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The Theory of the Leisure Class: Application and Illustration

Thorsten Veblen's classic sociological work, The Theory of the Leisure Class, divided human societies, for hueristic purposes, into two generic forms, the productive, in which most everyone works and participates in networks of solidarity, and the barbarian, in which a dominant class expropriates some portion of the production of society, rules over the productive segment of the population, and legitimates its status by elaborating myths according to which this idle exploitation is somehow finer and more noble than actually doing stuff.

Verily, the contemporary applications fain would make themselves, and indeed, one Etay Zwick has served as their facilitator:



The myth of the financial sector goes something like this: only men and women equipped with the highest intelligence, the will to work death-defying hours and the most advanced technology can be entrusted with the sacred and mysterious task of ensuring the growth of the economy. Using complicated financial instruments, these elites (a) spread the risks involved in different ventures and (b) discipline firms to minimize costs—thus guaranteeing the best investments are extended sufficient credit. According to this myth, Wall Street is the economy’s private nutritionist, advising and assisting only the most motivated firms—and these fitter firms will provide jobs and pave the path to national prosperity. If the rest of us do not understand exactly why trading credit derivatives and commodity futures would achieve all this, this is because we are not as smart as the people working on Wall Street. Even Wall Street elites are happy to admit that they do not really know how the system works; such admissions only testify to the immensity of their noble task.

Many economists have tried to disabuse us of this myth. Twenty-five years before the recent financial crisis, Nobel Laureate James Tobin demonstrated that a very limited percent of the capital flow originating on Wall Street goes toward financing “real investments”—that is, investments in improving a firm’s production process. When large American corporations invest in new technology, they rely primarily on internal funds, not outside credit. The torrents of capital we see on Wall Street are devoted to a different purpose—speculation, gambling for capital gains. Finance’s second founding myth, that the stock market in particular is an “efficient” source for funding business ventures, simply doesn’t cohere with the history of American industrial development. When firms have needed to raise outside capital, they have generally issued debt—not stock. The stock market’s chief virtue has always been that it allows business elites to cash out of any enterprise by transferring ownership to other elites. Old owners then enjoy their new wealth, while new owners manage the same old corporation. The reality is that business elites promote the stock market far more than the stock market promotes economic growth. (snip)


Proceeding further, Zwick illumines the sociological meaning of financial innovation:



Early on, capitalism encouraged entrepreneurs to invest in new technology, thus unleashing incredible productive potential. Yet as the hunger for profits outpaced technological innovation, the modern barbarian developed new instruments for increasing the value of his assets—without having to produce anything new. Rather than focus his energies on developing more productive ventures, he started to sell the promise of increased future revenue—which he called an “immaterial asset.” The first immaterial assets were patents and trademarks; what were formerly strategies for being more productive, the barbarian now learned to package and sell by themselves. The next step was to sell claims to these immaterial assets in the form of yet another immaterial asset: capital stock. This stock represented a promise of revenue based on other promises of revenue. Over time, more and more immaterial assets were created and sold, then listed on balance sheets as corporate bonds, credit derivatives and hybrid securities. Eventually, a corporation started to look less like a producing firm and more like a bunch of immaterial assets and liabilities. Today a corporation’s success often depends on how much credit it can raise—that is, on how successfully it can sell the promise of future success.

Salesmanship and future earnings projections have replaced productivity and innovation as the engines of our economy. The barbarian’s pursuit of financial profit now determines how a corporation employs its labor and technology—that is, whether it is valuable to be productive. Capitalism, once propelled by technological investment (classical capital), is now driven by immaterial technology that increases the value of immaterial assets (financial instruments moving modern capital). Today Goldman Sachs and JP Morgan don’t invest in the promise of producing things of use or real value. They invest in the promise of rising asset prices (or in the case of shorting stocks, the promise of falling asset prices). In their world, value is defined by gain. It used to be the other way around.

Because of the dynamic of constant financial innovation, patterns of economic boom and bust no longer follow the traditional business cycle model in which: (1) a low interest rate (meaning cheaper credit) leads to (2) increased investments and economic growth; followed by (3) a period of overheating and excess capacity; which is then balanced by (4) a re-stabilizing period and a cooling of inflationary tendencies. The “new business cycle” is determined by financial innovation, not national productivity and consumer demand. Booms are born when a new financial instrument is dreamed up, and busts occur when the conjurer’s secret is uncovered and collapses.

