MANAGING CAPITALISM: THE PICTURES

As promised, here is a picture of how capitalist economies, like ours, work over a long period of time. “GDP” stands for Gross Domestic Product, which is the common way of measuring how much total wealth national economies like ours produces over the course of a year. All capitalist economies go through “cycles” of growth (“boom” economies) and decline (“recessions” or “slumps” or “busts”)

simple biz cycleIf you are a few decades old, you’ve seen this happen more than once. For a few years, the economy grows, it’s easy to find a job, wages rise, and companies make good profits. When things are going well, we expect that to continue, and we take more chances on borrowing and spending, and sometimes we get in over our heads. Usually, prices rise as well when economies are growing (“inflation”[i].)

Then something happens. People and businesses realize they have to repay all the money they borrowed, and when they buy new items, they notice that prices have (usually) gone up as well during the “boom.” At some point, businesses and consumers (the “private sector”) start borrowing less and cut back their spending. As more and more spenders cut back, there is an economic effect like a snowball growing as it rolls downhill. Consumers buy less, so businesses lay off production workers, then those laid-off workers buy even less, so businesses invest less, and so on. Unemployment, low wages, low investment and low profits spread through the whole economy. Some businesses close, some laid-off workers can’t pay their mortgages, and may face foreclosure, and so on. The economy is in recession.

Eventually, after a couple or a few hard years, most debts are paid down, bankruptcies are settled, people start to buy again, companies start hiring, and the “cycle” repeats.   This has been happening for the past two hundred years in all capitalist economies, so we may as well get used to it, and plan accordingly.

Most people and most businesses, of course, would prefer steady and predictable growth. This is where the national government can step in and make a difference. Smart governments (beginning with the Roosevelt Administration in the U.S.) have learned to spend less (or at least run smaller deficits) when private businesses and individuals are spending more – and then spend more (hiring workers directly, or paying higher unemployment benefits, and so on) when the private sector slows down.

Chart below shows how government spending (green line) SHOULD move in opposite direction from economic growth (black line).

bizCycle2

When the private economy is “booming,” government spending or deficits should fall; and when the private sector is in recession, government should make up for that by spending MORE. Countries that do this find their boom periods are a bit less exaggerated, inflation doesn’t get out of hand, and sometimes the boom may even last longer. Then, when the inevitable recession comes along, increased government spending can keep lost jobs and business failures to a lower level than they otherwise would be – and eventually help the economy to recover faster and start growing again.

On the whole, when governments do this, total national spending doesn’t rise and fall so much; it stays closer to the straight line in the center of the graph: steady as she goes.

This is called “counter-cyclical” government spending, because government spending goes in the opposite direction of the “private sector” – it counters that spending cycle.

Why is it that a national government can spend more when it is collecting less in taxes? This is the opposite of what most of us must do, and it seems contrary to “common sense”. But national governments are unique, all over the world, because they can actually create money and wealth, up to a point. That is one of their indispensable roles – printing money. They are NOT like individuals. “Common sense” comparisons of governments and individuals are just wrong, as history has proved over and over. By printing and spending more in hard times, governments can actually help re-start economic growth.

And, on the flip side, by spending less when more money is available, and the economy is growing fast, they can prevent the economy from “overheating,” or creating inflation.

Finally, here is a picture of what should result when government spending moves the opposite way from private spending. While the economy still goes through up and down cycles, over the long run, the economy (the straight, dotted line) generally moves up. It grows.

bizCycleGrowthBy smoothing out the boom-and-bust “cycle,” smart governments make the economy more predictable, make advance planning more realistic, prevent a lot of dumb gambles and painful bankruptcies, and generally help the economy to grow more over a long period of time.

By the way, if you think about what the Obama Administration did during the “Great Recession” that started with the financial crisis of 2008, and what the government has done recently as the economy has been growing –they did what we just described. The federal government “stimulated” the economy right after the crisis with a lot of deficit spending, and is now cutting the deficit as the national economy gets back on a good track.

Most Presidents since World War II, including Republicans Eisenhower and Nixon, and Democrats Kennedy and Johnson also did this. President Eisenhower, for example, started building the very expensive Interstate Highway System as a way of getting the economy out of recession in the 1950’s. Presidents Reagan, the first Bush and Clinton also generally understood the rules. One exception: President George W. Bush, who took office in 2001, when the economy was already growing fast – and then stimulated the economy still further by increasing spending to pay for wars in Iraq and Afghanistan (while also cutting taxes, another way of increasing private spending). This dangerous spending increase in an already hot economy encouraged the excessive risk-taking in the financial sector that resulted in the economic crash at the end of his term.

