Peter Frase

It's [general strike day](http://zunguzungu.wordpress.com/2011/11/01/the-day-before-the-day-of-action/) in Oakland. I don't really know what to expect---this isn't going to be a true general strike in the sense of completely shutting down the city like [in 1946](http://ufcw324.org/About_Us/Mission_and_History/Labor_History/Oakland_General_Strike__A_Worker%E2%80%99s_Holiday/), but it could still be an exciting step forward. And since I've underestimated the impact of everything that's happened since the beginning of Occupy Wall Street, I won't make any confident predictions until I see what happens in the streets. But one big wild card, once again, is the response of the Mayor and the police.

What's been remarkable about the events in Oakland and elsewhere, so far, is how much they've freaked out and disrupted the political system. For my whole life, it seemed like the governing elite could easily get rid of mass protest through some judicious mixture of ignoring and repressing demonstrators. But that seems not to be working this time. When Michael Bloomberg tried to sweep away the Wall Street occupation under the pretext of "cleaning" the park, he was met with thousands of solidarity protestors and forced to back down. When the Oakland police tried to gas their city's occupation into submission, they not only made a martyr out of Scott Olsen, but felt they had to issue a bizarre [open letter](http://www.opoa.org/uncategorized/an-open-letter-to-the-citizens-of-oakland-from-the-oakland-police-officers%E2%80%99-association/) in which they distanced themselves from their own violent actions. In Albany, the police simply [defied](http://thinkprogress.org/special/2011/10/24/352228/albany-police-defy-orders-and-refuse-to-arrest-occupy-albany-protesters-these-people-were-not-causing-trouble/) the governor and mayor's order to evict protestors. In Tennessee, the state government first tried to dispel protests with mass arrests, but then [declined to defend](http://www.nashvillescene.com/pitw/archives/2011/10/31/state-concedes-defeat-in-occupy-nashville-battle-judge-bans-more-arrests) the policy in the face of a court injunction.

In all these cases, it seems that the system is incapable of handling the appearance of any kind of mass civic participation that doesn't go through the expected channels---and this problem is not limited to the United States. The European Union's attempts to contain its banking crisis are, it seems, not robust to the outbreak of democracy, since Greece's Prime Minister was able to plunge the continent into turmoil by merely threatening to [give his people a say](http://www.salon.com/2011/11/01/greek_bailout_wall_street/) in the current bailout and austerity plan for the country. In Britain, an occupation has [set off crisis](http://www.periscopepost.com/2011/11/occupy-london-claims-another-church-victim-as-knowles-resigns-st-pauls-in-turmoil/) and resignations in the Church of England, while directing uncomfortable attention to the [bizarre and authoritarian structure](http://www.guardian.co.uk/commentisfree/2011/oct/31/corporation-london-city-medieval) that runs central London. What's going on here?

A clue, I think, is to be found in a remark that comes near the end of David Graeber's recent [magnum opus on debt](http://mhpbooks.com/books/debt/):

> The last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures. At its root is a veritable obsession on the part of the rulers of the world . . . with ensuring that social movements cannot be seen to grow, flourish, or propose alternatives; that those who challenge existing power arrangements can never, under any circumstances, be perceived to win.

In this, Graeber is echoing one of my favorite, often-quoted lines from [Fredric Jameson](http://books.google.com/books?id=sPBad_aN0i0C&pg=PA229&dq=jameson+%22hegemonic+ideology+of+the+system%22&hl=en&ei=UwWxTp-4Kc6UOpmvyf4B&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCwQ6AEwAA#v=onepage&q&f=false): "The mass of people . . . do not themselves have to believe in any hegemonic ideology of the system, but only to be convinced of its permanence." This was the outlook that Margaret Thatcher enunciated in one of her [famous speeches](http://asq.org/learn-about-quality/process-analysis-tools/overview/fmea.html):

> If I could press a button and genuinely solve the unemployment problem, do you think that I would not press that button this instant? Does anyone imagine that there is the smallest political gain in letting this unemployment continue, or that there is some obscure economic religion which demands this unemployment as part of its ritual? This Government are pursuing the only policy which gives any hope of bringing our people back to real and lasting employment.

