Bulletin 652
Subject: Political
Economy vs. Modern Economic Science.
24 May 2015
Grenoble, France
Dear
Colleagues and Friends of CEIMSA,
Below
please find a suggested list of five important essays on political economy for your summer
enjoyment and instruction --to assist you with actually understanding what is
going on around us and through us. We are experiencing now a new level of
violence by the proverbial ‘invisible hand’ of liberal capitalism. The old
system has become once again militarized, necessarily displacing in rapid
succession one crisis with another, in what appears to be a desperate chase in
a descending spiral towards hell and unimaginable misery. This is a new episode
of ‘capitalism with the gloves off,’ the old obscene campaign of seeking more
and more private profits at higher and higher social costs.
We
must not underestimate the myopia of contemporary capitalists and their army of
money managers and ideologues who are rapidly degrading our environment and
cultures around the world . . . .
The
analyses below will suggest what must be done; they may be consulted as studies
to prepare us for our impending descent into hell, unless . . . .
Sincerely,
Francis
Feeley
Professor
of American Studies
University
of Grenoble-3
Director
of Research
University
of Paris-Nanterre
Center
for the Advanced Study of American Institutions and Social Movements
The
University of California-San Diego
http://dimension.ucsd.edu/CEIMSA-IN-EXILE/
a.
Why
Does Greece Not Simply Default?
by Jerome Roos
History has shown that countries that
refuse to pay their debts fall harder but recover faster than those that do
not. So why does Greece’s left-led government not simply get it over with?
As the Greek debt drama finally comes
to a head with the
Syriza-led government quietly warning the U.S. Treasury Secretary and the chief
of the International Monetary Fund that its last remaining cash reserves are
now all but depleted and the government will not be paying the IMF if it does
not receive an infusion of new cash before early June, a critical question
arises: why do the radical leftists not simply get it over with and declare a
default on the outstanding debt? What do they care about their creditors?
The question may sound trite, but
it becomes increasingly perplexing once we place Greece’s current crisis in
historical perspective. During the Great Depression of the 1930s, Greece —
along with most Eastern and Southern European countries and practically all of
Latin America — responded to its fiscal troubles by forcefully suspending debt
payments to foreign bondholders. Economic history is replete with such unilateral
moratoriums. Default was simply part of the rules of the game.
A remarkable contrast
Take the first wave of sovereign
defaults following the independence struggles of the Latin American countries
in the 1820s. Between 1822 and 1825, London and Amsterdam-based financiers —
blinded by the prospect of easy profits — gobbled up Latin American government
bonds like hotcakes. Some European investors were even deceived by a legendary
swindler into buying the
bonds of the non-existent newly independent nation of Poyais. In those years,
financial euphoria reigned supreme.
Yet the lenders’ fall was swift and painful. Lured by
cheap credit, the new Latin American debtors massively over-borrowed, while the
European creditors wildly overextended themselves. After the independence wars
were over, nearly every newly independent government fell into default. As one
of the leading historians of the episode noted, “during a quarter of a century most of the [Latin
American borrowers] maintained an effective moratorium on their external debts,
which indicated an appreciable degree of economic autonomy from the great
powers of the day.”
It is not difficult to understand why sovereign borrowers
would want to exert this autonomy to full effect. Economists have found that
countries that defaulted in the 1930s, for instance, recovered faster than those that did not. The
countries that repaid their debts were forced to carry out contractionary
policies (i.e., austerity measures) in order to free up the currency reserves
with which to pay their debts. Transferring these scarce resources abroad
directly contributed to a deepening of the crisis.
Why, then, would Greece not
simply go down the same path today? The country has spent about a half of its
history in a formal state of default. It defaulted on its first independence
war loans in the 1830s, along with the Latin American countries. It defaulted
again in 1843, in 1860 and in 1893. After the latter episode, German
bondholders demanded international control over Greek finances — which they
obtained with the establishment of the International Committee for Greek Debt
Management following the Greco-Turkish war of 1897. Still, Greece managed to
default again during the 1930s. None of these defaults occurred under radical
governments.