The most recent boom and bust (i.e. our current financial crisis) was based on this secret: “The market for subprime mortgages is not determined by the number of newly aspiring homeowners, but by the promise of profits from mortgage-based securities.” Irresponsible lending spelled profits for investment banks, so naturally they encouraged irresponsible lending. The story is familiar by now. Banks invented two kinds of risky securities that promised higher yields: collateralized debt obligations (that pay if high-interest mortgages are repaid) and credit-default swaps (that pay if they aren’t). Trading these shadow-financial (i.e. unregulated) securities generated enormous profits—both from constant trading fees and from speculation gains. But selling more subprime mortgage securities required selling more subprime mortgages. So investment banks bought mortgage-lending outfits and themselves offered subprime loans (even to individuals who qualified for better loans). As inevitable loan defaults started to pile up, the value of collateralized debts fell, and heavily invested banks couldn’t cover the swaps they sold. Wall Street’s expert salesmen had sold too many immaterial assets—too many promises of future value. The entire edifice of lending was paralyzed because it had become profitable to lend irresponsibly.


Zwick then continues by describing the manner in which an elite, in this case, the "meritocracy" of haute finance impresses its image upon the entire society, a lifestyle of instability, anxiety, enforced flexibility, and gratuitous, vulgar displays of transient status. And a sense that genuinely productive work is a sucker's game. But, don't you dare question them, because they are not only smarter than you, but are the very instantiations of Americanism.

The entire essay is worth a read.

Nevertheless, for those disinclined, for whatever reason, to read it, there is a Youtube video which nicely encapsulates both The Theory of the Leisure Class and the American instantiation of barbarian economics:

Comments (37)

Maximos,

I can barely make it through Zwick's first paragraph:

Veblen, an inveterate reader of ethnographies, noticed a historical pattern that could illuminate America’s peculiar relationship with its economic institutions. Societies everywhere fall between two extremes. First, there are societies in which every person works, and no one is demeaned by his or her toil. In these societies, individuals pride themselves on their workmanship, and they exhibit a natural concern for the welfare of their entire community. As examples of such “productive” societies, Veblen mentions Native Americans, the Ainus of Japan, the Todas of the Nilgiri hills and the bushmen of Australia. Second, there are “barbarian” societies, in which a single dominant class (usually of warriors) seizes the wealth and produce of others through force or fraud—think ancient Vikings, Japanese shoguns and Polynesian tribesmen.

Yeah, I've always found my societies fall neatly into extreme categories. Plus I like his examples -- like those Native Americans were such egalitarians and never committed acts of violence or barbarian savagery!

If you believe that Max, I've got a couple of low risk Credit Default Swaps I'd like to talk to you about off line sometime soon...

That's why I called Veblen's schema 'hueristic', Jeff. It's a simplification to be employed to elucidate otherwise hidden processes and relationships.

Mr. Singer -- please read the paragraph again, noting especially the sentence which says "Societies everywhere fall between two extremes." (emphasis mine.)

There is a sizable difference between falling into, say, two pits of raw sewage and falling between them.

First, there are societies in which every person works, and no one is demeaned by his or her toil. In these societies, individuals pride themselves on their workmanship, and they exhibit a natural concern for the welfare of their entire community. As examples of such “productive” societies, Veblen mentions Native Americans, the Ainus of Japan, the Todas of the Nilgiri hills and the bushmen of Australia.

Good gravy. Fall for Rousseauian noble savage myths much? What is this, kumbaya-singing peaceful Native Americans taking a village to raise a child and being At Peace with the Land? Pocahantas lives. I can't imagine that anybody with such a silly view of history has much helpful to say about the present.

Just Some Guy,

Good point -- I was annoyed at the Native American example and should have read more carefully. I'll give the whole piece a once over and come back with more comments.

Lydia, Veblen could be as wrong as it is possible to be about the Native Americans - the truth is somewhere in between the "noble savage" and "just plain savage" myths, which is to say, more or less where the rest of mankind is - and this would not effect, materially, his contention about barbarian/predatory societies; these latter processes exist whether or not Native Americans were Rousseauian 'Noble Savages".

