Monday, January 07, 2013

Tale of the Trinket Makers final draft, or, how the economic collapse happened, with reference to Marx and Sraffa

This is the last version of the story. 

Marxian economics still provides a very good guide to how things work, even if it doesn't adequately cover the cultural sphere. The assertion by some that culture actually creates the economy is something I consider absurd. Piero Sraffa, the Italian Marxist economist, made a great breakthrough in reframing and clarifying just what Marx was trying to accomplish in his economic theory. I've used some Sraffa’s ideas here to talk about the economic downturn, by picturing the speculation that preceded it as a misallocation of resources that was bound to lead to trouble.

Say you have an agricultural economy where most people work the land and exchange what they make with each other. Each household isn't self-sufficient, there is an economy, if only to trade food stuffs. There are a few small industries on the side to provide other goods that are very essential, but they’re insignificant. Everyone works, and society as a whole has enough to eat. Now, let's say that someone comes up with an innovation that lets farmers produce the same amount of food with only half the work. This would mean that everyone in society could be fed with only half of society working. Consequently, many people become unemployed.

 Some of the folks who are unemployed get the idea that they can get more food by making trinkets and selling them to the farmers. They make their trinkets, farmers buy them, the trinket makers get their food. Other people follow suit. Some decide to make a different sort of trinket. They now trade with both the farmers and the first trinket makers, because they too want some of the new trinkets.

Now in this economy, the folks who farmed also made many things for themselves, like clothing and possibly some farm implements, and came together as a community for large projects like building houses. Some of the folks who are unemployed get the idea one day that they can get their food by specializing in making clothing, or building houses, by doing things the farmers previously did for themselves. This not only improves the lives of the farmers, but frees up more time for their farming, making it easier for them to grow the food that feeds people. Soon, people begin to think of all sorts of useful objects in regular life that can be independently produced, improved, and exchanged for food.

At this point, it has become burdensome to exchange all these goods using food or products in kind, so a generic marker for goods is produced, money. Money, although apparently based on food in this case, is actually based on the amount of labor needed to produce the food, since the price of the food is determined by how productive agriculture is. The price of food decreases as less labor is needed to produce it. Because of this, money serves as an indicator of the labor put into the product, and buying and selling all products becomes the exchange of tokens of labor for goods made with an equivalent amount of labor.

However, while money itself appears as an independent thing, as something you can pile up and spend any way you want, the underlying economic structure of society still exists and determines how that money will likely be spent. The economy is still highly intertwined under the surface, providing food and products that improve quality of life, the efficiency of business, such as clothing, transportation, and machinery. The production of all of these are interdependent, with each often making use of the others, such as businesses benefiting from the transportation provided by trains, and trains in turn benefiting from the developments in engineering that make new trains more efficient. Ideally, only after the essentials have been provided for are trinkets, enjoyable shiny things that provide no added productivity, made.

For society to function properly, the money a person gets from work needs to be fed back into this structure of society according to real needs. The farmers need to be paid, the folks who provide transportation have to be paid, clothing has to be produced, or else the quality of life will eventually collapse. In fact, people already spend their money in this way, as reflected in their budgets: food, rent, electricity, water, phone, internet, transportation, clothing, and car insurance get first priority. All of these goods facilitate productive life and work. It's only when these have been provided that people, ideally, spend money on items they want that are non-productive, that are items of pure consumption.

It works the same way on the other side of the fence with production as well. Businesses constantly economize on essentials, the difference being that the surplus that exists after they are paid for is either given to owners or reinvested in the business itself.

When the two sides of consumption and production meet, when what is bought supports what is produced and both serve a productive purpose, the market not only clears, but it achieves a stable state that can accommodate the less essential production.

Now, what would happen if a large percentage of society decided not to spend their money on essentials, but instead chose to spend it on pure consumer goods? These people would soon be without housing, without transportation, and without food, but with lots of shiny trinkets. On a social level, if this was possible over a sustained period of time, the trinket makers would prosper, but the rest of society would suffer, because the essentials would not be bought. This would put many people out of work. Funds would be redirected to pure consumption that were necessary for the maintenance of other parts of society, and that were ultimately necessary for the goods of pure consumption to be made at all.

That would be a terrible thing, but, usually, sustaining such a situation would be very difficult. What would happen, though, if all of the sudden people found that they could invest in trinket making, and get lots of money back, without having to support the normal, productive, economy? You'd get lots of money, markers of value, produced by your investment, made without any actual useful production backing them up.  In the short term this money could be used just like any other, apparently with no consequences. After all, bills would still get paid, some businesses would still be supported. But as more and more funds that should have been going to build up the real economy are spent investing in trinkets, certain weaknesses in the economy would start to emerge, and society as a whole, by using the trinket money to support itself, would start to go in directions increasingly unconnected with the necessary functions of the economy. Society itself would also become more and more dependent on the money from the profitable trinket making industry for its sustenance.

One day, the trinkets generating money without productive labor suddenly aren't there anymore. What happens next? What's now exposed, what the trinket economy previously masked, is what now everyone needs more than ever: the underlying, interdependent, structure of the economy that was previously hidden by the glut of money from the trinkets, that developed in unsustainable, inefficient, and haphazard ways that did not make the most efficient use of the funds. Businesses that geared themselves to the dynamics of the trinket dominated economy as opposed to meeting the productive needs of society are now out of luck, and either have to retool very quickly or find themselves out of business. This includes boutique businesses made possible only by this influx of trinket money.

Since the trinkets provided so much money, a whole section of the economy will now have disappeared. If the society wanted to maintain its basic standard of living, it would have to build enough industry based on truly productive manufacture and exchange equal what the trinket industry previously provided, which is a much more difficult job to do. On top of that, society would also need basic investment in infrastructure to fix it up and get it to par with the state it was at before.

This is my take on what happened in the run up to the collapse of the housing market in 2008 and the general economic collapse that followed. We had our own non-productive trinket economy making money while providing neither real goods or services essential to individuals or to society itself, no real goods at all. The only thing produced by the housing bubble produced was bare money. Marx often said that the money economy, and the status given to money itself by society, is an illusion that masks the true life of society, and if you pay attention to the money instead of to what’s beneath it you miss the point. People might think that everything is fine simply because cash is rolling in, but the cash can flow while the actual life of the economy can be anything but steady. I think the economic crisis demonstrated the truth of Marx’s belief. The illusion of money created by non-productive means was ultimately set against the underlying productive reality, and the productive reality won.

Milton Friedman, the neoliberal economist, coined the term TANSTAAFL, or There Ain't No Such Thing As A Free Lunch, and while his take on economics is very different from what's described here, the acronym can easily be applied to the disjunction between the money economy and the real economy. If the action of the money economy strays from real production and becomes based on non-productive activity, going further and further away from supporting industry in a way that intelligently builds and supports the real economy, there will eventually be a crisis, and people will find that the economy they’ve been living in is not really supportable.  The real economy will reassert itself, with all the consequences that follow.

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