Yet today, even under an
anti-austerity government led by the radical left Syriza party, whose ranks
contain an array of old-school Marxists, Greece has been scrupulously obedient
to the dictates of its foreign creditors. This is all the more remarkable
because, in a previous election campaign just three years ago, the same party
still pledged to unilaterally suspend debt payments and to hold an audit of the national debt with a view
to repudiating all illegal and illegitimate obligations. While the Speaker of
Parliament, Zoe Konstantopoulou, has since called into life such an audit
committee, Prime Minister Tsipras has sworn not to take unilateral action.
So what’s really going on here…?
If less radical governments defaulted one after another in previous eras, why
does Europe’s most left-wing government in recent memory not simply do the
same?
Structural changes in capitalism
The short version of the answer
is that Syriza itself is hardly to blame for its forced compliance. In fact,
the world has changed in dramatic ways since the mid-1970s. The kind of capitalism
we have today is not like the capitalism of yore. It is not like the Keynesian
compromise that reigned during the post-war decades and that formed the bedrock
of the Bretton Woods regime and the social welfare state. Nor is it like the
classical laissez-faire liberalism of the so-called “first wave of
globalization” in the classical gold standard era, between 1880 and the start
of World War I in 1914, when default was still widespread.
Unlike previous eras, today’s
global capitalism has been thoroughly financialized. This, in turn, has had major
consequences not only for the centrality of finance within the regime of
accumulation; it has also affected the nature of the capitalist state and its
relation to private creditors. To summarize a long and complicated story, we
can identify at least three structural changes that have been seminal in
shifting the loyalty of governments away from their domestic populations and
towards international lenders and domestic elites.
First, peripheral countries have grown more dependent
than ever on foreign credit and international investment for their own growth
prospects. Second, a host of international financial institutions have been
created, most importantly the IMF and the ECB, which can jump whenever a debtor
is in distress to provide emergency loans (under strict policy conditionality)
so the debts can be repaid. Third, financialization has contributed to the
entrenchment of a state-finance nexus to a point where national governments and economies have
become increasingly dependent on central banks and on domestic,
privately-controlled banking systems. As a result, bankers have obtained vast
leverage over economic policy, even when they (or their friends) are not in
government themselves.
These three changes have been
foundational to the generalized move away from widespread default, as it
existed prior to World War II, and towards the incredible track record of
debtor compliance that has been established under the neoliberal regime of
financialization. Ever since the Mexican debt crisis of 1982 — and the Latin
American and Third World debt crises that followed in its wake — governments
have generally tried to avoid a suspension of payments at all costs. As David
Harvey has put it:
“What the Mexico case
demonstrated was one key difference between liberalism and neoliberalism: under
the former lenders take the losses that arise from bad investment decisions
while under the latter the borrowers are forced by state and international
powers to take on board the cost of debt repayment no matter what the
consequences for the livelihood and well-being of the local population.”
Of course there have been
exceptions. Russia defaulted in 1998, although the fallout was limited mostly
to domestic creditors and a major speculative hedge fund in the US. The
Argentine crisis briefly punctuated the aura of neoliberal invincibility in
late 2001, but as I have argued in a previous column, a closer look reveals that the
country’s default was in fact triggered by deliberate actions on the part of
the Wall Street-IMF-Treasury complex. This leaves Ecuador as the only country to
have imposed a unilateral default in recent decades — but even Ecuador did not
do so in the outright fashion of the 1930s.
The structural power of the
creditors
By and large, it is therefore
safe to say that the overarching rule governing international finance today is
that countries will repay even under the harshest of circumstances, and will
rarely – if ever – default on their external obligations. This has led to a
bizarre situation in which Yanis Varoufakis, the fervid Greek finance minister,
has pledged to “repay
private creditors to the last penny,” even promising to “squeeze blood out of a
stone” to repay the IMF. These statements are patently absurd, as it was
Varoufakis himself who, prior to taking office, claimed that the debt cannotbe
paid and argued that
Greece should have “given the finger” to Germany and defaulted a long time ago.