The term "native americans" is too imprecise for meaningful discussion as to social organization as the groups ranged from widely dispersed hunter-gatherers to settled agriculturists with a highly stratified social structure. The productivity that comes with settled agriculture allows for the drone classes and a higher level of organized violence.

Zwick is the classic polemicist who will say something like the following:

"Early on, capitalism encouraged entrepreneurs to invest in new technology, thus unleashing incredible productive potential. Yet as the hunger for profits outpaced technological innovation, the modern barbarian developed new instruments for increasing the value of his assets—without having to produce anything new."

with a straight face without a single reference to a source of data and Maximos wants me to take him seriously. How do I know he is right about profits and innovation? And when he does quote figures, there are no hyperlinks or even footnotes, so I have no way of checking on his more dubious claims (e.g. "the median income of ordinary Americans has dropped an average of $2,197 per year since 2000" -- I've seen numbers that suggests the median has held steady or slightly dropped -- but this figure, and its precise nature, seems ridiculous).

Finally, in another long piece attacking Wall Street for fostering a destructive image of the "good life" on society there is not one word about our government and its role in promoting certain images about what constitutes the "good life".

At least Paul usually links to critics who know their way around with data.

Come one, Jeff, do we have to have this conversation again? Did all of the MBS, CDOs, and CDS really produce something new, other than jobs for quants, traders, and an assortment of hustlers? Did they really do anything more than cause asset bubbles, absent a productive base sufficient to sustain the appreciation? Of course not, which is why the bubble, whatever the complex causation back of it, eventually popped, and all of the employment associated with the hall-of-mirrors economy evaporated; the burgeoning debt-loads of the American consumer far outweighed the ability of those consumers to service them, under conditions of minimal income growth, and wild inflation in housing, health care, and education.

The precise median income figure is bunk. No economist, left, right, or center I read has come up with a similar figure. That still doesn't touch the author's principal argument about high finance as a form of barbarism and predation.

from USA today

http://www.usatoday.com/money/economy/2009-09-10-census-healthcare_N.htm

INCOME FALLS IN 2008
Year Median income Dollar change
2000 $52,500 -87
2001 $51,356 -1,144
2002 $50,756 -600
2003 $50,711 -45
2004 $50,535 -176
2005 $51,093 558
2006 $51,473 380
2007 $52,163 690
2008 $50,303 -1,860

Source: Census Bureau

"During the last economic “expansion” (between 2002 and 2007), fully two-thirds of all income gains flowed to the wealthiest one percent of the population. In 2007, the top 50 hedge and private equity managers averaged $588 million in annual compensation. On the other hand, the median income of ordinary Americans has dropped an average of $2,197 per year since 2000."

Zwick seems to have used overlapping periods but that doesn't change his point that most of the benefits of the last "recovery" flowed mainly to the top few percent. This is well known to those familiar with the data. We should be long past the reflexive defense of the indefensible.

al,

Zwick says "per year" which to me implies that income keeps dropping every year by that amount. Maybe he meant to say that over the eight year period the median income dropped by that amount in total, but if so he should have been clearer.

Also, what is the point of throwing around a bunch of large compensation numbers for people you don't like? The folks at Google, Microsoft, Wall-Mart, etc., etc. also made large sums of money -- does that bother Zwick? This is not the place for an extended debate on income inequality but I just can't get worked up about the idea that some people are richer than others.

Maximos,

No we don't have to have the debate again as there is nothing I can say or you can say that will change each others views on the matter. Again, I just prefer my arguments to be supported by sourced data.

Jeff, what does quantitative data have to say about the nature of recent American political economy? Is there some number hidden somewhere, occulted away in some dark corner of the data trove, or as the product of some arcane calculus, that will disprove the manifest, namely, that the American economy, for at least 15 years, has been a series of speculative asset bubbles?

Jeff, there is a difference between wealth accumulated over time as a share of actually producing something and wealth accrued because of a few large paydays based on marking to market increasingly abstract financial paper. Zwick doesn't seem to be referring to the Silicon Valley model of folks willing to put in years of work for the prospect of a large pay day at the end.

Have to agree with Jeff Singer, here:

"...without a single reference...there are no hyperlinks or even footnotes..."

Look, this is basic. The one essential skill for anybody engaged in philosophic argument is the ability to characterize the positions of his opponents fairly and accurately, in terms that they would themselves accept.