This outlook is commonly summarized as "There Is No Alternative". From this starting point, one can create a method of rule which does not depend on being positively affirmed or seen as legitimate by most people, but merely requires the resigned assent of a demoralized populace. Thus the rule of the financial elites can continue, even as political legitimacy is [drained out](http://www.peterfrase.com/2011/09/politicizing-the-fed/) of the institutions of government. But if you build a system on the assumption that there will be no dissent and no alternatives, what happens when dissent *does* appear, and begins to articulate alternatives? I submit that we're seeing what happens, in the Occupy Wall Street protests and beyond: the basic fragility and brittleness of neoliberal politics is being exposed. That fragility is analogous to the precariousness of neoliberal economics, and it arises for some of the same reasons.

Contemporary capitalism, we are often told, is characterized by the relentless pursuit of *efficiency*. In one telling, a more efficient economy is one that gets more output out of the same amount of labor and resources. But from another perspective, a streamlined and ultra-efficient economy is one which produces more and faster in normal times, but which can only do so by cutting out the safeguards and redundancies that protect the system from catastrophic failure when things go bad. Thus the global economy becomes simultaneously more dynamic and more fragile. As Felix Salmon [puts it](http://blogs.reuters.com/felix-salmon/2011/04/18/the-implications-of-a-downgraded-us/), "as a general rule, the more efficient something is, the easier it is to break." Both the economics and the politics of neoliberalism are turning out to be very efficient and very easy to break.

To take a metaphor from engineering, capitalist societies of an earlier era were somewhat over-engineered. Before precise computer models were available, the builders of physical infrastructure built works that were [far more robust](http://www.freakonomics.com/2007/10/22/viva-las-vegas-seriously/) than they needed to be. This uses up more labor and materials, but it also makes structures more resistant to failure; thus, older bridges like those in New York City can stay standing even when they are neglected for years, while more recent structures can collapse in [catastrophic fashion](http://ezinearticles.com/?Insights-Into-the-Minneapolis-Bridge-Collapse&id=675460).

This same logic can be applied to the economy. The creation of a globalized, just-in-time, streamlined supply chain has made possible huge gains in the efficiency of manufacturing and distribution. Yet as [Barry Lynn](http://www.thenation.com/article/162317/how-america-could-collapse) has [argued](http://rortybomb.wordpress.com/2011/04/11/barry-lynn-at-inet-decoupling-our-corporations/), it also makes the entire global economy vulnerable to localized shocks, as when a Japanese earthquake crippled world-wide production of Toyota automobiles, or when an earthquake in Taiwan [led to a global shortage](http://www.deseretnews.com/article/722921/Computer-prices-on-rise-amid-chip-shortage-Taiwan-quake-is-most-recent-blow-to-ailing-industry.html) of computer memory.

And what goes for manufacturing goes double for finance. Investment banks, players in global markets who intricately hedge their positions in order to maximize their ability to take on risk, are uniquely vulnerable to economic shocks. As the saying goes, "in a crisis, all correlations go to 1". Using another engineering concept, "tight coupling", [Richard Bookstaber](http://rick.bookstaber.com/2007/09/myth-of-noncorrelation.html) explains the process, showing how disruptions in one corner of the financial markets can quickly propagate into a major worldwide crisis.

The tradeoff between efficiency and stability that exists in the process of production and circulation is also present in the [mode of regulation](http://lipietz.net/spip.php?article750). If the output of capitalist production is commodities, the output of the political system is social order and the consent of the working class. This latter, too, can be produced with either more or less efficiency. In the mid-20th century, capitalist economies developed welfare-state mechanisms for dealing with economic polarization and political unrest, and thereby securing some social stability. Keynesian capitalism's [failure mode](http://asq.org/learn-about-quality/process-analysis-tools/overview/fmea.html) was one in which working class dissatisfaction could be expressed through unions and labor parties; taxation and redistribution could be used to prop up demand, buy off the working class, and head off more radical forms of political dissent.

However, such a system is expensive for the capitalist class, in terms of both money and social power---eventually, the bourgeoisie concluded it would be more efficient to simply [keep all the surplus for themselves](http://www.peterfrase.com/2011/10/labors-share-in-cross-national-perspective/) and rely on hopelessness to keep the rabble in line. Thus neoliberalism has systematically dismantled the supports and failsafe systems that kept dissent in check, and has relied instead on preventing dissent from arising in the first place. The 99% have been cut off from institutional channels for influencing policy or voicing their grievances, and thus have been left with no choice but to take it to the streets. And now that we have done so, we are seeing the chaotic and unpredictable failure mode of neoliberal governance.