Still, it should be clear by now that Syriza’s
backtracking and Varoufakis’ wavering statements on whether or not the debt can
and should be repaid are not the result of some personal disloyalty to the
cause, nor of some grand scheme of betrayal playing out between Syriza and its
supporters. Instead, what has happened is that the Greek government has run
headlong into the structural power of its official creditors. This power revolves around
the fact that the IMF, the ECB and the Eurogroup — which now collectively hold
about 80 percent of the Greek debt — are the only ones capable of providing
Greece with what it so urgently needs: cash.
After all, governments will stand
or fall by the soundness of their finances. What matters is whether they can
pay public sector wages and pensioners — and, ultimately, police and the army.
What matters, in addition, is that credit keeps circulating through the
domestic economy and that cash keeps coming out of ATMs when people withdraw
funds from their accounts. If, within this complex system of credit
circulation, there is a sudden hick-up or a systemic blockage — if the state
can no longer pay its employees, or if the banks are forced to close doors and
private businesses can no longer obtain trade credit — the whole whole system
literally grinds to a halt.
The result of such an economic
freeze-up, history tells us, are usually not very pretty for those in power.
Argentina’s implosion following its record default in December 2001 is a case
in point. Similar revolts took place during public debt crises in early-modern
Europe, like when the wool carders of Florence rose up in the Ciompi revolt of
1378, or when the working classes and bourgeoisie of Paris rose up against
Louis XIV in France. Just a few days ago, a Bank of Greece official warned that a bank closure might have
similar consequences in Greece today: “We would see the revolt that this crisis
has not yet produced. There would be blood in the streets.”
Spillover costs of default
In the past, defaulting
governments were able to avoid such “spillover costs” by defaulting only on
foreign lenders. In the process, the costs of adjustment were effectively
shifted onto private bondholders in the creditor countries, and scarce
resources could be reinvested domestically in order to dampen the social consequences
of the crisis and hasten the recovery. But in the complex and highly
intertwined financial markets of our day and age, such discrimination between
externally and domestically held debt is no longer possible. Default on one
becomes default on all.
The result is to make a
suspension of payments very costly in the short term. In addition to the
oft-repeated “calamity” of being forced out of the Eurozone by the ECB, the
spillover effects of default would extend all the way down into the domestic
economy and would ripple out into the social fabric, threatening political
stability. No democratically elected government would like to take responsibility
for triggering (let alone putting down) a popular revolt over disappeared
savings and wages.
The flip-side of the story, of
course, is that such spillover costs generally turn out to be relatively
short-lived, and may therefore end up paying off over the long-run — if the
government is prepared for such an eventuality and manages to hold onto power,
that is. Aided by good external conditions, Argentina’s recovery began after 6
months. Greece’s conditions may be less rosy, but there is nevertheless reason
to believe that default and
euro exit would lead to recovery within months. Obviously, the government would
need to have a well thought-out Plan B that would allow it to bridge the
difficult transition period.
This is why some of Syriza’s more radical factions are
now urging the government to take this gamble and pursue a rupture with the creditors. The party’s
moderate and euro-friendly leadership, however, does not appear to be willing
to do so. While the divide between the two camps can partly be ascribed to
ideological differences within Syriza and the fear of being punished by voters
for crashing out of the Eurozone, it should be clear that the predominance of
creditor-friendly solutions to international debt crises cannot be ascribed
purely to a lack of “political willingness.” The spillover costs of default
structurally limit the room for maneuver of heavily indebted peripheral states,
compelling them to repay no matter who is in charge of the government and no
matter how radical their ideas may be.
These limiting factors are
related to the three structural changes mentioned before. In the case of
Greece, the country remains dependent on foreign sources of credit — at least
in the short-term — to pay pensions and wages. Since private investors have
long since stopped buying Greek debt, the only ones capable of furnishing the
Greek government with much-needed cash are the Eurogroup and the IMF. Both are
currently withholding promised credit tranches and refusing to extend further loans
unless the Syriza government surrender to the creditors’ dictates by
effectively renouncing the anti-austerity and anti-reform platform on which it
was elected.