On that score, this Zwick guy gets a big fat F.

Max,

This is exactly the kind of quote I'm talking about:

"Is there some number hidden somewhere, occulted away in some dark corner of the data trove, or as the product of some arcane calculus, that will disprove the manifest, namely, that the American economy, for at least 15 years, has been a series of speculative asset bubbles?"

In point of fact, I would suggest that it is manifestly absurd to describe the American economy, all $14 trillion + in GDP, as a series of speculative asset bubbles. Certainly speculative asset bubbles have occurred and have negatively impacted the American economy over the past 15 years. But no matter how many time you or Zwick insist that it is so, the American economy is more than Wall Street and a bunch of asset bubbles (many of which were stoked by the government, which I never tire of reminding you). To ignore the impact of Google, to use just one example (Apple would be another) while telling a story about the American economy over the past 15 years is to cherry pick your data to get to a particular conclusion. Which is fine, if you want to write a rant about Wall Street, but not so fine to understand how to help the American economy get moving again and even if you want to help the American people avoid future speculative asset bubbles.

Jeff -- part of the frustration some of us have is that your comments tend to follow a certain pattern.

(1) Appear in a thread, demanding citations, numbers, links, data.

(2) Data, links, citations duly provided.

(3a) *crickets*

or

(3b) Data rejected, citations dismissed, links scoffed at.

Last week, for instance, you scoffed at my citation of one of the world's most prestigious financial minds in support of my arguments against globalization, so I backed up and restated the argument, supplied with data, without the argument from authority of citing said financial mind.

*crickets*

A month before that, we had a discussion on the same topic, where it seems that you can come around a bit: http://www.whatswrongwiththeworld.net/2010/01/the_bailout_of_globalization.html

So there is a merry-go-round feel to this, which produces a touch of reluctance to go digging around for new data to fortify the arguments you've already rejected a priori anyway.

Paul,

You'll have to forgive me for not responding to every twist and turn in the comboxes. Quite frankly, when you get *crickets* from me, it usually means I have thrown my hands up in despair (metaphorically speaking) -- how many times can I say the same thing over and over again. Yes, certain financial products and markets gave us "too big to fail" and I agree with you, Lydia, Maximos, Steve and everyone else that "too big to fail" is NOT GOOD. We should enact regulatory reforms, including restrictions on my beloved free market (e.g. minimum capital requirements for certain asset classes) that help us avoid bailouts in the future. We should also stop using the government to subsidize all manner of risky borrowing, especially homeownership.

How any of this has anything to do with globalization, or international trade and investment, or broader economic trends of the past 15-30 years is beyond me. I know that somehow you and Maximos think there is some sort of link but I don't understand how it works and I haven't seen data that demonstrates how it works. So I won't pop up anymore or bother the two of you as your posts tend to follow a certain pattern:

1) find someone who says something inflamatory about the free market and/or Wall Street and/or globalization (preferrable all three for the hat trick);

2) throw in a fun factoid like "financial firms make lots of money";

3) condemn "banksters" and globalization and call for some vague new order that values old fashioned values of craftsmanship and thrift (as if no one values these qualities today).

4) make sure you don't say much, if anything, about how government incentives played a role in promoting our current situation.

5) "banksters" again.

Jeff - well said.

"If purely private players can screw-up financial markets around the world -- then I agree this is not good." -- Jeff Singer, Jan. 2010.

What we learned in 2008, and before that in 1998, is that purely private players can screw-up world financial markets. Thus the infamous Norwegian towns bankrupted on losses in US securities. That's the fragility of globalization. Fund managers all over the world in October 2008 heard from lawyers that they were in technical default because of derivative contracts attached to failed Icelandic banks. Imagine having to explain that to your clients.

Now, perhaps you will answer that "purely private" cannot apply to anything related to US housing. Fair enough. I will not gainsay that. That's been true since the 1930s at least. But it emphatically was purely private operations that gathered up all these mortgages into bundles, confected various instruments for betting for or against their values, and refashioned them a thousand other ways to generate a vast worldwide infrastructure of debt finance.

If you like, it was globalization that exposed everyone to everyone else's bad bets on US housing securities. Yes, government policy was part of this. But so was an authentic set of free market innovations, which may be properly signified by the word "globalization" -- the integration of world capital markets.