Since the end of the housing bubble, a lot of people have been looking for the next bubble to collapse. Maybe we've been living through a bubble in political order, a AAA-rated social stability which is turning out to be based on much riskier and more insecure foundations than any of its architects believed.

The lesser depression has called forth a profusion of new and old theories about what's wrong with the American economy, and what can be done to put it right. As you can see in Mike Konczal's topological maps, these accounts can be broadly separated into "demand" and "supply" side arguments. Within the supply side, there is a subdivision between arguments based on government-induced uncertainty (due to taxation, regulation, policy, or deficits) and those centered around labor productivity. Of these I regard the uncertainty argument as opportunistic rhetorical hand-waving, with no real principled rationale; the argument about labor productivity, however, has some real substance behind it.

Curiously, however, the labor-productivity side contains proponents of two antithetical views: one group argues that jobs and income have stagnated because labor productivity is growing too slowly, while others argue that technology has been changing too fast for the labor market to keep up. Tyler Cowen's The Great Stagnation, which I've discussed before, is an argument for the first proposition. A new book provides an argument for the second: Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy. The e-book, by Erik Brynjolfsson and Andrew McAfee of MIT, is a cheap and quick read (I call it a book, but it's really more like a very long article); it doesn't provide much detail that will be new to people who follow the topic, but it's a decent introduction to the effect of technology on the demand for labor. It's accessibly written without being too dumbed down, although it engages in some of the Gladwellese that seems to pervade recent pop-social science, such as the use of cutesy overriding metaphors (grains of rice on a chessboard, in this case). But while its account of the current economic landscape is useful, its ideas about where we should go from here are exceedingly lame.

Some liberals will probably react unfavorably to the book's whole thesis, because its emphasis on long-term technology and productivity issues threatens to distract attention from the more immediate problem, which is the tremendous shortfall in aggregate demand. The authors themselves are careful to say that they recognize the current demand problem, and that they do not believe that dealing with technological change should be a substitute for short-term measures to increase demand. Nevertheless, some commentators will no doubt be tempted to misuse the argument this way, as President Obama allegedly did when he used productivity-related claims to dismiss the need for additional stimulus.

But people on the left shouldn't let such foolishness scare them away from understanding changes in technology and labor productivity. Not only are such changes real and socially significant, but they present us with an opportunity to reorient the economic conversation in a more radical direction. To do so, however, we'll need to assimilate Brynjolfsson and McAfee's empirical argument, while rejecting their timid and depoliticized policy recommendations.

Technology and Employment

Race Against the Machine is organized around explaining the same empirical reality that confronts every would-be analyst of our economic woes: the stagnation of median incomes over the past three decades, long predating our current joblessness problem. As I noted recently, many of the underlying reasons for this stagnation are political, and this is something Brynjolfsson and McAfee don't discuss at all. But the fact that rising inequality and stagnating labor income have a political context doesn't mean they aren't also a function of technological changes: what we have seen in recent decades is a continuation of the disruptive and labor-displacing technical innovation that has always characterized capitalism, but without many of the countervailing protections that labor enjoyed in the heyday of the postwar Keynesian compromise. Brynjolfsson and McAfee do a good job of explaining the way labor markets play out under such conditions.

In contrast to Cowen, they argue that recent productivity growth has been quite good, and that published statistics are likely to under-state the increase in our social wealth. We're able to provide more goods and services with less and less human labor, which ought to make us materially richer as a society. The basic argument is similar to the one made by Farhad Manjoo in his recent series of articles on automation: computers and robots are rapidly permeating every part of the economy, displacing labor from high- and low-skill functions alike. Race Against the Machine gives many examples, from Google's self-driving cars to automation in Chinese electronics factories to software that can review legal documents. The problem, then, is not stagnation but uneven distribution: GDP per capita has continued to rise rapidly, but median incomes have stagnated, because the gains from growth are now going almost entirely to the very richest.

