Monday, November 21, 2011

The Origin of the [crisis in the] European Union – 4: A Refresher on Finance Capital



Force is a vector. That is physicists’ way of referring to a phenomenon that requires more than one characteristic to be fully and adequately described. A force must have magnitude and direction. With either of these attributes missing, a force is inconceivable.

When Macbeth asks: “Is this a dagger that I see before me?”, we do not know whether he has found a dagger in the street or a mugger is threatening him. Then we get the clue: “its handle towards my hand.” So, there is no threat and the dagger is being “presented” to Macbeth. That is the direction of the force.

As for its magnitude, we intuitively know it. “Just a little”, if we want to scratch our back with a dagger; “a lot”, if we want to stab someone.

The direction of force is singular. It is always one specific direction. It follows, then, that force is incompatible with freedom and negates it, freedom being defined precisely in terms of existence of alternatives. Force is the absence of alternatives. Conversely – and the proposition is convertible – we could say that if there is no alternative, a force must be present.

Now, observe, these sample quotes from the EU crisis:
  • Mr. Barroso [the president of the European Commission] also reinforced calls for Greek politicians to endorse the austerity measures. “If anyone thinks that without the program agreed with the E.U. and the I.M.F. we can still get by somehow, there’s an alternative program, that’s not true. There is no alternative.”
  • In words that recall former Prime Minister Margaret Thatcher of Britain, Mrs. Merkel says there is no alternative to trimming Europe’s entitlement programs.
  • This [Portugal returning to growth] will involve “a very rigorous programme of austerity and structural reforms” covering everything from slashing public deficits and extensive privatizations to shake-ups of justice and education. “There is no alternative,” [the country’s new prime minister] says.
  • Constrained by the unpopularity of bailouts at home, political leaders appear able to act only at the 11th hour, when they have no alternative.
So, a force is acting “on” Europe; there has to be, with so many leaders telling us that there is “no alternative”.

I have showed elsewhere that the force in question is finance capital. The upcoming Vol. 4 of Speculative Capital will explore this point in further detail. I merely note here that acting alongside finance capital is its latest, most advanced form, speculative capital. The two are not different forces but two movements of the same phenomenon; the latter can be explained by the former but cannot be reduced to it.

Finance capital is a force because it causes change. And it is a social force because it changes the social systems and relations. But unlike natural forces whose “purpose” is unknown – no one really knows why electromagnetic force exists –the purpose of finance capital is clear: It wants to maximize its profit. Its direction follows from that purpose. Finance capital pushes in the direction of maximizing its rate of return.

As for the magnitude, it is a function of the resistance it encounters.

In places where finance capital has managed to be an insider and there is little or no resistance, its magnitude is barely perceptible, as when gently scratching one’s back with a dagger. Then finance capital could be said to be “polite”. Like in Cameron’s silly Big Society, it speaks in terms of “initiatives”.

When there is the need to put the impertinent representative of a periphery country in his place, the force magnitude increases, as reported in the Financial Times of June 29:
Olli Rehn is nobody’s idea of hothead. A mild-mannered Finnish economist, he is regarded even by his countrymen as unassuming – verging on dull.

But twice in recent days Mr Rehn, who is the European Union’s senior economic official, has been forced to get angry.

At an emergency meeting of finance ministers a week ago Mr Rehn came down like a ton of bricks on Greece’s Evangelos Venizelos, who had the temerity to suggest reopening talks on the €28bn ($40bn) austerity package that Athens must pass this week to avoid sovereign default.

Those present were taken aback by Mr Rehn’s ferocity, and Mr Venizelos backed down.
It was smart of Venizelos to back down. Otherwise the mild mannered economists might had pulled a knife on him – or threatened his wife. The dull Finn is a trained dolphin at the service of finance capital and performs on its behalf, however much he might be unaware of that role.

Finally, for the rabble that disturbs the peace, the magnitude is ratchet up to crack the skulls.

