The eventual downfall of the USSR has often been seen as a self-evident example of the failure of central planning, both as a principle and especially in practice. The critics of the USSR also point to the low standard of living of the population during its existence, the prevalence of famines, the low availability and shoddy quality of consumer goods, and its continued lagging behind the United States in production as more proofs of the failure of ‘socialist construction’. Although these criticisms are not entirely without merit, they need to be contextualized and qualified strongly to be properly understood. It is therefore important to provide a rough outline of the economic history of the collapse of the USSR and its meaning. Because the focus of this article is on the economic problematic, more detail than is usual will be presented about these issues, whereas some political, cultural and social developments of importance will be largely avoided. Continue reading “An Outline of the Economic Problems in the History of the Soviet Union”
Tag: Economics
Orthodoxy Prevails in Academia
Notre Dame University has announced the closure of their long-standing department of “economics and policy studies”, to which it had condemned heterodox economists after splitting the formerly mixed Economics department in two. The university was so frightened of the pervasive discussions about ideology and methodology in this supposed social science that instead of fostering an atmosphere of debate, it wanted to separate the orthodox and the unorthodox as much as possible. Of course it has now used the situation as an occasion to get rid of the unorthodox entirely, as reported in the Chronicle of Higher Education. (1) Continue reading “Orthodoxy Prevails in Academia”
The Red and the Green I: Capitalism and Ecology
It is, or ought to be, by now a familiar fact that the world is in a state of great environmental crisis. While there is no need to believe in the myth of the perfectly virtuous native living in complete harmony with his environment, it is clear that the development of capitalism and the Industrial Revolution so-called have drastically and fundamentally altered the relationship of man to his biosphere. In fact, so much so that it is estimated this century may see the greatest single increase in man-made global warming in all of the memory of humanity as a species, as a result of processes begun only two centuries ago at most. Our impact upon the global network of ecosystems is now so great that the current period of civilization is now by biologists considered to be a Great Extinction Event, one of the very few in our planet’s entire history – the last one took place approximately 65 million years ago. Moreover, the current Extinction Event is also the fastest ever recorded. A consensus predicts a future scenario in which between 20% and 50% of all species on Earth may go extinct.1 Continue reading “The Red and the Green I: Capitalism and Ecology”
The Bankers Banquet
Today the Deutsche Presse Agentur reports that the Bundestag as well as the Länder have accepted the bill that would amend the German constitution to ban deficit spending.1 Of the sixteen Länder, only three voted in opposition. In Germany, all left forces are represented by Die Linke, which this past weekend held its party conference in preparation for the Bundestag elections later this year. It vigorously opposed the bill, but did not possess the power to prevent it. Now it has sought the advice of the Bundesverfassungsgericht in Karlsruhe, but it is not clear on what basis they seek to have them block the bill on their behalf.
The results can well be imagined. This rigid deference to economic dogma is likely to chain the beast of state until it can no longer move. But it will soon become clear to the Germans how difficult life is when one can neither save nor borrow. In California the result of a similar mindset has been disastrous already: there, ‘white’ taxpayers threw off the yoke of maintaining a humane lifestyle for the many immigrants to that state by passing an amendment effectively making any absolute increase in taxation impossible. Given the strong population growth from immigration over the decades, this had the obvious effect of utterly bankrupting the state. It is now forced to choose whether to auction off its future by shutting down its excellent state education system or whether to die heroically in the present by declaring bankruptcy and effectively committing suicide. It may be suspected a similar motive is behind this particular law in Germany. The very wealthy bourgeois of southern Germany in particular have long been incensed at ‘their’ money being spent on such fruitless endeavors as state improvements in the dilapidated eastern and northern parts of the country.
It is telling that the attempt by the European Union of the bankers to restrict nations to deficit spending of no more than 3% of GDP has failed entirely, with most major nations blithely ignoring the regulation: Germany itself already has a deficit worth 4% of its GDP. In 2005, a change in the regulation was passed that makes it for the most part nonoperative.2 If even the cautious German politicians see no value in placing themselves in an economic straight-jacket for the benefit of bank creditors, there is little reason to believe this law serves any other purpose than to ‘starve the beast’ in favor of feeding the wealthy. No surprise of course that precisely the poorest northeastern Länder Berlin, Mecklenburg-Vorpommern and Schleswig-Holstein opposed the bill.