Three interrelated mechanisms are adduced to explain this lopsided growth: the advantaging of high-skill over low-skill labor, the rise of winner-take-all "superstar" markets, and the increasing returns to capital rather than labor. All three of these trends are facilitated and intensified by rapid technological advances--especially in computers and networks--that are making the skills of many workers obsolete while enriching the owners of capital and a few well-placed workers. Overall, this account of the relationship between technology and employment is the book's strength, particularly since it manages to avoid two common fallacies that beset such discussions, what I'll call the "end of work" fallacy and the "end of technology" fallacy.

The end of work fallacy, named for the title of a Jeremy Rifkin book, is the mistaken notion that if most of the labor currently performed by humans is replaced by machines, the result will inevitably be permanent mass unemployment at some point in the future. This is a fallacy for two reasons: first, because it ignores the possibility that we could all work less rather than leaving some unemployed, and second, because it assumes that human societies are somehow inherently limited in their ability to concoct new occupations for people to perform. While they ignore the first possibility, Brynjolfsson and McAfee do correctly point out that there is no reason to believe the second; just as we found new jobs for all the people displaced from working in agriculture a century ago, capitalism is no doubt capable of generating novel occupations for those whose jobs are automated in the 21st century (if all else fails, perhaps we can all become the personal servants of the top 1 percent). They frame this as an optimistic vision of our economic future, but I would interpret it somewhat differently: the gradual disappearance of work may not be inevitable, but it is also not something to fear: rather, it poses a major political and cultural choice for human societies centered around the institution of wage labor; I return to this point below.

Arrayed against the end of work fallacy, one often finds the end of technology fallacy, which insists that there is some obvious limit to just what can be automated. I guess this isn't so much a fallacy as a failure of imagination: as Brynjolfsson and McAfee point out, such pronouncements can look silly within a remarkably short time. As one example, they cite a 2004 book that confidently asserts the impossibility of something like the self-driving Google car. Today, the jobs most resistant to automation seem to be those that require finer-grained types of manual skill, as robots remain crude and awkward when they attempt to manipulate the physical environment. But while it is certainly possible that some kinds of automation will never be attained, it's dangerous to base one's economic analysis or one's politics on that belief.

While I find Race Against the Machine's argument about automation generally persuasive, the general theory of socio-technical development that the authors rely on is somewhat questionable. Citing Moore's law and the futurist Ray Kurzweil, Brynjolfsson and McAfee portray technological development as a process that starts off slowly but then relentlessly accelerates "into the phase where exponential growth yields jaw-dropping results". But this is a misleading picture of the history of technology. As Charles Stross has extensively argued, (and as I've written about previously), the path of progress within particular technological domains looks less like exponential growth than like a sigmoid curve, in which a middle period of rapid and seemingly exponential growth transitions into a mature plateau of slow progress. It's tempting, when you're in the rapid-acceleration phase of the curve, to extrapolate it forward exponentially--but this can lead to extremely misleading predictions. Mid-twentieth century futurists extrapolated the rapid improvements in transportation that they had lived through, and ended up imagining a future with flying cars but not the Internet; anyone who tries to imagine our future without accounting for unexpected and disruptive innovations is likely to be proven wrong as well.

The book's central claim nevertheless holds up without the dubious assumption of exponential growth. As the authors point out, we are in many ways in the early stages of adopting and integrating the technologies we already have into the economy, and so we can expect much more technological displacement of labor even if Moore's law slows down. And even if computer processing speed plateaus, some other area, such as biotechnology, will eventually enter the rapid-growth segment of its own sigmoid curve. Hence I generally accept the argument that rapid automation and technological unemployment will be a reality for the foreseeable future, and our societies need to find a way to deal with it.

The Future of Work

But it's in the recommendations for adapting to technological change that this book really falls short. The program for winning the future, it turns out, consists of encouraging entrepreneurship and improving education. The former, the authors say, will allow us to discover a bounty of new ways of employing people, through the magic of Hayekian tacit knowledge and Schumpeterian creative destruction. And an improved education system will ensure that the general population has the necessary human capital to participate in this magical new economy. This is a remarkably thin vision, redolent of the kind of popular techno-libertarianism that flourished at the height of the dot-com bubble, and it's no more compelling now than it was then. Brynjolfsson and McAfee write that "the stagnation of median wages and polarization of job growth is an opportunity for creative entrepreneurs", who can "combine the swelling numbers of mid-skilled workers with ever-cheaper technology to create value". Aside from the moral gruesomeness of this entrepreneurial paradise built on immiserated and precarious labor, where is the demand supposed to come from to realize all this "value"? This sounds like a recipe for re-creating the bubble economy of the last few decades, where most economic rewards go to capital and the working class props up its buying power with debt.