But where does the magnitude of the force come from? How and where, exactly, does finance capital muster the ability to cow politicians, intimidate ministers and beat the populace in broad daylight, even though it operates in democracies where the majority of the population opposes its diktat? Recall Le Monde Diplomatique’s editorial which I quoted in an earlier part:
How is it that in a democratic system, the people are forced to accept cuts and austerity simply replace one failed government with another just as dedicated to the same shock treatment?
Think about it. People go to the ballot and vote for political leaders who then turn against them and their interests. How could that be?

It is simplistic to assume “corruption” explains everything. Corruption of politicians and the political process, while very real, does not explain this:
Mr. Papandreou went into the historic vote with a five-vote parliamentary majority. But the outcome was not certain, as the austerity plan strikes at the heart of the Socialist Party base.
Why does a party enact austerity measures that strike at its base? One can easily accept that Social Democrats of Papandreou ilk are unprincipled boors who will do everything to stay in power. But then why would they weaken the machinery that is the means of their assuming political power?

The common forms of the corruption of politicians – cheating on expenses, illicit affairs, accepting kickbacks and expensive gifts – are all illegal. They can only take place beneath the surface. When exposed, they must stop.

But the Greek legislators who voted for the crippling cuts and the drastic social re- engineering of the country did so with their heads held high and patriotic tears in their eye:
Most Socialist legislators said they would back the measure, in some cases only grudgingly, and with most stressing that patriotic duty must go before party ideals.

Elsa Papadimitriou, broke ranks with her New Democracy party and voted for the measure. “There is only one act of patriotism: consensus and cooperation,” she said. “Fiscal suicide is not an alternative. “
Nor is the unapologetic, in-your-face short-changing of the citizenry limited to Greece or Europe. Across the Atlantic, the U.S. political landscape offers a treasure trove of Exhibit A's in that regard in every bent.

Everyone knows, for example, that the cost of health care in the US is increasing in double digits year on year.

Everyone knows that a major component of that increase is the rise in the price of prescription drugs.

Everyone knows that the U.S. government is the largest purchaser of the prescription drugs through Medicaid and Medicare.

Everyone knows that wholesales prices are cheaper than retail prices.

Yet, by the act of the same Congress that is obsessed with reducing government spending, the US government is expressly prohibited from negotiating price discounts for prescription drugs.

This is not corruption in the usual sense. Yes, pharmaceutical and insurance companies pay the US legislators and buy their votes. But those are all legal campaign contributions. So the practice goes on in the open view of the public.

Perversion of democracy, you say? No, democracy manifest, I say; the government of the people by the people for the people. The only catch is people, which people misunderstand, because the strong biological/anthropological connotation of the word obfuscates its social/political context. But social/political is precisely what we deal with in talking about people and democracy.

This change in connotation is subtle, the resulting disconnect between the anthropological and political man easy to miss. Even some of the great minds who wrote on the subject fell prey to it.

Consider Socrates, Plato and Aristotle. All three had contempt for democracy; they considered the rabble unfit for the affairs of governing. More to the point, reading them, you will never know that they lived in a slave owning society. There is no mention of salves. People and democracy pertain to free citizens only. Slaves are mere objects.

More than 2000 years later, we run into the same suggestive mentality in the U.S. Constitution. Again, the authors of the document were among the most outstanding citizens the US ever produced. To take Benjamin Franklin as one example, legend has it that he never wasted a minute of his life, which must have been true on the evidence of the astounding body of works that he produced alongside his many activities – and first rate works in that. At merely 23, in A Modest Enquiry Into the Nature and Necessity of a Paper Currency, he espoused ideas about the role of money and the nature of value that half a century later Adam Smith used in his magnum opus. (Even the full title of Smith’s book, An Inquiry Into the Nature and Causes of the Wealth of Nations seems to have been inspired by Franklin.)