Meanwhile, the Greek state and
economy remain dependent on the functioning of the domestic credit system,
which is currently kept alive with drip-feed infusions of emergency liquidity
assistance (ELA) from the European Central Bank. The ECB sets the ceiling for
the total amount of ELA that Greek banks are entitled to, raising this amount
only marginally every two weeks. This is clearly a deliberate attempt to starve
the Greek economy of liquidity and thereby put pressure on the government to
surrender.
Unsurprisingly, in such a context
of growing financial insecurity, ordinary Greeks fear that the government may
soon impose capital controls to prevent a banking collapse, so they have begun
to withdraw their bank deposits in droves: more than 35 billion euros has been
withdrawn since December. If these trends continue, the banks may have to shut
their doors within three weeks.
At the edge of a cliff
Yet for all the obvious drama,
there is a grave irony in all of this. The structural power relations in
today’s heavily financialized world economy may have succeeded in preventing
the vast majority of borrowing countries from pursuing unilateral default in
response to a sovereign crises. But at the same time the extreme stance of the
creditors, in their insistence on full repayment even from a bankrupt country,
is threatening to produce precisely that which it is supposed to prevent: a
disorderly unilateral default.
At the moment, the Eurogroup
seems blind to the fact that Tsipras and Varoufakis are probably the creditors’
most reliable allies in Greece today. Both are moderate reformists with
widespread popular support who are actually willing to repay, even if they know
they cannot. Ironically, it is precisely by forcing Syriza’s relatively
pragmatic leadership into a humiliating defeat that the creditors may end up
strengthening the hand of the pro-default radicals inside the government. By
depriving the Greek government of the key resources on which it depends to
survive, the creditors may actually end up maneuvering Tsipras and Varoufakis
into the impossible position of having to bring a new reform package to
Parliament in front of a hostile audience that will include their own fellow
cabinet members.
Tsipras has already indicated
that he would refuse to pass such an agreement with the support of the
opposition. In other words: if his own internal opposition within Syriza
refuses to sign the prime minister’s last-minute agreement with the creditors,
he would rather reject the deal than break up his party and side with the
ancien regime of PASOK and New Democracy, or so he says. This shows that even
the most watertight regimes of financial control may end up backfiring into the
faces of those who run them — and while there can be no guarantee that this
will actually be the case for Greece, the creditors clearly cannot rest on
their laurels just yet.
Yes, unilateral default has been
largely banished from the global political economy in recent decades. And yes,
national governments have long since been shackled to their creditors in an
all-encompassing system of hyper-financialized capitalism. Standing at the edge
of a cliff and faced with such a deeply entrenched and extreme power imbalance,
we should not be surprised that a young left-led government like Greece’s is
unwilling to jump off the cliff voluntarily. Still, no one can predict how they
will react when they are pushed — whether by their creditors from above, or by
the people from below. On June 5, when the next IMF payment is due, we should know.
Jerome Roos is a PhD researcher
in International Political Economy at the European University Institute, and
founding editor of ROAR Magazine.
+
b.
How To Use Economics
& Not Be Used by Economists (1/6)
by Ha-Joon Chang
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&itemid=74&jumival=13830
+
c.
Reading Marx's Capital
with David Harvey
by David Harvey
http://davidharvey.org/reading-capital/
+
d.
On Dialectical
Materialism as Method (and not theory)
by Bertell
Ollman
(en
langue français)
http://www.palim-psao.fr/article-bertell-ollman-la-dialectique-mise-en-oeuvre-le-processus-d-abstraction-dans-la-methode-de-marx-110189520.html
&
(English
language)
http://www.nyu.edu/projects/ollman/books/dd.php
+
e.
Workplace Democracy
by Richard
Wolff, et al.
https://www.youtube.com/user/WorkplaceDemocracy1