Is the economy alive?
The French economy appears to be in an even worse state than experts predicted, although it is hardly alone in being in that grim condition.
The total number of unemployed has reached 3.6 million, including a rise of 80,800 last month - a 10.4% increase on that month last year.
The government is being asked by the left and the unions to spend more and do more. But are they being asked to poke their fingers into a living organism? More on this near the end of this posting.
The French are again under attack for protectionism, this time from the head of Italy's biggest private employer, Fiat. Sergio Marchionne also attacked the financial help given to car makers in Sweden and Britain.
"These are very dangerous unilateral decisions," Mr Marchionne said at Fiat's annual general meeting in the northern Italian city of Turin, which was targeted by workers protesting redundancy conditions.
State funds "put certain players in a privileged position and force the others to fight with their hands tied," he added. "The aid should either go to everyone or to no-one."
His company saw profits plunge by 20% in the last quarter of 2008 and they've been force to lay off workers.
In France, the public mood seems to be swinging behind the call for more aid. I am heading to the country's second largest city, Marseilles, as part of the BBC's coverage of the run-up to this week's G20 summit, where we will see whether the world's leaders will discuss new rules and regulations for the world economy.
But are they interfering with a system so complex, so intertwined that it amounts to a living organism which humans tamper with at their peril? That seems to be the argument in this odd but intriguing blog from the free market Adam Smith institute, which compares the world economy to the natural environment and argues for an economic version of the Gaia theory. We'll see how that goes down with the French unions.
I’m Mark Mardell, the BBC's North America editor. These are my reflections on American politics, some thoughts on being a Brit living in the USA, and who knows what else? My 
~RS~q~RS~~RS~z~RS~36~RS~)
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The Austrians... believe it has passed predictive tests.
Hahahahaha.
Mark, there are two words in that article that should cause you to run a mile: catallaxy and Austrian (in the context of economics). Paul Rincon wouldn't link Intelligent Design, or Richard Black global warming denialists, and the Beeb has already settled its position with respect to 9/11 truthers. These are the equivalent in the economic sphere.
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human's? aaargh!!!
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Survival of the fittest is more relevant than gaia.
If you artificially support bad companies, then the good companies suffer.
What do you want? good companies or bad companies.
The truth is that national governments don't care about good and bad, they just care about native and foreign.
In the big game of 'split or steal' Gordons tactics (or always offering to split) ensures that the UK either break even or lose out - never winning, so never coming out ahead nor covering the cost of past losses.
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If it is indeed a living organism, i think it's closer to a rottweiler with rabies rather than a sweet panda bear, maybe we should consider euthanasia ? More seriously, is it so complexe that is resembles a living organism ? Maybe, but it as to be tamed or at least contained, we don't have to let this organism roam freely and cause as much damage as it wants to. I'm not certain that the Franco-German zoo (guards and a shit load of fences) is better than the Anglo Saxon jungle (glorified greed and financial opacity) but maybe it's time to really think about a compromise in which greed and corruption will not stay unchecked or even encouraged anymore, but where there is still enough room for entrepreneurs to maneuver, that would be a great start.
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My view is that, if it is an organism then its a very simple organism and can be adjusted. The economy should be there to serve the people and not the other way around. The idea of leave it alone because its too complex and only experts can touch it and the "markets" know best does not hold water any more. Politicians if all agree can define economy to be, whatever they want to be. If for example the G20 decide that a country's growth will be measured by how many stay away at night counting starts then the country that a year later provides the list with the most stars has grown the most, instead of the country that produced the largest number of cars!
So yes fiddling with the economy is the right thing to do and economy should be directed towards serving the people
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Mark,
The intriguing blog from the free market Adam Smith institute, thinks that it is so easy to play with words with a false logic in them.
I want to quote: "Whence it follows that the bad environmentalist pursues a small present good that will be followed by a great evil to come (i suppose these are the charlatans in politics and bankers or better say opportunists), while the good environmentalist pursues a great good to come, at the risk of a small present evil.(and these are the religious people, communists, environmentalists or better say the believers in something good that will never come, but willing to sacrifice)”
In order to make it short, because is not so intersting.
What about a third option 3, to pursuse small present good(s), and be followed by a greater good to come?