Brynjolfsson and McAfee do offer a more specific 19-point policy agenda. Some of the proposals are good ideas: reducing government support of the financial industry, decoupling social benefits from employment, scaling back copyright protections, increasing government funding for infrastructure and basic research, eliminating the home mortgage interest tax deduction, increasing high-skill immigration. But much of the rest is the usual grab-bag of neoliberal market idolatry: cut back workplace regulation, reduce taxes, make it easier to fire workers. The section on education, in particular, is just a rehash of the usual education reform arguments: less job security for teachers, longer hours, and more testing (though to be fair, they do at least call for higher teacher pay).

In the end, Brynjolfsson and McAfee don't even try that hard to make the case that their agenda will actually employ everyone or reverse rising inequality and stagnant incomes--they admit that "not everyone can or should be an entrepreneur, and not everyone can or should spend 16 or more years in school". But they casually dismiss the one thing that indisputably would address the unequal rewards of the contemporary economy: direct redistribution of income. "While redistribution ameliorates the material costs of inequality", they say in their one mention of the possibility, "it doesn't address the root of the problems our economy is facing" and "does nothing to make unemployed workers productive again". There's an implicit belief here that distributional outcomes somehow aren't "real" unless they are the result of the private labor market operating in the absence of government transfers. This denigrates the robustness of redistribution as a program: European social democracy, for all its shortcomings, has shown that it's possible to create an enduring system in which highly unequal market outcomes are ameliorated by government taxes, transfers, and social programs. That's one reason I'm partly sympathetic to the model of "globalize-grow-give" progressivism, which focuses on remediating inequality through redistribution rather than tight regulation of the labor market: leaving the labor market as it is and then doing lots of redistribution on the back end may not be ideal, but it would be a lot better than what we have now.

But if technology really is dramatically reducing the need for human labor, then we have an opportunity to think bigger and better, getting beyond merely trying to scrape up new skills and new jobs for the displaced proletariat. If you're a regular reader, you know where I'm going with this by now; as somebody said of one of my earlier renditions on this theme, "we get it--Peter Frase hates work". Totally missing from Race Against the Machine is any consideration that we might take some of our productivity gains in the form of free time rather than income. Nowhere do the authors even contemplate reducing the length of the work week and work year, or accepting a lower labor-force participation rate. Thus, despite constantly reminding us of all the ways in which technology has improved our standard of living and transformed society, Brynjolfsson and McAfee never question the centrality of wage labor in its current form: they never consider that there is any alternative to a society in which everyone expects, and is expected, to spend the bulk of their life as a 40 (or more) hour per week wage laborer, or as a profit-maximizing "entrepreneur".

Mostly, the immortality of capitalism is just an implicit assumption. But to the extent that this book contains a defense of the wage labor society, it is this: "the value of gainful work is far more than the money earned", and "forced idleness is not the same as voluntary leisure". Both are true, and both are reasons why in the short term, a federal jobs program is a good demand--and one that's more likely to revive the economy than any amount of education reform or entrepreneurialism. But the question that Race Against the Machine raises is explicitly not about the short term aggregate demand problem, to which some package of monetary and fiscal stimulus could be an adequate solution. If we ever escape from the nightmare of self-inflicted disinflationary contraction, we will essentially be back where we started before the financial crisis--and we will still have to come to terms with the constantly changing balance of labor between human and machine, and what it means for the future of work.