Yet, a man with such obvious intelligence and experience saw no irony in signing his name to a document that starts with “We the People” and excludes blacks. Nor did any of his compatriots.

The explanation lies in the anthropological/political dichotomy. The Founding Fathers did not doubt that slaves were human. Surely George Washington who fathered a child with a slave servant must have known that.

But they were writing a document in governance and not in biology or anthropology. It is in that sense – with respect to having a say in the running of a republic – that blacks were left out of the Constitution; they were excluded from the political process. So were women, who did not gain the right to vote until 1920. (In Switzerland, it was 1971!) “Not being counted as people” is an inference that followed from that exclusion. But the issue was always political.

The U.S. Constitution is about the rights of property owners. Those rights arise from ownership and not a person’s biological or anthropological attributes. In that context, it did not occur to its authors to recognize slaves and women. That would be absurd, akin to recognizing pets or trees as people.

This calculus of power was on display at the Philadelphia Convention of 1787. The Convention elevated blacks to 3/5 of a person for the purpose of distribution of taxes and the apportionment of delegates to the House of Representatives. The arithmetic gerrymandering was a concession to the Southern plantation owners who were demanding more representation and thus, more power, on account of their property which also included slaves. Otherwise, it had nothing to do with the liberty of the black population whose fight for civil rights continues to date. (The Voting Rights Act – notice the name – was not passed until 1965.)

Fast forward to 2011 and we see the same practice in Murdoch’s News Corporation, where one Murdoch family member is counted as 4 regular types. From the Financial Times of July 21, under the heading US fund attacks New Corp’s share structure:
The two-tiered structure that gives the Murdoch family almost 40 per cent of the voting rights in a company where in owns about 12 per cent of the equity was a “corruption of the governance system”, said Anne Simpson, senior portfolio manager, of Calpers Global Equity and its corporate governance chief. “Power should reflect capital at risk”.
Power should reflect capital at risk.

Thank you, Anne Simpson. I could not have said it better myself!

Because at the age of self-destructive speculative capital, capital is everywhere at risk, to reflect that risk, capital moves to assume the position of power everywhere. The power commensurate with global risk is global power. That power is available only at the state and supra-state level.

In this way, finance capital assumes a new, more potent form. It is no longer the petty interests of a neighborhood “boss” enforced by physical violence or the diktat of a strongman enforced by more organized thuggery, but the international and state law, enforced by the machinery of state and international organizations. In this way, we arrive at democracy.

Sunday, November 20, 2011

The Origin of the [crisis in the] European Union – 5: Capital as the Union’s Main Driver

If you are following the crisis in Europe, you know how complicated the whole thing is. You see the stressed looks on the faces of politicians, central bankers and the heads of places like the World Bank, the IMF, the European Commission, read or listen to their often contradictory comments and wonder that if they are at a loss for an explanation/solution, what chance do ordinary mortals have of making head or tail of the situation? Look.

If that is what you think, you have been had; chalk off one “mission accomplished” for your local papers and international news media.

What is taking place is Europe is quite simple to understand.

The EU was created as the answer to the problem of falling rate of profit in the industrially advanced European countries. Reversing the falling rate of profit is the objective. The EU is the vehicle for realizing that objective, the means of getting there.

Creating a vehicle such as the EU which must stand over the heads of the European nations and governments is no easy task; the very idea points to the audacity of the force behind it. The force is capital, with the “democratic government” being its immediate manifestation. The size or intensity of the force – that would be the governments’ agenda, vision and modus operandi – is a function of the local conditions and varies from country to country and situation to situation. The direction of force, toward a homogenous social system conducive to capital, is fixed and remains unchanged throughout; it is “remorseless”, in the words of a British official.

Let us look at these points in the case of Greece. It should suffice for illustration.

When the Greeks were invited to join the EU, they were jubilant. Here at last was the confirmation that Greece had “arrived”. With the military dictatorship gone, the country could take its rightful place among the advanced, civilized countries.