What about a fourth option 4, to pursue a greater good to come, by start making small present good(s)?
There is also a fifth option 5, but that i would leave to other bloggers to find out :)
This economic crisis or great evil did not come because we were pursuing small present good, and it cannot be solved by the same elites pursuing now a greater good to come, by asking from people to sacrifice and to risk small present economic evil(s).
Why they dont offer option 3 and 4? why not option 5? i like more option 5.
This economic crisis was caused by risking systematic small present evils(but when accumulated over it a great evil), for a greater good to come(hypothetical), by those bankers and politicans who have behaved and are behaving in total denial like gambling addicts and religious charlatans.
if we do small present good every time, according to logic, we will have a even greater good to come. But if we do small present evils all time, the worse is to come.
Mark, i think you should also consider option 5, which is 'ignore the incompetents' otherwise you are one of them. The elites should go, for the greater good to come. This is the sacrifice the people are asking from the elites. or is it too much for them???
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The French economy appears to be in an even worse state than experts predicted
Plus ca change?
What are the actual underlying factors though?
Are the normally militant French workers still working, or are they preparing to strike?
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the more time we give to these discredited elites to solve the crisis they caused by taking small evil risks they didnt understand, in order to pursuse a greater good (this was option 2), the worse will come for us, as they will use it to transform themselves into option 1, which means more of the same. They will pretend to pursue small present good, but the worst great evil has yet to come.
They need a time out.
Someone many times ago, said: "Forgive them ... because they dont know what they are doing."
Did he mean about the financial decline and collapse of Roman Empire?
Why the elites of that time felt a danger from his inside knowledge of the system? He was exposing the elites for what they were, just charlatans.
if we know this today, that our elites are the same, people would be on the streets, but we pretend and hope they are not. but they are.
so we are reduced to hopeless people once again.
what is missing to the plot it a new man to be crucified, but that also will come in the right time.
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Mark,
Don't drink this kool aid. I am a great fan of Adam Smith, but these guys are heads in the fridge crazy.
The fundamental error in their thinking is money. They presume that money is somehow a natural phenomenon, that it exists without a deliberate political structure in place that "owns" the money circulating within a given state, or superstate, such as the EU.
You may be aware that it is a crime to destroy a piece of money. This is because it doesn't belong to you. It belongs to the state. In fact, it technically belongs to a private company, the Bank of England, but such is the very close fusion between private ownership and the state when we speak of banking, the state will protect the Banks property as though it owned it. Thus destroying bank property is a crime, not a civil issue.
Now because money is a deliberate fiction, created by individuals and institutions for very specific reasons, it follows that it cannot possibly behave with the complexity of a biological system. That is why these guys are not taken seriously. They imagine that the monetary system is part of the biological scheme of life. In effect they forget that mankind once bartered with produce for produce, and that not so very long ago all currencies were tied to the gold standard, which is effectively makes trade with banknotes a proxy barter of goods and services for gold.
And economic collapse has a long history of being linked to removing a currency from the position of a proxy barter mechanism. The crisis of the third century in the Roman Empire is linked to the economic turmoil caused by the deliberate dilution of the silver content of roman coin by the state. Huge amounts of international trade from the Roman economy went via the middle east to india, and the Indians had much better metallurgy technology than the romans. Consequently, merchants from India would know the Denari had become devalued, and they demanded the roman merchant smelt their coin and pay in pure silver. This caused a crisis in Rome, as word spread and merchants understood that the coin of the realm could not be trusted in trade.
It is possible to imagine how a network of electrical connections in a world wide web might approach the unconscious sophistication of the neural networks of the mind, sparking the sort of spontaneous evolution of a living system that you read about in science fiction.
It is extremely hard to believe such a thing would happen, but it is possible to imagine such a thing, where a human creation mimics life. But to imagine that the schemes of roman emperors and bank of england owners can somehow take on a life of their own..... it is hysterical madness. It just goes to show how really stupid most economists are. They call themselves economists, because they haven't got a real trade or a profession. They sit around with like minded folks, and conjecture. An economist is not a banker, remember. Bankers do real things. They understand a real trade. Generally speaking, the employ metallurgists to tell them how much precious metal is nearby, and they invest in real property and oil.