Some more examples of how these ideas really work? Well, look at what happened after the financial crisis of 2008. The governments of the European Community did NOT follow the U.S. example of stimulating the economy (increasing spending) following the collapse of Wall Street banks around 2008. Instead, led by Germany, they cut spending during the recession. They prescribed austerity, instead of stimulus.

What was the result of these opposite policies in the U.S. and Europe? Europe is still in recession, while the U.S. is well out of it. In effect, the world just tried a big experiment as to which government policy – stimulus or austerity – works best in a recession. And the U.S. was right.

Newspapers recently are reporting that Europe has recognized its mistake. The European central bank is starting do what the U.S. Federal Reserve did seven years ago. They have begun to encourage borrowing and spending more money – and if what you have read here is right, Europe will now begin an economic recovery. In the next recession, let’s hope they get it right the first time.

Governments and nations that don’t learn from history, pay a high price.

[i] A little inflation (say, 1% to 3%) is not bad news, but if prices grow too fast, workers’ raises may disappear.

Spinoza: Natural Law is God’s Law

Baruch Spinoza was born in liberal Amsterdam in 1632, ten years before the birth of Isaac Newton in England, near the dawn of modern scientific culture. He was descended from grandparents who had emigrated from Portugal to escape the Catholic Church-led Inquisition.   At the age of twenty-four, he was placed on religious trial himself, and expelled from the Jewish community of Amstespinozardam for what the leadership deemed flagrant atheism. He flatly rejected the charges, insisting that he saw God in everything.

Utterly confident and uncompromising in his philosophical views, Spinoza was kind and humble in interpersonal relationships, earning a modest living at work in his small apartment, grinding glass for microscopes and telescopes. He also made little money from his philosophical work – most of it banned from public sale, but widely distributed hand-to-hand. His ideas attracted the attention of European intellectuals like Gottfried Leibniz, co-inventor of calculus (and hypocritical butt of Voltaire’s Candide). He died at the age of forty-five, probably from respiratory infirmities stemming from his profession.

When asked if he believed in God, Albert Einstein famously answered, “I believe in Spinoza’s God.” Einstein explained his admiration for Spinoza by crediting him as “the first philosopher to deal with the soul and the body as one, not two separate things (and) the first to apply with strict consistency the idea of an all-pervasive determinism to human thought, feeling, and action.”

Spinoza, in fact, defined God and Nature (the entire physical and conscious world) as one and the same: God WAS Nature, and Nature was God.   Since, logically, God could ONLY act perfectly, neither God, nor we humans were ultimately free. Like all physical events, every human thought and every action, Spinoza argued, is predetermined, but seems to us an act of choice, due to our incomplete understanding. “Man considers himself free,” he writes, “because he is conscious of his wishes and appetites, whilst at the same time he is ignorant of the causes by which he is led to wish and desire.”[i]

The work of science, Spinoza believed, was to discover and explain God’s law. But Spinoza’s God, after giving rise to perfect, natural laws, had no reason – or ability – to intervene in the course of Earthly events following that law. For Spinoza, attributing events on Earth to divine intervention, rather than seeking a rational (evidence-based, scientific) explanation, was “the last refuge of ignorance.”

It is easy to see why religious leaders of his day were outraged. They believed that God ruled the world like one of the arbitrary monarchs of their day – deciding each morning who would live, and who would die, who would prosper and who would starve, and so on. But for Spinoza – and for scientists in our day – everything that happens in our universe is presumed to be pre-ordained and inevitable, following the unchanging (once fully understood) laws of Nature.

Remarkably, and in no less defiance of the political norms of his day than his religious views, Spinoza advocated complete free thought, political freedom, and democracy with the same vigor as he denied the ultimate existence of free will in a deterministic universe.

Speaking with a passion fed by his personal persecution, he insisted that “freedom is absolutely necessary for progress in science and the liberal arts… “[T]he more rulers strive to curtail freedom of speech, the more obstinately are they resisted… [T]he object of government is not to change men from rational beings into beasts or puppets, but to enable them to develop their minds and bodies in security, and to employ their reason unshackled… In fact, the true aim of government is liberty”

In politics as in science and religion, he blazed the liberal path that many scientists follow to this day.

From my point of view, however, while Spinoza both defined the deterministic path that naturvendoral science follows, he also articulated its central contradiction: if free choice is ultimately an illusion, what can words like “truth” and “freedom” mean? If there is not real choice somewhere, are we not just wind-up “puppets,” as in the Woodman (New Yorker) cartoon on this page?

But that is a contradiction we all live with today.

Spinoza’s re-unification of body and spirit may prove his most lasting contribution. He helped move Western thought away from the Christian (Platonist) view of his day, which held that the ideal and unseen universe of Heaven was vastly more important than anything “down here” in our world of dirt and sin.

[i] Spinoza, Ethics, Part 1