Monday, March 20, 2006

Living with booms and busts

In yesterday's post, I touched on the idea of a balance between over-reliance on a system of exchange and missing out on the virtues thereof which, in hindsight, I should have explored in more detail. The point I was trying to make was that the cycles of boom and bust inherent in the capitalist system were not in synch with the need to acquire the daily necessities of life. Simply put, a family can starve before a bust resolves itself.

Over the past few years, Stephen Roach of MSDW, among others, has warned of projectionist dangers. Recently, he worried about politicians lack of concern over the lessons of the 30s and counsels patience to let the "win-win" of globalization raise living standards around the world. I think Mr. Roach and I take different lessons from the period.

Advocates of the virtues of free trade in any and all circumstances see the Smoot Hawley tariffs as a prime contributor to the depression. Yet the depression hit the agricultural economy in the mid-west, to cite one example, in the early to mid-20s, long before the tariffs came into play.

Leaving debate over the choice of response to the problem aside for the moment, that there was a problem seems evident. The problem, in my view, was that the agricultural economy in the mid-west bet too heavily on the constancy of returns flowing from the system of exchange.
In financial terms, many were too exposed to the market.

My mother was born into a Missouri farming community which survived the depression reasonably intact because, in part, they weren't wholly integrated into the commercial system. Most families had gardens, kept livestock and traded within the community. While the depression reduced income for tradables, life could go on.

This focus on the downside of markets might seem to be a polemic on capitalism but that is not my intent. Rather, my argument is that in order to find a balance between the extremes of total self sufficiency and total integration within an international system of exchange, one should explore the downsides of both of those extremes. Just as I'm not knocking eating when I warn of the dangers of obesity or malnutrition I'm not knocking capitalism when I suggest that its virtues too are limited.

Of course, this view begs the assumption that one needs to find a balance-that total integration might not be such a win-win. As this is a contentious issue among those who see globalization as synonymous with good, let's not take it as a given.

Industrialization of a nation involves significant shifts in cultural behaviors. As more and more families migrated from rural to urban and suburban communities they slowly lost their abilities to fend for themselves and became more reliant on labor income from more specialized skills. While, for example, a father moving from a farm to a city might have learned welding among a host of others skills, his son, born and raised in the city, might be a better welder than his father by virtue of specialization, but without any of the other skills. This would be an example of "efficiency" Greenspan-style.

The father in our example has a choice. In the event of a bust, say a two year mortorium on new skyscrapers in a city, he can always go back to the farm. His son, however, would have to learn new skills, a tough thing for some, in order to move to the farm. This son is a product of the new culture of labor specialization.

Thus, I contend, the welfare state. Having imposed a compulsory national education system which fosters labor specialization, the leaders of a nation, and those made wealthy by it, bear some responsibility for those who have been, in a sense, forced to bet their well being on it, assuming they intend for future generations to make the same commitment.. The key point being compulsion. If you compel a man to spend a large portion of his life in a system, in my view, you are responsible for his upkeep. A domesticated animal rarely survives in the wild.

You might notice the theme of freedom in my arguments. I believe industrialization has improved the lot of man on earth, but forced industrialization, or industrialization in the extreme, has created its own new set of problems, an ever growing class of people ever more reliant on that system. I'm not arguing that non-compulsory industrialization would not have generated its own problems, it did. Rather, I think people, families and communities would have found the balance between extremes quicker.

As the welfare state has grown and morphed into a "let's make sure economic indicators all point to blue skies ahead" state the need to strike a balance has only grown, in my view. If booms and busts are part of capitalism and that is the chosen form of political economy then man should be free to choose how reliant on that system he wants to be. One cannot make that choice freely however, if the inevitable busts are considered things of the past by those promoting greater integration within the system.

It seems to me one way to eliminate the welfare state before it takes down the whole financial system with it is to allow people to find their own balance. The first step in finding that balance is honesty in discussing the virtues and vices of broader systems of exchange.