It is only economists who believe in paper.
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the-real-truth wrote:
"Survival of the fittest is more relevant than gaia.
If you artificially support bad companies, then the good companies suffer."
Is it not fair to say that the red army proved "fitter" than its opponents in Russia? It destroyed them fair and fair, if you believe in a battle of might to show legitimacy.
And so, was it not survival of the fittest that created communism?
There is an assumption in the west that we live in a classless society, and that government does not create opportunities in the market. I think this assumption is completely untenable, and we must stop believing that the the theoretical ideals of the free market exist. Clearly, they do not.
In the UK today, a government contract is crucial to survival unless you run a very small business and cheat tax. That is a sweeping statement, and lots of people might howl with outrage at it, but it is closer to the truth than it is to a lie.
In the field of law, government contracts are the stuff of life! Nobody except government departments can afford lawyers, so you need government money or you die. Even corporations understand that the law is so useless for solving disputes, and so hideously expensive, that they are better off settling them out of court.
In medicine, the idea of trying to run a business without government funding is absurd in the extreme. Sure, some doctors want to be able to charge more to richer clients, but if you were to suggest taking away government funding for infrastructure, and make these doctors pay for the full cost of their education, they would turn communist faster than you could say "Stalin's weren't so bad."
One of the reasons political parties have become so incredibly dominant, over independent MPs, is because the government control over the economy has become greater and greater, over time. As government s increase the taxation revenue they collect, so they can increase their control over market behaviour by spending that revenue on services and products provided by companies loyal to them. Now loyalty does not mean that the company cant also fund other political parties. Oh no! That is fine. Loyalty to the party means funding the party system, not just one party. This is why all the big corporations (and their shareholders) fund BOTH parties equally. This is what loyalty to the party means. It means loyalty to the system, not the policy.
Companies (and their shareholders) who have access to government contracts do not care about rising taxation, because they understand that they can always charge the government more in order to make up for the increase in taxes. This is why economists say that taxing oil is just a tax on the consumer. In fact, high taxes drive business that is not connected to party contracts to the wall very quickly, leaving only those companies who are part of the party system to operate.
This is what we have now. The only companies existing in the free market are cheating tax, and run by mums and dads. For all the rest, they exist in a party system that does not follow the rules of a free market system.
Like feudalism, the common people work, the propertied classes own shares of tax revenue, and the government maintains order. Hence it is properly called "corporate feudalism".
Any discussion of the free market presumes a reality that cannot be demonstrated, given the level of taxation and the size of the government budget compared to GDP. You can't have a free market if the government spends most of the money in the market. This is axiomatic, surely? But this is where we are today.
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Are Governments mising a trick with this protectionism lark?
Renault built a nice new factory in Slovakia (I think) then because of the downturn they shut it and move production back to France.
Is there anything to stop the Slovakian government nationalising the now empty factory (for nothing) re-employing all the old workers (with no training costs) and start producing their own cars?
They could do it cheaply because they wont have any of the expensive start up costs or research costs and have a top of the line production capacity thanks to the French.
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As I spend time in both the UK and France it's interesting to compare the solutions those 2 countries have used to approach their respective economic problems. Gordon Brown has rolled the dice and is gambling on an uplift in the global economy before the next General Election. Good luck to all of us. Nicolas Sarkozy is going to do what every French president left and right since Pompidou have done. Give in to the unions, subsidise state-owned industries, the automobile sector and farming, soak up unemployment by expanding the already bloated public sector and squeeze yet more taxation out of an already overburdened private sector. Then he and the rest of his government will pray the eurozone doesn't implode before the next parliamentary elections. Come to think of it, Brown and Sarkozy's policies aren't that different except Britain doesn't have any farmers left.
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"...under attack for protectionism, this time from the head of Italy's biggest private employer, Fiat.."
And now Chrysler too... (c.f Pres. Obama's ultimatum today)
Fiat will presumably be bailed out by the USA along with Chrysler - nice work if you can get it!
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In a previous thread, a discussion came up about the idea that new jobs were always going to be created, and therefore increasing automation of industry and service industries, via robotics and computer networks, would not cause mass under employment.