"Veblen could be as wrong as it is possible to be about the Native Americans"

True. Veblen was writing in the 1890's and it would be instructive to discover which particular American Indians he had in mind. (He hardly would have been considering all Native Americans, and he wouldn't have called them that anyways.)

In any case, his arguments do not rest on this one facet and as Maximos says, even if he is wrong on this account, it's no defeater for his larger claims. That is why the book is considered an economic/sociological classic. One may find similar questionable elements in, say, Weber and Durkheim, but no one throws them out entirely because of that.

Well, Jeff, you got me: I, writing in haste, in between tedious tasks at the office, wrote that the American economy was nothing but a series of speculative asset bubbles, when what was intended was that its "growth" was the result of a series of asset bubbles. We know that there was no income growth over the course of the Noughties; neither, for that matter, were jobs created, on net - in fact, jobs were destroyed. And this all came to ruination when the rates of default on mortgages began rising precipitously towards the end of 2007, and into the beginning of 2008 - which is taken by just about every serious economist I read as an indication that the "Greatest Story Never Told" was really a rising froth of housing excesses.

Maximos, the basic thrust of Verblen's division is still wrong, however you slice up the data on this or that tribe in whether they really do end up matching the ideal of a "productive" society.

It is fundamentally true that the manager is a productive part of the cog of a large enterprise. But that applies equally to the line manager who oversees 14 mechanics, or the mid-level manager who oversees 14 regional units, or the executive who oversees 14 divisions. Yet the executive is undoubtedly in the class of those who "rules over the productive segment of the population".

Again, there is a fundamentally productive aspect to the process a wealthy guy uses to go through a stack of 30 potential ventures to find one that sounds promising and would be a worthwhile investment, and establishing a business relationship with the owners thereof and getting to understand the corporate culture, and then deciding to buy in for 30% of the stock, and who votes the stock towards the company eventually providing a long-term profit margin of 5%. This investor is certainly one who receives "some portion of the production of society," without actually getting his hands dirty on the factory floor, nor even spending his time managing those workers. But he is not "expropriating" something that does not belong to the value of his input.

Again, there are indeed people who legitimates its status by elaborating myths according to which this idle exploitation is somehow finer and more noble than actually doing stuff. But the set of these is not coterminus with the people who "rules over the productive segment" by any means. Everyone recognizes that the freeloading son (who parties every night and sleeps in every day) of a rich dad who made a going concern out of a tractor dealership is an abuser of the social fabric. Nobody in his right mind thinks that the fact that there are such freeloaders who abuse the social fabric makes the fabric by which dad became successful a barbaric society. And nobody much minds when the son ends up a poor slob who can neither hold a job nor hold onto the wealth that he inherited from Dad but got squandered to the point he neither lives the high life nor lords it over anyone.

The reality is that abusers cut across all social classes, and hard-working sorts who benefit society are found in all social classes as well. Verblen's division of human societies just isn't realistic.

Going back to the other side: it was always the case that as soon as you have enough wealth in a society to constitute long-term surplus, you have had people who manage, oversee, and control that surplus. Whether he is called "chief" or "elder" or something else, as soon as he spends significant time in oversight and control, he theoretically falls into the "class" that is distinct from direct production. Since you never choose to vest control in someone who doesn't have some kind of respect, the "legitimizing its status" goes hand in hand with the right to control. (And even in the poorer societies, you still have people who live off the production of others and lord it over them: why don't we re-read the Jesuit Fathers' accounts of the Iroquois Indians, and how the men primarily hunt, wage war, and sit on their cans while the women do everything else; whose "legitimizing" is based on the notion that the brave who hunts and goes to war is too high and mighty to dirty his hands in tanning a hide or cooking.)

To the extent it is true, it appears that Verblen's supposed "two kinds of societies" amounts to the division between those who are too poor to have any long-term surplus, and those who do. Big Deal.

Everyone recognizes that the freeloading son (who parties every night and sleeps in every day) of a rich dad who made a going concern out of a tractor dealership is an abuser of the social fabric.

In fact, if I recall correctly, Ayn Rand (of all people) despised such rich free-loaders.

Maximos, the basic thrust of Verblen's division is still wrong, however you slice up the data on this or that tribe in whether they really do end up matching the ideal of a "productive" society.

