Saturday, January 05, 2013

The tale of the trinket makers, or, how the economic collapse happened, with reference to Marx and Sraffa

Marxian economics still provides a very good guide to how things work, even if it doesn't cover the cultural sphere. The assertion of some, that culture actually leads to economics, is something I consider to be absurd. Piero Sraffa, the Italian Marxist economist, made great breakthroughs in describing just what Marx was trying to accomplish. I've used some of his ideas to talk about the economic downturn, by comparing speculation to a misallocation of social 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 purely self sufficient, there's an economy, and there are a few small industries on the side to provide things that are very essential, but not many. Everyone is working, and everyone has enough to eat. Now, let's say that someone comes up with an innovation that lets people produce the same amount of food with half of the work. This means that everyone in society can be fed with only half of society working, and consequently many people are unemployed. Some folks who are unemployed get the idea of making trinkets to sell to the agricultural producers in order to get their food. They make trinkets, the farmers buy them, they get food. Other people follow suit, with some making a different sort of trinket, which they now trade both with the farmers and with the first trinket makers, makers #A, because they want some of them too.

Let's say now that in this economy, folks who farmed also made many things for themselves, like clothing and maybe some farm implements, as well as community built houses. Some of the folks who are unemployed get the idea that they can specialize in making clothing, or building houses, in exchange for food. This not only works, but also frees the farmers to have more time to devote to farming, thereby making it even easier to feed people. Soon, people are thinking of all sorts of things from regular life that they could produce or improve, and get food in exchange for.

At this point, it's burdensome to exchange all of this with food or goods in kind, so a generic marker of goods is produced, money. Money, although based on food in the immediate, is actually, then based on the amount of labor needed to produce the food, since the price of food is constantly going down the more productive agriculture becomes. Through this, money comes to be an indicator of labor put into a product, so that buying and selling becomes the exchange of tokens of labor for goods produced by labor.

However, while money itself appears as a static thing, as something that you can pile up and spend any way you want, the underlying economic structure of society still exists. The economy is still highly intertwined under the surface providing essentials like food, things that improve quality of life and are useful, like clothing and transportation, as well as non essentials like trinkets, that are basically just shiny things that provide no added productivity to a person's life but are just enjoyable.

To function properly, the money a person gets needs to be fed back into the structure of society. The farmers need to be paid, the folks who provide transportation have to be paid, clothing has to be produced, and, in fact, this is reflected in most people's budgets: what gets priority is things like food, rent, electricity, water, phone, internet--if used productively, transportation, clothing, insurance for your car. All of these things facilitate the process of productive living and working. It's only when these things are provided for that it's possible to spend money on non-productive, pure consumption, items.

It works the same way on the other side, in production as well, only the surplus is either given to the owners or reinvested. When the two sides agree, the market hopefully clears, meaning that what's produced is consumed and what needs to be consumed is produced.

Now, what would happen if many people in society decided not to spend their money on essentials, but instead chose to spend it on pure consumer goods? First of all, on the individual level, people would soon be without housing, without transportation, and without food, but with lots of shiny trinkets. On a social level, if it was possible to sustain such a thing, trinket makers would prosper, but the rest of society would suffer, because the essentials would not be bought, putting people out of work. Funds would be redirected to pure consumption that were necessary for the maintenance of other parts of society, that were indeed ultimately necessary for pure consumption good to be made at all.

That would be a terrible thing, but, usually, the unsupportability of this would preclude it. But what would happen if all of the sudden people were convinced that they could invest in trinket making, and get money back, without having to support a normal, productive, economy? Let's say they weren't just convinced, but that, somehow, for a while, it was possible to invest in trinkets and get much more money back than would normally be possible. What you'd get would be lots of money, as markers of value, without anything behind it, that, however, in the short term could indeed be used just like any other sort of money, because it had the face value.  The money would be there, but as more and more funds that should have been going to build up the real economy was being spent investing in trinkets, weaknesses would emerge. Not only that, but the economy as a whole would become more and more dependent on this new industry for its sustenance.

One day, the trinkets that generate money without productive labor suddenly aren't there anymore, what  happens? What's now exposed, and what now needs to support everyone, is the underlying structure of the economy that was masked by the glut of money coming from an unproductive source. Businesses that geared themselves to the dynamics of this trinket economy as opposed to meeting the needs of more productive parts of society are now out of luck, and either have to retool very quickly or find themselves out of business. This includes people involved in industries that served those who had access to trinket money. The investment that should have been going on in the productive industries that are necessary to make society work and function, but that went to trinket investment, will now show itself in the form of a weakened economy in general, that needs basic investment to fix its structure and get it up to par with how it was before.  And, on top of all of that, since the trinkets provided so much money, if society wants to live at the same standard of living as before, it will have to build enough industry based on true productive needs to equal it, which is a much different and more difficult job to do than trinket making.

That's my take on what happened with the economic collapse in 2008 in the housing market. We had something that was a money maker that provided neither anything that was essential to an individual or anything that was essential to society itself, in terms of real goods and services. Instead, what it produced was bare money. Marx often said that money and the money economy was an illusion that masked the true productive life of society, and that by believing in the money economy as the director of economic life people missed the point. I think the economic crisis demonstrated that the illusion of money created by non-productive means ultimately has to reckon with the underlying productive reality, and that while people in general might think that everything is fine simply because the cash is rolling in, the life of the economy can be anything but.

Milton Friedman, neoliberal economist, coined the term TANSTAAFL, or There Ain't No Such Thing As A Free Lunch, and while his policies are quite the opposite of what's being described here, the acronym could easily be applied to the difference between the money economy and the real economy. If the action of the money economy becomes based on non-productive activity, and strays further and further away from meeting the needs of the real economy, eventually there will be a crisis and the real economy will reassert itself, with all the consequences that will follow from that.

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