Insiders are already quite aware that the European Central Bank’s policy is strongly based on the views and methods of the German central bankers, and their orthodoxy of economic dogma is infamous. Desiring to be ‘more Roman than the Pope’, their restrictive monetary policy has threatened deflation in a time of crisis, while consistently causing unemployment in the major industrial nations of the continent to be relatively high, even so much as a steady 7-10%. With the current crisis reaching its peak, in Spain unemployment is in fact already 17.4%, in France 8.8%, in Germany itself 7.6%.3 Until the current crisis, the United States had a lower unemployment rate, mostly thanks to its own central bankers being a lot less dogmatic in pursuit of its national interests. They knew full well the dangers of further social segmentation in as unequal a country as theirs. Only the fast industrial collapse and evaporation of capital caused by this crisis of capitalism, as well as the large-scale mismanagement and stock-jobbing fraud on the part of private bank management, has managed to raise unemployment in the United States to the higher level of the major European economies. Until recently it was also the case that those nations pursuing get-rich-quick schemes, relying on influx of very volatile financial capital to help them advance in the line of nations, managed to evade the phenomenon of large-scale unemployment. However, the problem with the policy of stock-jobbing and loansharking as basis for a national economy is that money that is quick to come in is equally quick to get out. Any downturn and the established capital evaporates faster than the steam of the geyser or the tones of the harp.
The nations with established niches as carrying-traders are essentially mere underlaborers for the major industrial powers and completely dependent on them. Examples of this can be found in the Netherlands, in Austria, in Denmark and so forth. These seem to have maintained their position for now, thanks to the vast sums of public money flung into the pit of capital’s loss write-offs in the industries of the major economic powers. If we allow for a switch in metaphors, this makes their position similar to that of the bird that lives on picking the leftovers from the crocodile’s teeth. Easy for them to go along with the beast, as they do not have to pay for its maintenance and yet can profit from it nonetheless. But this also means their actual economic significance on a larger scale remains limited, and with it their political independence. Remains to deal with the nations that hoard the black gold that enslaves the modern man as much as the yellow enslaved the Athenians in Shakespeare: those nations, whether Norwegians or Arabs, are to the economic powers what Timon of Athens was to his false friends. Their ending is likely no better: ours is to play the role of Apemantus at this bankers’ banquet.
1.http://www.monstersandcritics.com/news/europe/news/article_1483088.php/Germany_amends_constitution_to_bar_deficits_by_2020_->
2.COUNCIL REGULATION (EC) No 1056/2005.->
3.Schmitt, Rho & Fremstad, “U.S. Unemployment Now As High as Europe”, CEPR Issue Brief (May 2009). http://www.cepr.net/documents/publications/US-EU-UR-2009-05.pdf .->
On the Living Costs in the Third World
It is considered an intuitively self-evident idea among most people in the developed nations, whether they are intellectuals or otherwise, that the difference in income between those nations and the underdeveloped ones can be explained away by noting that the costs of living in the Third World are lower than in the First. This is generally seen as a truism, supported by the experiences of many a tourist from the developed world when visiting popular destinations in the underdeveloped parts, such as Egypt and Mexico, and then noting the extraordinarily low prices for basic products in these countries. Surely then with such low prices, the lower incomes must have been compensated for, so that the common people in such nations are not in terms of living standards that much poorer, according to the norms they are used to?
Yet this idea is wholly false, as can be demonstrated by some simple calculations. Indeed of course the relative costs of living vary much by nation and also within nations, and incomes vary much as well; yet it is possible to give some examples that will indicate how strong in fact the difference in incomes also translates into differences in living standards, because the living costs in the underdeveloped world are in fact higher than in the developed world.