Tony, I take your critique, and don't really disagree with any of its substance. Where I disagree is in believing that this tells against Veblen's distinction. My reasons are two: First, there really are examples, both historical and contemporary, of utterly, irremediably unproductive expropriation, rent-seeking, and status-posturing. The very culture of high finance discussed in Zwick's essay is, in the majority of instances, an example of such a culture, inasmuch as the entire architecture of usury it spawned not only served, for a decade, to veil the fundamental structural problems of the economy, but left us, after the collapse, with a massive overhang of debt. It facilitated world-historical levels of malinvestment, economic distortion, and a well-nigh unprecedented degree of economic fragility, and yet it was exceedingly lucrative for the so-called Masters of the Universe; they appropriated large percentages of this "wealth", at once illusory and extracted, and justified doing so by appeal to their meritocratic status as the Masters of the Universe, plus some now-discredited economic theories. We could expand the indictment to encompass microeconomic considerations, in addition to the macroeconomic ones. What, for example, is the actual productive value of 30-page credit card contracts that are indecipherable, and contain numerous traps, conditions, qualifications, and so forth? There isn't any productive value to such contracts, which in my estimation are not valid contracts to begin with, inasmuch as no one really comprehends what he is consenting to in signing the forms; they are engineered solely to extract additional rents from those least able to avoid the perils of low finance. That is barbarian economics, and the ideology and mindset which would legitimate it is a barbarian culture, on Veblen's terms.

Second, even within enterprises and undertakings uncontroversially productive, there are questions of degree, of whether any given level of compensation for those who, of necessity, must oversee the enterprise, the "surplus", if you will. Even if we postulate, contrary to all reason and good sense, that the investment banks and structured investment vehicles lately in the news had engaged in no usury, no exploitation, is it really the case that the compensation packages lavished upon top executives and traders are commensurate with their productive value, and the benefits they bestow upon the economy as a whole? Of course not, as a comparison of contemporary financial culture in America and the UK with the financial culture of America, circa 1940-1980, or even that of contemporary Canada will make manifest: the lurid levels of compensation correspond more to the perils these activities pose for the wider economy than to any social benefits of banking per se, and are not even necessary to secure for society those benefits banking provides. They accrue to their recipients not by virtue of what they do to enhance the productive factors of society, but on account of the positions they occupy, the peculiar culture attached to those positions, and the obeisance of society, including its political arms, to the myths by which these positions are legitimated. Or, to consider, in passing, another example in the news of late, is it really the case that Carlos Slim merits his colossal wealth, merely because he has an aptitude for snapping up assets in murky privatization auctions and establishing oligopolies?

There's nothing fundamentally wrong in Veblen's schematization; it only requires supplementation from other branches of social science.

This address by Gary Gensler, Chairman of the CFTC, may be of interest to some (hat tip to Kevin Drum).

"Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.” The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be “null and void to all intents and purposes.”

For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest."

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/speechandtestimony/opagensler-32.pdf

The speech also has suggestions to improve things.

A comparison of credit default swaps to something much like a tontine, in other words? But the reason for banning those was just sheerly the incentive to order a hit-man to kill the person, sink the ship, or whatever. I'm not sure I see the parallel in the contemporary case.

The parallel is that the holder of a CDS has a material incentive, in the case of bankruptcy or impending default, to not come to terms for a fraction of the owed sum, thus accepting a loss on an investment, but to facilitate the collapse, so as to collect the CDS payout in full (insurance). In other words, if you invest in a failing enterprise, you should be required to come to terms at a loss, instead of enjoying the prerogative of exacerbating the failing in order to profit. Then, there is also the naked CDS, which has no insurable interest whatsoever, being nothing more than a wager.

Indeed and couple that with a lack of transparency and huge leverage and we have a melt down should anything go wrong.

Paul,

Lest you think my *crickets* mean anything substantive, I must disabuse you of the idea -- I've been home nursing a nasty cold and I'm just now getting on the computer for the first time today.