As the Iranian proverb has it, they went for the smell of kebab, only to discover that donkeys were being branded. But by the time that realization came, when the draconian cuts hit every aspect of social life in the country, there was no going back, short of a violent overthrow of the government, which was not going to happen because Greece was now a democracy.

This latter point needs elaboration.

Look at this sentence from a New York Times article this summer after the Greek parliament had approved the first in a series of slash and burn measures:
Markets rallied globally, and European leaders welcomed the passage of one of the most radical overhauls of the Greek economy since democracy was restored in 1974.
The sentence is written like an advertising copy. Nay, it is an advertising copy, a style of writing designed to create an association between a product and “positive” words – and thus, feelings– in the absence of any logical association. You know the routine: Selling a car? Then say power, beauty, freedom.

The Times uses the formula to a “t”. "Positive" terms – Markets rallied, European leaders welcomed, overhaul of the Greek economy, democracy was restored – are tightly packed into a sentence to “soften up” the reader. The racket is quite sinister and demands the picture of the street riots to work, which is happily supplied.

Now, reading the jubilant account of the reaction to cuts in Greece and seeing the bloody faces of demonstrators confuses the readers. They are presented a contradiction that they cannot resolve with the limited information provided. They cannot make sense of the events. Confused, they become ignorant spectators of events, accepting whatever is thrown their way and passively waiting for leadership – of both thought and political kind – to show them the way. Murdoch provides the former. Cameron, Berlusconi, Sarkozy, Merkel, Obama and Papandreou provide the latter.

But facts are not isolated events. Their relation, arising from the compulsion of reason, remains indestructible and comes through even from behind a confused text. We only need to rearrange the words and put the emphasis where it belongs.

Here is the logical rewrite of the Times sentence that eliminates all the internal and contextual contradictions of the text:
It was precisely because democracy was restored that the most radical overhaul of the Greek economy became possible, after which finance capital everywhere celebrated as it saw its grand design for increasing its rate of return one step closer to realization.
Democracy is the name of the form of the government created by capital. One does not have to be a supporter of the Greek Junta to note that the undemocratic colonels would not dare to subject the Greek society to so violent a shock therapy. More to the point, they would not accept or allow it.

Establishing democracy in Greece was the necessary condition for, and the harbinger of, a social order mandated by the EU whose sole objective is making the member societies an agreeable stomping ground for capital. That’s what the EU’s 100,000-page rulebook is all about.

Now, Europe is a divided entity, with the political and social divisions at times following the change in landscape. Belgium, for example, only recently managed to have its first government in one and a half years because the northern Flanders and relatively poorer southern Wallonia could not agree on the division of the country’s wealth. (The compromise government, far from being a unifying power, reflects the institutionalization of the separation of North and South.) Or take the equally small Switzerland, in which the culture and social concerns in Canton Ticino are more Italian than any part of the country north of Gotthard.

Only a fanatic doctrinaire, then, will seek to explain everything that has been happening in Europe in terms of capital and finance capital. I devoted Part II of this series to “defining” Europe precisely to highlight the political, cultural and economic differences among the European countries and even within them. There is a historical rivalry between France, Germany and England, for example, and Silvio Berlusconi would have had his rivals and enemies even without the EU.

But the falling rate of profit and the need for cheaper labor is the grand narrative of the EU. All other events take shape and play out within it, in the same manner that all events in War and Peace take place within the context of Napoleon’s invasion of Russia. No detail of the EU crisis (or War and Peace) contradicts that main storyline. That is another way of saying that all the contradictions of the EU, which have manifested themselves in a laundry list of banking crises, market instability and political gridlock, could be explained and resolved by that narrative.

Let us wrap up then.

The idea of the EU rose from the need of capital in the industrially advanced West European countries for lower labor costs and new markets, the one-two punch that the industrialist in those countries correctly calculated would solve the problem of the falling rate of profit.

