My Quest for an Introductory Understanding of Modern Economic Theory
It is a surprise, I think, that evangelical Christianity has yet to announce the obvious. At long last, after two millennia of false alarms, we are witnessing clear and unassailable portents of the end times. Capital in the Twenty-First Century, by Thomas Piketty, a 700-page book of economic theory, translated, from the French, was, for weeks, the bestselling book on Amazon. The book’s publisher, an imprint of the Harvard University Press, has run out of copies. Amazon said that I, a Prime member, would receive the book by June 6th. When I called my closest Barnes and Noble, the lady on the phone laughed. In liberal Austin, of course, the only store with a copy is twenty miles north, in Round Rock. That is to say, in Round Rock, Texas, one of the great beige suburbs of our nation, in which what is left of the middle class is too busy struggling to survive to read a book informing them they are completely fucked.
In a manner the French pioneered, M. Piketty has become an honest-to-God intellectual rockstar. He has been feted by glowing reviews from the New old guard (The New York Times, The New Yorker, The New Republic), lengthy validations everywhere else that matters, has toured both of our coasts, has met with members of the Obama administration and has been attacked by the right for everything from his youth (because only the cadaverous are capable of producing serious thought) to his gall at proposing one possible future for the world economy based on nothing but 15 years of study and mountains of hard numbers.
And what is he saying? Simply what we’ve long suspected: that the rate of growth from wealth already accumulated grows faster than the economy at large (i.e., your paycheck). Those who already have some money will always have more money than you unless you can somehow come across a large pile of assets. In page after page of charts and graphs we see a great maw forming between the incomes of those with money (especially those with inherited fortunes) and those who depend upon a wage from their labor. In short, the future is a return to Western Europe pre-World War I. Capital in the Twenty-First Century has all the makings of the book that for the next decade you will wave at your parents while shouting, “There’s not even a point in having this conversation until you’ve read this!”
As is always the case with massive popularity, we should approach the object that has so entranced the public with more than a little caution. Who among us has yet to un-read the mommy porn that our friend, the one that doesn’t generally read, pressed upon us urgently, saying “Really, try it, it’s deeper than everyone says?” Or forgotten the low sigh of “That’s it?” that escaped from the final pages of The Marriage Plot and Freedom and Telegraph Avenue and settled softly to the carpet like a sclerotic fart. Enough has been written on the right’s hysterical reaction to Capital, the shrillness of which has increased in direct relation to the book’s sales figures. Forbes has turned itself inside-out. It’s a wonder Fox News hasn’t made the book into their own missing Malaysian airliner. Amidst the lengthy clamors of Nobel laureates you’ve vaguely heard of and think-tank contributors you distrust implicitly (most if not all of them dishearteningly white and be-testacled) it takes a conscious effort to discover the more measured language coming from both sides explaining that Capital in the Twenty-First Century, like all books, is imperfect.
Most glaringly, Piketty seems to have misstated the history of the minimum wage, forgetting to mention the occasions it rose under Republican presidents; perhaps, as a foreigner, he didn’t realize that George W. Bush needs no help in looking diabolical over here. More complexly, there seem to be serious questions of Piketty’s mathematical models and in the limits inherent in the tax records he uses for most of his data, though models based on census surveys and payrolls have displayed very similar trends. If ever there was a book worth waiting to read in expanded, revised paperback, even if it were readily available today, this is it.
For the first time in my life, I feel vaguely ahead of the curve. On March 26th of this year I ran a search on Amazon for capitalism and my first result was Capital in the Twenty-First Century, which had come out just two weeks before. It sounded exciting (and infuriating and impenetrable) but since I couldn’t find a copy in Austin’s public library system, I wrote it off for the time and started clicking through the recommended also-boughts. I compiled a list of similar Serious titles that were available and left for my day job. Two hours later, on a break, I opened Twitter, and the top item was a headline from The New Yorker: “Piketty’s Inequality Story in Six Charts.” Was I baader-meinhoffing, or was something serious at work?
By the time the book exploded in earnest a month later, I had taken my first cautious steps into the world of economic theory. I had by my bed not only The Enigma of Capital and the Crises of Capitalism by David Harvey and The Making of Global Capitalism by Leo Panitch and Sam Gindin, but also Debt: The First 5,000 Years by David Graeber, The Big Short by Michael Lewis, The Affluent Society and Other Writings, 1952-1967 by John Kenneth Galbraith, and (what would my parents say?) The Communist Manifesto. Anyone with any knowledge of the field must recognize here the sight of an amateur grabbing books at random and in increasing desperation, and all of it because, back in 2008, I couldn’t wrap my mind around why buying and selling another person’s debts could possibly be smart business.