Now classical economics relies on people being employed, so that they can spend their money. If society becomes automated and networked to the point that manufacturing jobs and service jobs scarcely exist, how can the classical economic model continue to work? In order to consume, people will need to be given money to spend. That money must come from somewhere, so presumably taxation will simply suck money back from the process of spending (VAT) this money that has been given out.
I would like to see a discussion of the possibility that work itself it becoming an outdated concept. As a starting point, consider the following fact: In 1993, an industrial robot from a Swiss firm cost 50K pounds. Today you can buy one for 5K. Back then the software to drive the robot cost 50k as well, and the technician to run the software was a highly paid expert. Now a 12 year old can write a program to drive the industrial robot, or download it for free via torrent, and any person can operate it.
We know Moore's law as it applies to computer chips, but very few people I speak to are aware of the way robotics in industry is advancing at incredible speed. If technology continues to create massive automated production facilities that require fewer and fewer people, what happens to the people that are no longer required? How do they fit into the classical economic model?
We presume, when we discuss economic theory, that the free market has room for everyone, because there will never be a shortage of work. Is that tenable? 20 years ago it was science fiction to imagine a society where everything was automated. Now it seems it will just be a matter of time, and predictions for the length of that time span are getting shorter and shorter with each new advance in robotics and software development.
Given environmental pressures, wars for resources and the shrinking availability of work, can we realistically afford to keep discussing the economy as an open playing field where every person is to compete and keep whatever they can grab for themselves?
Adam Smith lived in a time when technology and economic growth was driving the standard of living ever upwards, and he saw the birth of the middle class in england due to free market competition in industry. But we live in a different time, with a different level of technological and industrial capacity. Do we even need competition in the market anymore, or has competition become rapacious, and the political doctrine that will drive the middle class back into the depths of grinding poverty?
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We would do better to seek an environmental equivalent of Adam Smith's "invisible hand" than to search for an economic equivalent of the Gaia hypothesis.
The economy is certainly a dynamic entity composed of living things (us) but that does not mean it is alive. Like the environment it is system of billions of independent actors in dynamic equilibrium, such that a single intervention will result in series of knock-on effects until a new equilibrium is reached. This may create the illusion that the economy (or the environment, as per the Gaia hypothesis) can be regarded as an intelligent collective organism capable of acting in 'its' own self-defence, but the truth is far more prosaic. Millions of individuals act in their own self-interest and this create an illusion of large-scale intelligence.
The consequences of state intervention in the economy are however pretty predictable. When a state subsidises an ailing sector of industry it must finance the subsidy through taxation, which places an additional burden on the wider healthy part of the economy. Adam Smith showed that the loss to the productive part of the economy is always greater than the gain to the ailing part. If France (or any state) chooses to subsidise its car, nuclear, etc. industry then it is burdening other sectors of the French economy which will be at a competitive disadvantage to overseas competitors. Interventionist politicians like Sarkozy are essentially pulling a confidence trick on their electorate in getting them to focus on the sector that gains directly from his intervention while overlooking the more diffuse damage he is doing elsewhere. The new economic equilibrium that will be reached is simply too many people working in an unproductive french domestic car industry with jobs in more productive sectors heading overseas.
Environmental politics can be appealing to a libertarian, but all too often gets hijacked by those with an egalitarian agenda. Environmental policies that seek to prohibit or discourage activity harmful to the environment should be welcomed by the liberal providing that the harm to the environment is provable and providing this translates ultimately into harm to us humans. The tension between liberals and some green campaigners occurs when the environmentalists go beyond 'harm prevention' and seek to use "The Environment" as a catch-all excuse to pursue their chosen redistributive or protectionist policies, e.g. taxes on luxurious cars, pricing people out of exotic holidays, or erecting trade barriers against countries too poor to afford leading edge clean technology.
