and that the addition of a few effluent and severance taxes here and there will solve the problem. The issues are much deeper and inevitably impinge in the distribution of income and wealth.
Why do people produce junk and cajole other people into buying it? Not out of any innate love for junk or hatred of the environment, but simply in order to earn an income. If—with the prevailing distribution of wealth, income, and power-production governed by the profit motive results in the output of great amounts of noxious junk, then something is wrong with the distribution of wealth and power, the profit motive, or both. We need some principle of income distribution independent of and supplementary to their income-through jobs link. A start in this direction was made by Oskar Lange, who attempted to combine some socialist principles of distribution with the allocative efficiency advantages of the market system. However, at least as much remains to be done here as remains to be done in designing institutions for stabilizing population. But before progress can be made on their issues we must recognize their necessity and blow the whistle on growth mania.
STUNTING growth mania
Although the ideas expressed by Mill have been totally dominated by growth mania, there are an increasing number of economists who have frankly expressed their disenchantment with the growth ideology. Arguments stressing ecological limits to wealth and population have been made by Kenneth Boulding and Joseph Spengler, both past presidents of the American Economic Association. Recently E.J. Mishan, Tibor Scitovsky, and Staffan Linder have made penetrating antigrowth arguments. There is also much in Galbraith that is anti-growth—at least against growth of commodities whose desirability must be manufactured along with the product.
In spite of these beginnings, most economists are still governed by the assumption of infinite wants, or the postulate of non satiety as the mathematical economists call it. Any single want can be satisfied, but all wants in the aggregate cannot be. Wants are infinite in number if not in intensity, and the satisfaction of some wants stimulates others. If wants are infinite, growth is always justified—or so it would seem.
Even while accepting the above hypothesis, one could still object to growth mania on the grounds that given the completely inadequate definition of GNP, "growth" simply means the satisfaction of ever more trivial wants, while simultaneously creating even more powerful externalities that destroy ever more basic environmental amenities. To defend ourselves against these externalities, we produce even more, and instead of subtracting the purely defensive expenditures, we add them. For example, the medical bills paid for treatment of cigarette-induced cancer and pollution-induced emphysema are added to GNP, when in a welfare sense they clearly should be subtracted. This should be labeled swelling, not growth. The satisfaction of wants crated by brainwashing and "hog washing" the public over the mass media also represents mostly swelling.
A policy of maximizing GNP is practically equivalent to a policy of maximizing depletion and pollution. This results from the fact that GNP measures the flow of a physical aggregate. Since matter and energy cannot be created, production is simply the transformation of raw material inputs extracted from the environment; consequently, maximizing the physical flow of production implies maximizing depletion. Since matter and energy cannot be destroyed, consumption is merely the transformation into waste of GNP, resulting in environmental pollution. One may hesitate to say "maximal" pollution on the grounds that the production inflow into the stock can be greater than the consumption outflow as long as the stock increases as it does in a growing economy.
To the extent that wealth becomes more durable, the production of waste can be kept low by expanding the stock. But is this in fact what happens? If one wants to maximize production, one must have a market. Increasing the durability of goods reduces the replacement demand. The faster things wear out, the greater can be the flow of production, one must have a market. Increasing the durability of goods reduces the replacement demand. The faster things wear out, the greater can be the flow of production. To the extent that consumer reaction and weakening competition permit, there is every incentive to minimize durability. Planned obsolescence, programmed self-destruction, and other waste making practices so well discussed by Vance Packard are the logical result of maximizing a marketed physical flow. If we must maximize something it should be the stock of wealth, not the ecological limits that constrain this maximization.
But why this perverse emphasis on flows, this flow fetishism of standard economic theory? Again the underlying issue is distribution. There is no theoretical explanation, much less justification, for the distribution of the stock of wealth. It is a historical datum. But the distribution of the flow of income is at least partly explained by marginal productivity theory, which at times is even misinterpreted as a justification. Everyone gets a part of the flow—call it wages, interest, rent or profit—and it all looks rather fair. But not everyone owns a piece of the stock, and that does not seem quite so fair. Looking only at their flow helps to avoid disturbing thoughts.
But even if wants were infinite, and even if we redefine GNP to eliminate swelling, infinite wants cannot be satisfied by maximizing physical production. As people grow richer they will want more leisure. Physical growth cannot produce leisure. As physical productivity increases, leisure can be produced by working fewer hours to produce the same physical output. Even the common-sense argument for infinite wants—that the rich seem to enjoy their high consumption—cannot be generalized without committing the fallacy of composition. If all earned the same high income, a consumption limit occurs sooner than if only a minority had high incomes. The reason is that a large part of the consumption by plutocrats is consumption of personal and maintenance services rendered by the poor, which would not be available if everyone were rich. By hiring the poor to maintain and even purchase commodities for them, the rich devote their limited consumption time only to the most pleasurable aspects of consumption. The rich only ride their horses—they do not clean, comb, saddle, and feed them, nor do they clean the stables. If all did their own maintenance work, consumption would perforce be less. Time sets a limit.
The big difficulty with the infinite wants assumption, however, is pointed out by Keynes, who in spite of the use made of his theories in support of growth, was certainly no advocate of unlimited growth, as seen in the following quotation:
Now it is true that the needs of human beings seem to be insatiable. But they fall into two classes—those needs which are absolute in the sense that we feel them whatever the situation of our fellow human begins may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still they are. But this is not so true of the absolute needs—a point may soon be reached, much sooner perhaps than we are all of us aware of, when those needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.
Lumping these two categories together and speaking of infinite wants in general can only muddy the waters. The same distinction is implicit in Mill, who spoke despairingly of "consuming things which give little or no pleasure except as representative of wealth..."
The source of growth lies in the use made of surplus, the controllers of surplus may be a priesthood that controls physical idols made from the surplus and used to extract more surplus in the form of offerings and tribute. Or there may be feudal lords, who through the power given by possession of the land extract a surplus in the form of rent and the corvee. Or they may be capitalists (state or private) who use the surplus in the form of capital to gain more surplus in the form of interest and quasi-rents.
If growth must cease, the surplus becomes less important and so do those who control it. If the surplus is not to lead to growth, then it must be consumed, and ethical demands for equal surplus could not be countered by productivity arguments for inequality as necessary for accumulation. The surplus would eventually enter into the customary standard of living and cease to be recognized as a surplus. Accumulation in excess of depreciation, and the privileges attached thereto, would not exist.
We no longer speak of worshipping idols. Instead of idols we have an abomination called GNP, large parts of which, however, bear such revealing names as Apollo, Poseidon, and Zeus. Instead of worshipping the idol, we maximize it. The idol has become rather less concrete and material, while the mode of adoration has become technical rather than personal. But fundamentally, idolatry remains idolatry.
This article was excerpted from an article entitled "Toward a Stationary-State Economy," in Patient Earth, edited by John Harte and Robert Socolow. New York: Holt, Rinehart and Winston, Inc., 1971.
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