The price of bread in Ghana is 0.6 Cedi (this is the minimum price guaranteed by the state), which is $0.46. The American price of bread is $1.28 (given as average price in an article in the Boston Globe, dated 09-03-2008.). The average daily wage in Ghana is $1. The minimum hourly wage in the United States is $6.55 (federal minimum); assuming eight hours of work, we get $52.40.
Now all you need to do is calculate how many local loaves of bread one local day of work is worth, to compare. We see that one day of work buys the American minimum income worker $52.40/$1.28 = almost 41 loaves of bread (40.94). One day of work for a Ghanaian average worker buys him $1/$0.46 = a little over 2 loaves of bread (2.17). Therefore, the cost of living (expressed in bread) is much higher in Ghana than in the US.
But, it will be objected, there is more to living costs than merely food prices. Bread may in the parts of the world where this is the common staple food serve as an acceptable proxy for the costs of food, but another major expense is the costs of housing. What of this? It must first off be noted that in terms of housing comparisons are much more difficult to fairly make. Bread is bread everywhere and everywhere essentially the same, but housing costs vary enormously. Not just because of the differences in amenities common in the housing units, but also because of the differences in land prices, due to the influence of land rent. This in turn is affected by a great many variables, from effects of crime to proximity to work and urban areas, as well as environmental factors and so on.
Yet we need not despair for our analysis entirely. The LA Times fortunately has some information in their article of 26-03-2007 on the slum living of illegal immigrants near Los Angeles. They give the example of a family which earns $10.000 a year and pays $360 a month in rent. I’m not sure if this is household income, but I think so. Rent then is 43.2% of their income, monthly and yearly, for the equivalent of an illegal hovel. From Kenya we have info on slum living, assuming the source is accurate, from a Pambazuka News article of 03-07-2007 by Humphrey Sipalla. The cost of rent is here given as KES 2,693 monthly, which is at current exchange rates $34.26 (this just to give an idea). According to the article, this represents 22% of their income, I assume also applies to households. If this is accurate then, the housing cost in a Kenya slum is just under half of what it is for illegal immigrants in California (22% versus 43%). But it would have to be 1/20th, i.e. ten times as cheap, to remove the difference in living costs altogether. Of course rents account for differences in costs as mentioned, but comparing Nairobi to the Los Angeles area seems to me not so unfair as to undo that entirely.
We may conclude then from this example, comparing the expenses in major cities in the United States (for average people and poor people respectively) with the living costs in food and housing in Ghana and Kenya respectively, that the common idea of the living costs being much lower in the underdeveloped world is wholly false. Indeed it makes that appearance because the prices, when valuta are calculated according to exchange values on the market, are indeed significantly lower in the Third World – the bread in Ghana costs one-third of what it does in Boston. However, our naive friends in the developed world forget that the incomes in the underdeveloped world are so much lower than theirs, that 1/3rd of the price is for them over 20 times the relative cost.
On a final scientific note, it must be taken into account that there is good evidence that the currencies of underdeveloped nations are undervalued by exchange rates in comparison to their value in terms of purchasing power. The nominal exchange rate of 16-01-2009, which is the one that I have used, is likely (as any nominal exchange rate) to undervalue the currencies of underdeveloped nations compared to their purchasing power. This has no particular implications for the living cost comparison I have undertaken, but it does affect international trade between, say, Ghana and the United States, because it means Ghanaian wages as well as prices are undervalued compared to American ones in the exchange rate, causing the terms of trade to tilt strongly in favor of the United States. Gernot Köhler’s research, described in “The Structure of Global Money and World Tables of Unequal Exchange”, in: Journal of World-Systems Research 4:2 (Fall 1998), p. 145-168, indicates in the appendix that the estimated loss as percentage of GNP (PPP) on the part of Ghana and Kenya is respectively 30% and 35%. If currencies were equalized according to PPP, the relative value of the Cedi would be much greater, increasing the relative price of food in Ghana compared to the United States, but also increasing the relative value of the wage. This would not of itself necessarily alter the proportion between wage and food costs within Ghana (aside from changes in the market caused by changes in international trade in the longer run, which are outside the purview of this article), but it would to a significant degree remove the false impression on the part of citizens of developed nations about the low costs of living, because they would experience the local prices as much higher.