Germany and France were the leaders of the movement. Italy, Nordic countries, Belgium and Luxembourg with the relatively small, less export-oriented economies, assumed a secondary, supporting role.

The so-called “periphery” countries – the Greece and Cyprus and the Ireland of the Union – were the mark. So were the German and French workers. And the workers in Italy, the Nordic countries, Belgium and Luxembourg.

In an integrated EU, the German industrialist could produce machinery with the Greek wages, which is why and how, in a double whammy, and using the threat of cheap labor in the newly freed East Germany and the southern flanks of the EU, they were able to push down the German wages by about 20%. That, in turn, allowed them to set the euro rate against the USD at a relatively low level, which helped boost the exports and thus, profits. That is the story behind Germany’s “strength”, its “EU leadership” or much admired “competitiveness”. I quoted earlier:
Helmut Kohl, the chancellor of Germany in the early 1990s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.
Now you know the story behind the conviction and determination of politicians. (The 80% opposition, by the way, was coming from the workers and ordinary citizens who, despite massive selling of the the EU idea, had not bought into its promises. In North America, NAFTA was sold using the same exact play book. It was supposed to bring jobs to the U.S. and Mexico.)

The periphery countries proved problematic. Their problem, in a nutshell, was – and remains – the historical problem of training a peasant workforce for industrial labor.

Peasants, because their life tempo generally follows that of nature, have large margins in their daily lives. The cows need not leave their stable at 5:10am sharp, the way a train leaves the station. Approximate “sunrise” will suffice. For coming home, in like manner, “sunset” will do just fine. No need for precise arrival time, as there are no connecting herds.

This margin is precisely what the industrial capital could not permit. An assembly line is nothing but the precise quantity of work performed in an exact interval of time. When peasants are brought into the factory environment, they must be trained to shed the old ways and become robots.

Robot is precisely the word. The sole condition for working in an industrial setting is performing the prescribed steps repetitively in the given time to the exclusion of thinking and individual initiatives. That is why assembly lines naturally lend themselves to automation: in them, workers are automaton.

(The robotization/dehumanization is enforced through a training regimen whose structure and content demands a post of its own. In the training classes of FoxConn’s Chinese plants, for example, peasant/workers are instructed to go from one corner of the room to the opposite corner. When they naturally walk across the room – even donkeys would do that to reach a stack of hay on the opposite side, proving that the hypotenuse is shorter than the sum of the two sides – they are fined. The point is conditioning them to shed their instinct and initiative lest they seek shortcuts. They must at all times follow the walls, like blind men do.)

At the technical level, the inability of the peasant/workers to perform at high levels of precision translates itself to inability of the emerging countries to manufacture high quality and high precision products. So we see that even in today’s competitive markets, the members of Germany’s Mittelstnad are thriving because the highly specialized machinery they produce cannot currently be manufactured by the Chinese workers.

At the social level, the absence of industrial discipline manifests itself in a more relaxed life style which itself arises from the looser and less formal documentation of property rights and legal/commercial relations. It is not uncommon for a property’s boundary to be defined by non-stationary reference points, say, a river. Over time, then, as the boundaries change, the land disputes begin and go on seemingly forever, paralyzing the legal system. And, of course, no one beside the government workers pays much tax because the government has no way of tracking people’s income. In that regard, the racist and ignorant Prof. Hans-Joachim Voth whom I quoted in Part I of this post was right to complain about Greece’s land registry and tax system:
A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity. The economic evidence is unambiguous – the larger and more effective a country’s state apparatus, the higher output per capita. Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.
When a less industrial country such as Greece is forced into a union with an industrially developed country such as Germany under conditions that are defined for the benefit of capital only, its life style must change accordingly. Dinner starting at 9 and lasting till midnight – and that on a week night? Inconceivable! Retirement before 60? You must be kidding.