Like most people paying a modicum of attention (which was, I think, for the banking class, a disturbing and unprecedented number of people) I feel pretty confident I understood the sub-prime mortgage crisis better than the banking class told me I was able to. A large number of people were sold homes they couldn’t actually afford. Their banks then sold their mortgages to other banks around the world, making lots of people very rich. During all of this, some banks and capital firms were also taking out things called derivatives (essentially tools to place bets on anything—the price of milk going up, the price of oil going down—with their clients’ money) to gamble on when buyers would default on their loans. Eventually, the obvious came out: Buyers were defaulting on these loans en masse and the banks were in fact millions of dollars in the hole. And, thanks to the dismantling of various restrictions and laws built to protect the average citizen, it was not the banks that suffered, but the people who didn’t fully grasp that their retirement funds were wrapped up in the whole mess. Suddenly everybody realized that nobody had any money. So far, so Reagan.
What I didn’t understand were the finer points. How does selling someone’s debt make you rich? What is interest? What, exactly, does a derivative look like? Why does a stock market even need one? Can’t it just be about buying and selling stocks in a company? And what is a bond? Is it rectangular?
These, in turn, gradually led to thornier questions. How is it legal for a bank to authorize a loan it knows the buyer can’t pay back? Why does the government seem weirdly OK with what is functionally gambling on an international scale? Why does it seem to be taken for granted that these large firms can’t be allowed to fail as a result of their malfeasance? What is keeping these men (because they were mostly men, of course) from getting arrested? Why do these collapses continue to occur and get worse every time they do?
If you live on a fault line, shouldn’t you study how earthquakes work?
But the early Obama years were heady times, if you were only paying a modicum of attention. For a couple months, questions of the status quo were the loudest they’d ever been in my (admittedly brief) lifetime until, suddenly, they stopped, like a channel changing. For my part, I stopped asking my questions. We all had contact highs of hope and change.
The niggling doubts of the 2009 bailouts.
The dawning anxiety of the 2010 midterms.
The blank horror of the 2012 election.
It is 2014 and I am nothing but questions.
And yet, how to begin? Just because I am no longer willing to accept the conventional wisdom that the common woman cannot understand the high finance and the academic theory that shape every aspect of her daily life, the fact remains that I have never in my life taken a course in economics or statistics or political science or math more advanced than college algebra. Before that Amazon search on March 26th, I did not know a single title besides Michael Lewis’ The Big Short which, because I’m perverse, I put down for being too easy.
With a deceptive ease (that, I have to admit, leaves me seeing green) Lewis introduces a cast of sharply realized characters and sends them hurtling towards a reckoning within his first 20 pages. He describes Steve Eisman, an investor who saw the subprime crisis coming, as “dress[ing] half-fastidiously, as if someone had gone to great trouble to buy him nice new clothes but not told them exactly how they should be worn.” And Vincent Daniel, who came to work for Eisman: “He had little to lose but still seemed perpetually worried that something important was about to be taken from him.” He lays out the nature of housing bonds and the fraudulent nature of the subprime market in less than a page of punchy quotes and a great deal of concealed sweat. I am riveted. Three chapters blitz by. I switch gears. I want a mental workout. I want to wrestle with Big Issues.
On page eleven of The Enigma of Capital is the sentence, “Financial crises serve to rationalise the irrationalities of capitalism.” Now we’re getting somewhere. And then on page 17 is, “The demand problem was temporarily bridged with respect to housing by debt-financing the developers as well as the buyers. The financial institutions collectively controlled both the supply of, and demand for, housing!” I was soon reading every sentence twice, if not five times.
The 260 pages of The Enigma of Capital took me a month of serious effort to finish and my biggest takeaway is that I need to read it again. Harvey’s language is obsessively precise and even if not intentionally opaque it sometimes leaves one feeling a little ignorant: “…the effective demand for yesterday’s surplus product depends upon workers’ consumption plus capitalist personal consumption plus the new demand generated out of tomorrow’s further expansion of production.” “At the heart of the credit system there exist a range of technical and legal aspects (many of which can fail or badly distort, simply by virtue of their rules of operation) coupled with subjective expectations and anticipations.” I spent entire days off trying to unpack the book. I discovered that there’s something sensuous to reading Marxist critique while sunbathing.
