Friday, December 11, 2009

Let them eat derivatives.

Ever since the GOP seized upon the S word and the R word during Campaign 2008—that's socialism and redistribution (as in, "...of wealth")—we've tended as a culture to flinch away from all notions that capitalism is anything but the best economic system for the good old USofA. And that may still be true. But people who get all warm and fuzzy about capitalism, and who consider it a sacrosanct part of Americana since Plymouth Rock, tend to forget that capitalism then was very different from capitalism now. So much about the American free market has changed—just as the entire social context for the 2nd Amendment has changed (even if it did once mean what the NRA says it means, which I personally don't buy). After all, the U.S. Constitution was ratified in 1788, which I think was even before iPhones, cable and Lady Gaga.

Capitalism was a marvelous system for an emerging, industrializing nation, a nation whose economic growth was inexorably tied to the production of actual things—cars, homes, tractors, bullets, sinks, Louisville Sluggers. More growth entailed more labor. To get bigger you had to build factories. Those factories required the employment of people, who could then take their earnings and go out and buy still more products, thus fueling new demand and theoretically keeping the cycle humming along in perpetuity. That model changed in recent decades as the locus/focus of American growth (or at least activity) shifted to derivatives and elements of intellectual property; these often involved far fewer if any added workers, or even any added work. A good layman's example of this—i.e. without getting into the stock market and the arcane financial instruments that helped sunder AIG and many banks—is the so-called "personal seat license" or PSL, now commonly
sold by many sports teams, particularly when they're about to unveil hot new stadiums. You're not actually buying season're buying an option on season tickets, the right to buy those tickets at some point down the road. Thus the demand for a season ticket has itself been commodified, adding another layer of financial participation to the merchandise. The PSL itself does nothing. It creates nothing. It's a simple form of derivative.

Or it's also like the SHAMsphere (as well as most multilevel marketing): If my program for teaching you how to get rich consists of teaching you how to teach other people how to get rich, and so on and so forth, there's nothing really going on there but a concept. There is no product beyond
illusion and imagination; it's a financial hall of mirrors. Once again, I have commodified hope and greed, neither of which, in its pure state, requires factories; neither of which is labor-intensive. I have found a way to create wealth (mine) without infrastructure. There is little or no new economic activity set in motion in such a paradigm; there is only the money extracted from those who currently have it. The income stream changes direction: from trickle-down to pour-up.

This new model of capitalism allows for the accrual of enormous sums of money without the commensurate broad-scale socioeconomic growth that supplied the (supposed) benefits even as recently as, say, Reaganomics. The added revenue no longer must be shared or passed along, translated into the development of factories and warehouses and offices and retail stores. Whatever profit is created stays at the top, or damn close.

I'm leaving out a few steps here, but the bottom line is that this newer model of "growth" is unsustainable. You cannot have an entire, vibrant, well-rounded economic system that exists to serve the upper class: a boats-and-Botox economy. In a nation of 300 million people, you cannot simply have rich folks selling to other rich folks (while also continuing to siphon off money from the not-so-rich folks below). After a while there isn't enough traditional commerce going on in the overall to provide bloodflow to the American body as a whole. After a while the tax base will consist chiefly of whatever incremental sums we can squeeze out of that top 10 or 20 percent, which funds must be used more and more to help out the other 80 or 90 percent who've been disinvited from the party. That is where we're headed.

We'd do well to keep in mind that when a parasite finally sucks all of the blood out of a host...both die.


Anonymous said...

Hmmm, it seems to me that the problem lies with capitalism itself. It's a wonderful system for developing countries, but once people have more in the way of hard goods than they need, but are endlessly urged to buy more---the latest and greatest must-have stuff, whether they need, want, or can afford it---the system no longer works. Unfortunately, I (and much better economic brains than mine) don't have a workable replacement system to save our economy and take it to the next stage. It was once thought that computers would lead to a new economy of intellectual and virtual property, but as we've seen, only porn and sports sites (and maybe eBay) have been able to turn a profit from the internet. I don't know how we'll save ourselves, but I do know it won't be through capitalism (or any other extant economic model).

Tyro said...

I think the principles of capitalism - reward innovation, decentralized decision making, individual incentives - are still sound but we don't need to turn the dial to 11. There is room for some top-down regulation to rein in the bottom-up creativity.

To my mind, things like copyrights, patents, limited liability incorporation and anti-trust laws are all integral to modern, thriving economies yet all are examples of state intrusion. There is room for fruitful debate over the extent and application of these laws but even ardent capitalists would agree these are useful or even necessary yet all are examples of top-down state regulation over the market.