These habits and conventions, however much their roots might be economical, pertain to the old ways of doing things, i.e., they are cultural. So, as the mouthpieces of capital are quick to remind everyone, the cultural in these countries must change:
As a British taxpayer and therefore (via IMF), a contributor to the Greek budget, I was irritated to discover that all Greek students still have a constitutional right to a free, university education – and spend an average of more than seven years over their degrees. British students will be charged up to £9,000 ($15,000) a year in tuition from next year … Greece has been promised new money. Now it needs a cultural change. Otherwise the country really is going to the dogs.
And it is not Greece only. The Spaniards, Portuguese and even Italians had it too good for too long. But the party is over now and it is time to "grow up", time to pay the piper. The “piper” is the “democratic government”, which, as per Prof. Voth, must be strengthened so it could deliver the populace to the capital – lock, stock and barrel – until such time that its even minimal regulation gets in the way of capital’s expansion, at which time it should be dismantled through whatever means necessary, say a “big society” racket here or the installation of some mad man as president there.

That is it, then, all one needs to know about the EU. As for the roving sovereign/banking crisis which has been hitting the EU member states in the past couple of years, in one sense, the crisis is real. As the rate of profit across the EU members has fallen, the government expenditures that corresponded to the pre-fall era have become “unsustainable”, to use a word now in vogue. So expenditures must be cut, especially in the euro zone where government can no longer print money.

In the private sector, the main expenditure is the labor cost; hence the mass layoffs and refusal of the businesses to hire which has resulted in record unemployment.

In the public sector, in addition to labor costs, the retirees’ pension is a large expenditure. Naturally, then, it is the main focus of the “pension reform”, which aims to simultaneously cut off the pension payments and increase the retirement age so that the payments will start later.

But believing that no crisis should be allowed to go to waste, the architects of the EU are using the governments’ revenue shortfall as a bogeyman for further weakening the power of labor unions and pushing down the wages. The case of Italy shows us how the game works. FT’s political/financial commentator on October 12:
While [Italy’s] public sector debt is high at 119 per cent of gross domestic product, the private sector balance sheet is remarkably strong and the government budget is in primary surplus – that is, before interest payments. The surplus is forecast to increase significantly.

The short term position is thus comfortable and in ordinary times markets would be relaxed about default risk here.
So, Italy’s finances are in order. The country’s surplus is “forecast to increase significantly”.

But that is not the point and certainly no excuse. The commentator goes on:
In common with much of the rest of southern Europe it has a huge competitiveness problem, with unit labor costs reckoned to be 30-40 per cent too high relative to Germany. Even if we charitably assume that Italy’s underlying trend growth rate is 1 per cent, it is hard to see how the trajectory of public sector debt can be pulled back.
You see the sudden shift to the labor costs. Either Italy – now a “south European” country, and we know how those people are – increases the rate of profit by bringing down the labor costs or else. In the “else” scenario, the “markets” will discover that the Italians have been living beyond their means, the country’s bonds will tumble and the spreads on its credit default swaps will rise to the stratosphere. The country will no longer be able to borrow on capital markets and might be forced to default, with all the consequences that follow. To avoid all that, the draconian reforms must be implemented, including the “labor market reform” and pension reform.

Berlusconi could not play along so he was pushed out – for that reason alone and not for any of his long list of transgressions.

Now the “technocrat” Monti has been brought in with much hoopla to save Italy. The ignorant consumers of news are jubilant:
“We finally have a competent government, not one of dwarfs and ballerinas,” said Antonio di Pietro, the former anti-graft magistrate and head of the Italy of Values party.
Perhaps Berlusconi’s government was a circus. But alas, the joke is on the ex-magistrate and the technocrat Monti will do exactly, precisely what capital demands of him – and not an iota more or less. The Financial Times of November 15:
Mr Monti has plenty of ideas to promote in the long term through liberalising the labour market, weakening the powers of fiefdom of professional services and making it easier for public and private sectors to hire and fire.
At the end it makes no difference who is in charge because capital is ultimately in charge.

I will return with the concluding part.