Friday, December 04, 2009

Capitalism is a wave form not a straight line

Continuing a theme today...

Interesting article a few months back in The New Yorker (subscription required) called, "The Secret Cycle: Is the financier Martin Armstrong a con man, a crank, or a genius?" by Nick Paumgarten (October 12, 2009). The paragraph that really stayed with me (and prompted me to write a blog post about it almost 3 months later) is this one:

"In the nineteen-twenties, Nikolai Kondratiev, a Soviet economist, concluded that capitalism was inclined to half-century cycles of boom and bust and boom again, rather than, as Marx believe, a single, inexorable march toward collapse. Wrong answer. Stalin had him imprisoned and executed. It was the Austrian economist Joseph Schumpeter, he of "creative destruction," who called these cycles Kondratiev waves and popularized them in the West. "

I think that is it exactly. Capitalism is a wave form -- innovation followed by greed followed by collapse over and over again in 5 to 50 year cycles of boom and bust. [I could add: Capitalism is a wave form of innovation followed by greed followed by collapse -- followed by rebirth IF progressives are elected to clean up the problem, i.e. Franklin Roosevelt; OR fascism if conservatives are elected/seize power in response to the problem, i.e. Augusto Pinochet.]

I think the Wall Street guys know this too. They study the financial data more than anyone, they know that markets move up and down in waves. But the Wall Street guys never tell the general public that information. Rather, when they are selling stocks, 401(k) plans, and IRAs to the rest of us they always portray the market as a straight line of 8% returns year in and year out. ("Don't think about it," they say, "just give us your retirement savings and everything will work out fine. Trust us." Hard to imagine that not working out.) And it is precisely in the difference between the wave forms that Wall Street is riding and the straight line that they are selling to the rest of us that Wall Street makes all of its billions -- betting against the down times and riding the wave of succeeding bubbles.

Furthermore, the capitalist enablers in politics, Republicans, also sell capitalism to the public as an inexorable march of steady progress (profit), a rocket ship streaking ever onwards and upwards. And it is precisely this public lie of the straight line of capitalism by Republican politicians (and way too many Democratic politicians) that gives the Wall Street guys the cover they need to make money off of the actual peaks and valleys of capitalism.

How much wiser then it would to have a public policy that understood capitalism as a wave form subject to inevitable booms and busts, than as a straight line around which we try to build rational incremental linear policies. Indeed the challenge of progressive politics is to take the wave form of capitalism and straighten it out through massive regulation, enforcement of white collar criminal statutes, and a social safety net that protects the most vulnerable in society from the vicissitudes of the market.

I think it is wonderfully liberating to see that the both the straight line down of Marx and the straight line up of capitalist apologists are incorrect. It liberates us to focus on the challenge of how to design public policy based on curves -- calculus rather than arithmetic.

Update #1: I probably should have spaced out my earlier post, "Men's desire is a straight line, women's desire is a wave form" with this one because even though they both talk about straight lines and wave forms, I don't think the two topics (the booms and busts of capitalism and the peaks and valleys of women's desire) have anything to do with each other.

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