Politicians (especially those wedded to collectivist doctrines) pretend the Kyoto treaty will make us turn off our light bulbs or develop more efficient products, but if they were serious about the environment they would simply focus on measures that align pricing mechanism to environmental goals. Individuals will turn of their own light bulbs to keep their electricity bills down; Companies will develop more efficient products that their customers can justify upgrading to. And unless we have an incentive to do these things it is unlikely anyone else will do them either. Too often politicians in the West pretend we should do nothing until Indians or Chinese do something. But since the harmful effects of pollution are strongest close to the source of pollution we all have a far greater interest in keeping our locality clean than in what those living on the other side of the planet do (especially when they cannot afford to do much). If we each all look after our own neighbourhood then we will create the illusion of a collective solution to global environmental problems without any need for layers of undemocratic international bureaucracyl an Invisible Hand for the environment. My personal opinion is that harm to the environment can best be discouraged by taxing carbon emissions similarly to alcohol, i.e. at any level up to that which maximises tax revenue, with the revenue used to lower other forms of taxation.
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Interesting blog, interesting comments.
democracythreat @9, well said. The great man (Adam Smith) warned against avarice: and just look what's happened when it's given free rein.
HardWorkingHobbes: are you sure? The last time I updated myself (a few minutes ago) the Slovenian plant was working nearly flat-out, trying to keep up with orders for the models it produces.
What Sarkozy has done (on advice) is to protect jobs in companies in good health. He's let many others take their medicine (ie fail) because they were not worth supporting.
As for the French workers. My view is that, whereas once upon a time they (and the students) demonstrated in the pursuit of principles. Now they demonstrate in the pursuit of personal ends.
So far as the French economy goes: well, Sarkozy has banked on supporting the "supply" side of the economic equation; Brown, in the UK, on the "consumer" side. Given that we're in uncharted waters, it will be interesting to see what works.
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This comment was removed because the moderators found it broke the House Rules.
John From Hendon
You have no idea. Fiat is in good shape and this is why Chrysler wants to link up with them. They expect a billion in operating profits. Small cars are going very well in dire times. Think before you write.
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#18 Gheryando wrote:
"Fiat is in good shape...Think before you write"
Two points:
1. But Chrysler isn't in good shape and I suspect far far worse shape than we know, or than Fiat knows.
2. Whilst working in Italy I got to gain a reasonable understanding of the nature and quality of any form of accounts in the country's businesses and I am remain quite sceptical about any accounts reported from any business in that country. I recall buying an Italian business and finding whilst doing due-diligence that the records were far from what they seemed and differed from any of the sets of books that they kept and presented to me. In the end only a zero base estimation of the worth of the business proved at all reliable.
On the general point about small cars:
True small cars are doing well in this current market, but very few of them can be imported or be made in the USA because they have no type approval. Fiat hardly exists in the USA market - they only seem to have a finance business there held via the Swiss holding company with revenues of between 1 and 10 million USD.
Thee are very few manufacturers of small 'European' cars with active importing activities in the USA - that, I venture to suggest, is because the market does not want to buy the products and I have not yet seen the new regime in the USA changing the rules or providing incentives for its citizens to buy small foreign cars.
It is also reasonable to characterise all of the US car manufacturers as gigantic pension liabilities supported by tiny automotive manufacturing arms and I also have not seen any indication of this problem being tackled and I don't think that the new President can do so without very serious consequences. His best hope is to hope and pray for huge inflation and the consequent reduction in the pension liabilities relative to the manufacturing side of the business for to actually take the necessary steps to radically reduce pensions to former employees and current employees is politically suicidal, although necessary.
So in summary I don't believe Italian accounts as far as I could throw its Prime Minister, and Chrysler will need continuous rescuing for decades as no President can actually fix it. And that goes for all of the large auto manufacturers in the USA too. in general - the problem is economically and politically intractable and the best hope is to wait for the inevitable(resulting from all this Quantitative Easing and absurdly low interest rates!) inflation to reduce the liabilities to a manageable size.
So I stick to my point that it is reasonable to argue that the USA will be rescuing both Chrysler and Fiat if they join up.
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My previous comment was moderated because of a risk of defamation. I dared to suggest that certain bankers and government officials might be guilty of fraud.
The point I was trying to make is that saying this, saying that bankers might commit crimes, is unacceptable. Our society has been conditioned to believe that whatever happens in the city, it is always just a mistake. Never a crime.
The reason i wanted to make this point was to shed light on the economic concept of "moral hazard": the idea that you do not bail out businesses because then their will be no incentive for them to act sensible and carefully. So you get more waste, and more failure.