My quote from that previous thread was an acknowledgement that given a theoretically possibile (hence the "if" before private players) chance of worldwide financial meltdown due to our interconnected financial architecture, then yes we should erect firewalls and take other precautions to avoid this theoretical meltdown from happening. I'm not sure the Great Recession of late 2008 proved this to be the case -- yes, certain banks in Iceland and Ireland took crazy risks and are now paying the price for their foolishness (just as everyone in the U.S. who thought poor people would keep paying off their subprime loans took foolish risks on CDOs and CDSs) but is that really an argument for the inherent danger of globalization? I mean, if I invest my money in the stock market on a tip from my crazy uncle and the stock tanks, does that experience demonstrate the danger of the market? In both cases you could answer yes -- markets involve risks and whether we are talking about investing in a factory in China, a tech stock in Silicon Valley or opening a bakery in a neighborhood in Chicago there are no guarantees -- life involves risk. So what is your point?

Again, if the idea is to enact specific reforms that can curb the abuse of a specific financial product (e.g. the quote from al about insurance fraud and its applicability to Credit Default Swaps) then count me in. But it is when you and especially Maximos then use these discrete examples to somehow turn around and condemn the whole system is when you lose me -- I just don't follow the logic.

I'm with Tony -- is seems like your case against capitalism, globalization, investment banks, etc. is a case against man's eternal capacity for sin and in your zeal to correct particular abuses you both have a tendency to want to throw the proverbial baby out with the bathwater.

Jeff Singer - I *think* that Jeff Martin, and maybe Zippy, and possibly even Paul Cella, are, ultimately, arguing in favor of "Distributism."

http://en.wikipedia.org/wiki/Distributism

And I *think* that they imagine that the main obstacles to distributism are to be found, not to their left, but to their right.

That is barbarian economics, and the ideology and mindset which would legitimate it is a barbarian culture, on Veblen's terms.

Even if I were to grant that your claim is valid simply, without a number of important qualifications, all you have shown is that there are indeed a significant number of freeloaders in the system, indeed there is a sub-set of the system in which freeloaders are in the sub-cultural mainstream. It still doesn't prove that this is the culture as a whole. For example, do nearly all investors understand themselves as "Master's of the Universe"? Not hardly. Do nearly all executives of organizations take grotesque profits and wages? Not hardly. Do nearly all of the people who help make the rules participate in the taking rents on things that there ought be no rents on? NOT HARDLY. Therefore, what you have identified is a sub-culture, not THE culture.

Therefore, what you have identified is a sub-culture, not THE culture.

Tony, that's the only claim I'm making, as implied by my previous comment. Well, that and the claim that, as the recent crisis demonstrates, the freeloading barbarians overwhelmed what was good in the system.

"And I *think* that they imagine that the main obstacles to distributism are to be found, not to their left, but to their right."

Individual and particular obstacles to a humane economy are found to both the left and the right. However, the biggest obstacle is that modern hybrid of left and right, the managerial/corporate state.

And I *think* that they imagine that the main obstacles to distributism are to be found, not to their left, but to their right.

Well, what JSG said, first of all, and second, the rightist obstacle is that the political economy most conservatives defend - often because they imagine that the left opposes it - actually is subversive of the long-term prospects for liberty and republican self-government.

Another consideration re: regulation of capitalist enterprise. This surfacing story on the Lehman matter.

"The trades, which were never disclosed to investors, rating agencies or regulators, are described as “window-dressing” and “an accounting gimmick” in the report released on Thursday by Mr Valukas."


http://www.ft.com/cms/s/0/2e412d50-2d6e-11df-a262-00144feabdc0.html?nclick_check=1

The manner in which these trades were done may well be a criminal matter.

I immediately thought of the criminality surrounding Enron and the energy crisis in California a few years back and the S & L crisis. If there aren't regulations (and regulators willing to enforce them), commerce devolves into criminality.

"If there aren't regulations (and regulators willing to enforce them), commerce devolves into criminality."

The Federal Register alone, ignoring state and local governments, has 75,000 pages of regulations. How many more regulations should there be?

An alternative to having perpetually swelling beauracracies endlessly chase, and inevitably fail to keep up with, private actors in the financial industry in order to prevent the formation of asset bubbles and their subsequent collapse would be to do away with irredeemable paper currency. Banks would then be forced to keep cash reserves on hand that would cover 100% or very close to 100% of their checking deposits thus ending for good the baleful bank credit expansion and its issuance of fiduciary media (made possible only with the sanction and encouragement of the federal government) which is the source of all systemic instability in the financial system.

That's "bureaucracies"

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