We live in a society in which a huge amount of a person's status and sense of self-worth is tied up in what they do for money. And the stigma of joblessness, combined with the stresses of job-hunting and dealing with the meager American welfare state, make unemployment a physically, psychologically, and emotionally damaging ordeal. But these aren't inherent features of the human condition; as another analyst of productivity-enhancing technology said:

Just as the savage must wrestle with Nature to satisfy his wants, to maintain and reproduce life, so must civilised man, and he must do so in all social formations and under all possible modes of production. With his development this realm of physical necessity expands as a result of his wants; but, at the same time, the forces of production which satisfy these wants also increase. Freedom in this field can only consist in socialised man, the associated producers, rationally regulating their interchange with Nature, bringing it under their common control, instead of being ruled by it as by the blind forces of Nature; and achieving this with the least expenditure of energy and under conditions most favourable to, and worthy of, their human nature. But it nonetheless still remains a realm of necessity. Beyond it begins that development of human energy which is an end in itself, the true realm of freedom, which, however, can blossom forth only with this realm of necessity as its basis. The shortening of the working-day is its basic prerequisite.

"We clearly are not pessimists about technology and its impacts", write Brynjolfsson and McAfee. They add that they considered calling their book "The Digital Frontier, since the image that keeps occurring to us is one of a huge amount of new territory opening up because of technological improvement and innovation". As it happens, I'm not a pessimist either, and I think the Digital Frontier is a wilder place than our intrepid economists imagine. Out there you'll find the advocates of work time reduction and guaranteed income and plenitude, and many others working to build the realm of freedom and abundance rather than keep capitalism's engine of artificial necessity and scarcity chugging along. The defenders of the current order will keep trying to convince us that in a technologically advanced world of material plenty, more capitalism is still the solution to all our problems; but perhaps it is capitalism itself that is holding us back, and maybe it's time for that integument to burst asunder.

Peter Orszag has a [column](http://www.bloomberg.com/news/2011-10-19/kaldor-s-facts-fall-occupy-wall-street-rises-commentary-by-peter-orszag.html) about the diminishing share of labor in national income, relative to capital. Mike Konczal provides some useful [additional discussion](http://rortybomb.wordpress.com/2011/10/20/labor-share-long-term-trends-and-financial-crises/). Both of them frame the issue as a new empirical mystery, because it contradicts a "stylized fact" that economists have long assumed about capitalist economies: that the relative share of labor and capital in national income remains constant over time.

I try to avoid the characteristic sociologist's vice of economics-bashing, but this does rather strike me as a case where economists are betraying their insularity by purporting to discover something that other social scientists are already talking about. Mike quotes (the generally excellent) Arjun Jayadev musing that "A more comprehensive account should really take a look at the politics of this shift and there is some evidence for the contention that an eroded bargaining power of labor is an important factor." As it turns out, someone has looked at "the politics", although they're not an economist. Last year, the *American Sociological Review* published a paper called "Good Times, Bad Times: Postwar Labor's Share of National Income in Capitalist Democracies" by Tali Kristal of the University of Haifa, which bears directly on this issue. (An un-gated version is [here](http://gesd.free.fr/kristal10.pdf).)

One of the tricky things about explaining long-term economic trends is that we don't have access to the counterfactual: what would the U.S. economy look like if, say, we still had 1950's levels of unionization? As a next-best solution, though, we can contextualize the United States by comparing it to other rich countries. The global economy is characterized, as Trotsky put it, by "combined and uneven development": while the declining share of labor income is a cross-national phenomenon, it has not been experienced or responded to in exactly the same way everywhere. Kristal's paper compares the U.S. to 15 other countries in the period since 1960, in an attempt to identify some of the factors behind labor's declining income share.

Even if you don't want to wade through the text, I highly recommend giving it at least a "quant-jock read"--that is, have a look through the charts and tables. I'll try to summarize the main argument and findings of the paper here. Kristal shows that Labor's share of income has risen and fallen over the past century, "stylized facts" notwithstanding. In the United States and and the UK, much of the increase in labor's share took place before and immediately after World War II; there was a substantial postwar increase in continental Europe, the Nordic countries, Australia, and Japan. Since 1980, labor's share has generally declined everywhere. But the scope and timing of this decline differs across countries, indicating that the relative position of capital and labor is related to the economic and political particularities of the countries.