When someone insists that entirely free capital is the only policy, there's nothing much to say. They're ignorant and/or deceitful and they're definitely ideologues, not worth listening to.

roger o'keefe said...

Steve, it may shock you to hear that this is a new way of looking at the problem for me and I thank you for bringing it to the fore. When I read the title of the post I groaned and thought "here we go again", but I have to admit your logic is compelling, even if I could nitpick you on some minor points. It's a lot of food for thought and I'll be forwarding it around.

Mike said...

To give you an idea of just how massive the financial sector has become, google Jack Bogle's 2007 commencement address that later inspired his book Enough (Bogle's the founder of Vanguard). He dropped the following stat: The financial sector accounts for nearly 30 percent of the earnings in the entire S&P 500, more than the energy and health care sectors combined. Go back to as early as 1980 and it was just 6 percent. That's how much money is changing hands and being syphoned to the top simply through monetary commerce -- banking, trading, and yeah, all those derivatives. That's an astounding number when you start talking about trying to restrict or regulate the industry. And the sector creates nothing except the perception of value. Like Gekko said, "I create nothing. I OWN."

Yekaterina said...

Great post Steve. I have nothing to add, just wanted to let you know it was enjoyed.

Elizabeth said...

Can't help but notice that your most recent post titles create a curious bit of a narrative, Steve:

Controlling the debate on climate control?

I guess they expected Barack magic.

Let them eat derivatives.

Wonder what'll come next. :)

Anonymous said...

'After a while the tax base will consist chiefly of whatever incremental sums we can squeeze out of that top 10 or 20 percent, which funds must be used more and more to help out the other 80 or 90 percent who've been disinvited from the party. That is where we're headed.'

Because of the small percentage at the top, comparatively little revenue can be squeezed from that 10-20 per cent.(At that level retaining good tax lawyers makes economic sense also) The tax base that is squeezed can only be the middle and working lower classes as only they have the numbers to produce the significant revenue. The top percentile will also get tax breaks since they, as 'generators of wealth', must be placated and protected.

This, the economic disempowering of the middle classes, is a classic preparatory move towards authoritarianism whether it be facism, communism or a run of the mill tyrant.
The real generators of wealth have always been the middle and working classes, the top percentiles are simply stockpilers, hoarders of wealth.

Elizabeth said...

This, the economic disempowering of the middle classes, is a classic preparatory move towards authoritarianism whether it be facism, communism or a run of the mill tyrant.

Very interesting, Anon. I was about to comment that if the bankers (and teabaggers) knew what's good for them, they would stop scaring everyone with the S(ocialism) word.

The little bit of socialism that Western Europe has had -- i.e., decent wages and work laws, social benefits, etc. -- is largely what prevented W.E. countries from succumbing to communism.

Consider "socialism," in terms of securing a more equal footing in life for everyone and not the teabaggers' version of it, as a preventive measure against tyranny.

roger o'keefe said...

This, the economic disempowering of the middle classes, is a classic preparatory move towards authoritarianism whether it be facism, communism or a run of the mill tyrant.

And after my compliment in the previous comment, I knew somebody would have to go and ruin it all. This here, where you convert the whole thing into a conspiracy theory of somebody's secret political agenda is where you lose me, and I suspect a whole lot of others who were following along with interest as well. Not everything in life is a diabolical plot!

Steve Salerno said...

Roger: Where "I" convert the whole thing into a plot? I think you were just writing carelessly, but I hope people realize that SHAMblog is--has always been--an open forum (subject to certain ground rules having to do with "decorum"). The views expressed in the Comments section are never limited to those sanctioned/subscribed to by the blog author (me).

How boring it would be if they were!

Dimension Skipper said...

Steve, Publish this or not as you see fit because I realize it isn't really on-topic (although you could maybe it stretch it and say it is in very general ways). I haven't had anything worthwhile to add to the ongoing discussion here, but since I'm here now I did want to mention that I particularly liked your closing line on this post. Anyway...

I just had to bring this link to your attention as it's right up the middle of your alley re the perils of SHAMmic positive thinking:

What’s Wrong with Positive Thinking?
By Therese J. Borchard for World of Psychology (, though in actuality she just relates what Tamar Chansky, Ph.D., has to say on the subject.

Steve Salerno said...

DS: That article on positive thinking is a worthy addition to any post, whether it's on-topic or not. Thanks, DS, as usual.

Anonymous said...