What I did understand my first time through The Enigma unsettled the hell out of me. For one, the long-term prospects for capitalism are worrisome. In order for a market to be considered healthy, it needs to grow by three percent a year. If it fails to grow—if created products merely sit in warehouses gathering dust, if cash reserves merely sit in banks accounts and deteriorate from inflation—we are in a crisis because money has stopped flowing. Nobody is buying anything, and nobody is getting paid.
Capitalism is constantly seeking to overcome the barriers to its growth: advances in shipping allow more concrete to be shipped to China; employment of a new, cheaper labor force cuts back money spent on payroll; removals of artificial trading limits allow more iPods to be shipped to South Korea. But can this expansion continue forever? If we grow at 3 percent a year, “there will be over $100 trillion in the global economy by 2030. Profitable outlets will then have to be found for an extra $3 trillion investment [in one year]. That is a very tall order.” Where will we be selling our iPods then? Africa?
Harvey asserted theoretically in 2010 what Piketty has now asserted mathematically in 2014. When the economy is expanding at three percent (or the more common 2.25) those who have the money to get involved in the growth will do much better than the people in their employment. If you inherit, say, your father’s glove factory and $10 million in cash, and use that cash to open a second factory, even if you only net a profit of 2.25%, you’ll have $10,025,000 next year. In three years this factory will be making you $11 million a year. I think. As your income compounds, you can soon—by combining the income of your two factories and maybe an attractive low-interest loan—open a third factory. Soon you could open five. You could buy a stake in a new restaurant chain or buy some mortgage bonds. Eventually a broker will come knocking with news of a new investment scheme made possible by his friends in Washington that could provide returns of five, 10 or even 50 percent. Through a number of complex algorithms and workarounds, it is guaranteed to succeed. You’d be a fool to miss out on such an opportunity.
Granted, there is an element of risk involved, but provided you don’t invest too much of your father’s money into the system and overextend yourself, you could always just shut down a factory that isn’t turning a profit or close a few restaurants, at which point the newly unemployed workers are no longer your problem, but the government’s (though, theoretically, they could still be your problem by proxy, if you’ve been paying your taxes, but if you’re smart and have your company headquarters in Ireland, you haven’t been). And what does growth look like for your employees? A raise, the rate of which you, the owner of the factory, have set.
Those who run the factories (though today a smarter analogue would be “those who run the service conglomerates”) seem unaware that most of the solutions to their growth problems only create more problems down the road. By keeping wages down, they reduce the money their workers can use to buy their products. By convincing politicians to remove regulations on stocks and bonds, they can make bigger and bigger gambles in the economy until it all explodes in their face. If my first reading of The Enigma has taught me anything, it’s that capitalists possess neither memory nor foresight, and they will never change their behavior unless they are forced by the state to do so.
It is in the solutions they offer that I am at my least persuaded by either Piketty or Harvey. The former advocates a global wealth tax on the top percentiles, the earnings of which can be redistributed through education, healthcare and other tools the rest of the population needs to survive and prosper. But even Piketty himself is quoted as describing this tax as “utopian.” After all, how does one expect to convince China, the United Arab Emirates and Russia to agree on a unified tax for their wealthiest (and, hence, most powerful) citizens? For his part, Harvey also acknowledges that his pleas for another crack at Communism are utopian, “but so what,” he says. “We can’t afford not to be.”
I still have so much reading to do. The introductions of The Making of Global Capitalism and the first chapter of Debt: The First 5,000 Years showed me that I have not even scratched the surface. Could globalization, that wonderful advance in human development so championed by The World is Flat et al actually be setting us up for an even greater catastrophe? Could our species as a whole soon need to re-evaluate the nature and ethics of debt itself? What is an interest rate? Why do large Communist systems always seem to fail?
Whatever the solutions, certain things seem certain. It’s in the nature of capitalism to produce crises, and the fewer regulations placed on its main players, the worse those crises are going to be. The right’s rhetoric of trickle-down economics and pulling yourself up by your bootstraps is being decisively proven to be bullshit. The fact that a 2,800-word article discussing these issues is being published on a website aimed at millennials is, somehow, significant. And the fact that a 700-page book of economic theory, translated, from the French, was the bestselling book on Amazon is a sign of the end times, but the question is: whose times, exactly, are ending?
Photo: Shannon Kringen