[OPE] class illusions about the crisis and the state

Paul,

It is not technically feasible to reverse the legal and financial policies implemented across three decades in the course of one depression. To do so, you would practically need something like a dictatorship, but leaving aside the question of how you would obtain a political mandate for that, the most likely effect of such a dictatorship would be massive capital flight. Most of the prescriptions for capital controls really concern only specific international flows which would seriously destabilize an economy http://research.stlouisfed.org/publications/review/99/11/9911cn.pdf In fact politicians just scramble for the "middle ground".

In reality, no amount of capital controls can prevent the plunge into recession, at most they can mitigate the effects somewhat. The only effective "capital controls" there are, are (1) fullscale nationalization and (2) simply outlawing particular types of capital transactions, but like I say you would run into stiff resistance and would have to have a political mandate for it; but the effect would still be massive capital flight, and you are left with a big foreign trade problem. That sort of thing is conceivable only in the context of military wars or an unemployment level in excess of about 15-20%.

I have not kept up with "third way thinking" in Britain but Lord Mandelson's speech http://www.chathamhouse.org.uk/files/12786_031208mandelson.pdf I think confirms the view I posted previously. Lord Mandelson is an admirably optimistic chap, extraordinarily clever (they used to call him all sorts of things, "spin doctor" etc.), but leaving aside the political aspect, actually I distrust his analysis, because there is no systematic analysis of the UK workforce and the UK industrial structure underpinning it. I regard New Labour as essentially anti-working class, anti the wholesome creative spirit of the healthy British working classes. I am rather skeptical of his analysis of the UK financial sector. I have yet to read a really good book on The City, it's on my to-do list but meanwhile you have all sorts of other stuff happening, and I don't get to read in depth. The virtues of moderation are standard fare in politics, until the middle ground disappears, and you really have to do something.

I did not catch what you meant on exchange rates. I did refer to the exchange rate problem previously though in several posts (Prof. Rogoff has a real concern about this). It is a major problem of Keynesian theory, but to his credit Keynes did recognize it and indeed recommended capital controls in his time. Logically speaking, I do not really know, why so much is made of Keynes again these days. Ideologically it is obvious, but logically it does not make sense to me at all.

Suppose you bought a property in 1991 for 300,000 pounds and now it is worth 700,000 pounds, next it loses some 30% of its value in the recession, then it's nominally worth 490,000 pounds. Assume one-third of that is price inflation (well, property prices do not mirror the CPI exactly), well the property has still appreciated in value in real terms by 9.4% or so. It's much less profit, but still a positive profit. That is what you are dealing with. It just promotes an ideology that "we have to make do with less", that is all.

Real point is, that the idle capital does not disappear, it has to go somewhere. So where does it go? It goes to where it conserves its value, with a lower return, but still a positive return.

Jurriaan

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Received on Mon Dec 29 12:49:22 2008