Not a conspiracy theory, Roger, its realpolitik. I doubt any current incumbent is plotting to become a dictator but the cash has to come from somewhere. The wealthy are mobile and move their cash rather than pay swingeing taxes.
The stable middle classes are more numerous and less volatile, they pay up. Governments know this.

Eliz, I wasn't trying to be the voice of doom, I have benefited from the W.E. brand of socialism my entire life and am sorry to see it disintegrating now under the pressures of paying off our enormous debts. It has been a bulwark against more authoritarian regimes. I hope the great beleaguered middle remains a solid presence despite shouldering the responsibility for righting our economic woes.
The bourgeoisie is the real engine of economic health.
My point was just to underline the numbers, significant revenue is only ever generated from the vastly more numerous less-than- wealthy.

Elizabeth said...

Anon, this is exactly how I understood your comment (not as a voice of doom or conspiracy). Sorry I did not make it clear in my first response.

Anonymous said...

To further explain my comment on the dangers of authoritarianism and lack of a conspiracy theory, historically such authoritarian figures have only been able to grab power when the conditions allow it. Tyrants are supreme opportunists, taking advantage of turmoil and uncertainty to make their move.
There doesn't have to be a well thought out five or ten year plot to rule the world, that kind of thinking comes later, after the power-grab, as power is consolidated and the drive then is to hold onto and increase the gains.

Generalised fear and instability has always worked for a well-placed megalomaniac with an acute sense of timing, the ear of the disaffected and enough muscle to begin building his power base.

Reason enough for me to champion the principles of the W.E. model of socialism, for all its faults. I hope it remains a continuing work in progress.

NormDPlume said...


I would assume from this post that you are against cap-and trade (CAT) as the basis for our national energy plan.

As it is currently written, CAT will create an entirely new class of vaporware assets - carbon credits. These carbon credits are the right to burn carbon-containing fuels, and they can be sold, traded and consumed on an open market. But capitalism has not created this asset: the governments have. Anybody consuming carbon-based fuels will pay based upon an arbitrary supply capped by the government. And the government gets to distribute credits - worth billions of dollars - to whomever they see fit. It is a transfer of wealth from every consumer to the chosen few, politically connected insiders. Like Al Gore's friends.

For all its faults, capitalism has raised the standard of living for more people throughout the world than any other system. Capitalism created the middle class and distributed wealth to more people in a more equitable way. Political redistribution is corrupt to the core and has a history of non-stop failure.

Steve Salerno said...

NormD: Sticking to the issue at hand... I do not deny what capitalism has done for America. I don't deny it in the post itself--and I say right in the beginning that it "may still be" the best system for America. However, things in life are not static; the fact that we had a certain model of capitalism for 200+ years, and that that system took us to a certain pinnacle of success, does not necessarily mean that we are duty-bound to sticking with that system in its pure state.

To use an analogy: It is commonly recognized in the business world that the type of person (entrepreneurial) who is well-suited to launching a company, infusing it with a kick-ass spirit and getting it to a certain stage of viability is not the same type of person who's well-suited to running that company once it's established.

Sometimes we do need a fresh horse in midstream in order to avoid drowning.

Elizabeth said...

Steve 'n all, you may enjoy Les Leopold's article, The Middle Class Collapse.

littleplanet said...

ah yuss.
The Looting of America is a luvly read...
I think it was Kevin Phillips that penned one of my fave lines - to wit: "wealth is not created, it is intercepted". hum.

What really gets me (being hoplessly addicted to the Bay Area Housing Crash) is that whilst whistling past the graveyard, no-one apparently noticed how little anyone can really afford, anymore.
(unless massive amounts of debt are accumulated - which of course, can never be paid back.)
Be it housing, education, middle class lifestyles, vacations, and all the assorted and sundry little goodies that constitute an American sleepwalk into dreamland.
...while hoggish Neros fiddle the Wall Street two-step as Washington burns.
While there's still a pulse beating faintly somewhere in that lukewarm corpse formerly known as the American economy, astute physicians of financial expertise appear to be awaking to the idea that what might save the patient is a bit of loose change - some actual "re-investment" in good old-fashioned capital infrastructure (you know, the factories and whatnots that used to be required to actually -make- things?)
It's been one helluva global joyride, folks.
Where is the jewel in our crown?
- some kinda zircon fake Vegased Disneyed sparkly dispeptic pathetic waltz into a burned out ballroom where no-one actually works anymore.
The jobs have all departed.
We're over-educating to the max, future Wallyworld associates.
It's the waste...that gets me, more than any other single detail.