My point about bankers, and indeed government regulators, was that we face a moral hazard by ignoring the very large probability that their behaviour has been criminal, in the ordinary sense of that word. That is, we ignore the possibility that the bankers and politicians at the top of our society understood what they were doing, and did it for profit. Clearly, to the man in the street, if you cause huge numbers of people huge losses of money, and you know what you are doing, you are behaving in a criminal manner.
Equally clearly, if society does not hold such people accountable, we have a "moral hazard". Why would such people NOT take whatever they can get, deliberately and destructively, if they know that they will never be held accountable? Hence, according to the theory of deterrence and moral hazard, we should expect more of the same.
Now the reason I brought this up in this thread was because I do not think it is accidental that we are hearing theories about how big and awesomely complex the market is. These theories are going to get a lot of airtime in the coming years.
See, if it is all just ever so complex, (perhaps even organic, who knows) it becomes reasonable to claim that the bankers were just confused. They were not acting deliberately. They were just confused, and they made mistakes. Because it is ever so complex, you see.
Now the fact that these same bankers made literally hundreds of millions of pounds from their behaviour ought to imply that they precisely what they were doing. Oh no. You see, it is ever so complex. It is almost organic in complexity. Nobody knows how it all works.
And therefore, nobody can be held accountable for their actions, because nobody did anything wrong. It was all just accidental. It was an accident that those guy who set policy for the big banks made so much money selling phoney debt and insuring phoney debt so they could sell more of it. All just one big accident. A lucky accident. A hugely profitable accident, almost like winning the lottery every single day for ten years.
But just an accident. The system is so confusing, you see. It is ever so complex. It is almost like it is ALIVE, and has a mind of its own.
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"But are they interfering with a system so complex, so intertwined that it amounts to a living organism which humans tamper with at their peril?"
Oh that is realy rich. Call it laissez-faire capitalism, call it supply side economics, call it deregulation, call it self regulation, left to its own devices, the free market will have periodic depressions like the one that started with the stock market crash that began in 1929, like the one that started in 2008. It was precisely the lack of regulation, the removal of restraints on boom that led inevitably to the bubble and the bust. Short term profits wins out over long term stability and growth every time where there is no limit to the degree of risk to any and all asset classes. And that is what happened. It would eventually right itself in time but the social cost is far too great. It should never be forgotten that whatever system is chosen, it is allowed to exist only in the service of the greater society at large, not in a vacuum by itself.
Socialism has proven itself an inherently flawed system which will forever fail because it does not recognize the basic traits of human laziness when it can get away with it and greed as an incentive to produce beyond mediocrity. But unrestrained capitalism is also flawed. We had a happy medium in the US until a few decades ago when a crowd headed by Alan Greenspan came to power. And what did he tesitfy to before Congress in his own defense? "There is something about markets I don't understand." And some say the British have a knack for understatement.
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We've been told of the dire state of France's economy for decades - and French voters themselves fell for the "Anglo-Saxon" mantra of deregulation and stripped-down government in 2007, only three months before the bottom fell out of the great neoliberal project. Yet now even the Thatcherite wannabe Sarko accepts that the state will have to take the lead in tackling this global disaster. France will go for intervention, of course: when you look at the wreckage of the US and British economies you can't really blame them.
Mr Harnwell's blog post which you cite is, however, quite the nuttiest thing I've seen from the grossly-misnamed ASI: the author's analogy seems to invite the opposite conclusion to that which he intends, unless we're really to believe that government inaction on environmental matters is going to miraculously reverse that incipient collapse too.
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Interesting blog, interesting comments, great questions!
I love reading this stuff (when I have the time). The basic premise that we expect politicians, bankers, economists and academics to have a better answers than the rest of us, is actually at the root of all these problems. Maybe they do have a better "overview" but why would their answers to these questions be any better than our own? We make the decision whether to "participate" or not with their ideas. If you don't agree, vote with your feet. I think we will see more focus on local economies in the future, with people doing business more with their neighbours rather than globally or with corporates. I have a small business in NL and so far the recession has not had much impact. Perhaps because most of my clients are local, small and medium-sized businesses - and government. Curiously enough, it is my work for multinationals which has largely dried up.
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