The assumption that labor's share of income is constant implies that gains in national income due to increasing productivity are always shared equally by labor and capital. Kristal shows that this is not the case: in the 1960's and 1970's, labor income grew as fast as or even faster than productivity, whereas since 1980 labor income has lagged far behind. In other words, this pattern is valid cross-nationally:


Kristal makes the interesting point that this dynamic isn't necessarily related to the much more studied phenomenon of rising income inequality. Income inequality could increase if one group of workers captured most of the wage gains, which would keep the overall labor share of income constant. And as Kristal wryly notes, studies of income inequality "tend to identify the capitalist class as
a subset of the self-employed."

In attempting to explain the changing fortunes of labor, economists are generally inclined to reach for explanations rooted in the market rather than the political sphere. Thus, as Kristal explains, the two leading explanations for the declining labor share of income have been technology (i.e., the adoption of labor-saving production techniques) and worker bargaining power (declining unionization, competition from abroad). But workers can alter their share of income by political means that go beyond the immediate power of unions in wage bargaining. When social democratic parties are in power, they can shift income shares by shielding workers from market forces, expanding public employment, and regulating the workplace, as well as by taking steps to strengthen labor unions.

Kristal attempts to capture these dynamics with a regression-based analysis, in which labor's income share in a given year is predicted based on both economic and political variables. Changes in productivity, inflation, unemployment, union power, the strength of left parties in government, and several measures of economic globalization are all combined in the model. To quote from Kristal's conclusion:

> __Labor’s share of national income increased in the 1960s and 1970s due to unions organizing new members, the surge in strike activity, and the consolidation of the welfare state.__ These factors all increased labor’s compensation faster than the economy’s income. __Labor’s share declined since the early 1980s with the decline in unionization rates and levels of strike activity, stagnation in government civilian spending, and bargaining decentralization. Labor’s capacity to influence state policies has also declined across countries, and governments’ targets of full employment have been abandoned in favor of labor market flexibility and low inflation.__ The current decline in labor’s share of the national income can also be traced to an increase in imports from developing countries and the increased presence of foreign affiliates of multinational firms.

Technology, meanwhile, looks like it is not an independent source of labor's diminishing share. That is, while increasing productivity is associated with a lower labor share of income, this association has *always* been present, even in the earlier periods when productivity growth and income growth matched up in the aggregate. What has changed is the countervailing political factors that used to ensure that a share of economic growth was paid out to workers.

You can question some of the particulars of the modelling that leads to this conclusion, and in general it's hard to disentangle the causal relations in this kind of bird's eye view quantitative analysis. But as an overall correlational picture of what's happened to labor in the past 50 years, I think there's a lot in this analysis that people can learn from--maybe even economists.

Via [Yglesias](http://thinkprogress.org/yglesias/2011/09/28/330662/productivity-increase/), I find to my dismay that some alleged progressives at [Lawyers, Guns, and Money](http://www.lawyersgunsmoneyblog.com/) are exulting in the failure of supermarkets to replace human checkers with automatic checking machines. Like Yglesias, I don't think bemoaning automation in this way is helpful. He gives the empirical argument that slow productivity growth hasn't historically been good for workers, and that too-low wages are probably one of the things impeding the adoption of productivity-enhancing technology. The second is an argument that I [made before](http://www.peterfrase.com/2011/07/cheap-labor-and-the-great-stagnation/), specifically using the supermarket checkout machine as an example. But now I want to make a broader ideological point about this.

These two posts, the one from [Erik Loomis](http://www.lawyersgunsmoneyblog.com/2011/09/on-self-checkout-at-supermarkets) and especially the follow up by ["DJW"](http://www.lawyersgunsmoneyblog.com/2011/09/two-cheers-for-luddism), contain two distinct arguments for the anti-machine position. To take the second and less compelling one first, there's the claim that maybe being a supermarket checker isn't so alienating and menial after all:

> Secondly, this line of thinking makes some assumptions that I’m sympathetic to, but can’t entirely get on board with. First, __the assumption that we can theorize about jobs in this concrete and certain way and determine that supermarket checker (and I assume many much worse jobs) are ‘menial’ and we should hope for a world in which humans don’t do that sort of thing.__ I like my early Marx, too, but I can’t get on board with this. I simply don’t think we have the tools to do this kind of universal theorizing about the essential nature and value of this or that job. __People have long found meaning and dignity in all manner of repetitive and uncreative work.__ Others have approached the world of work with indifference; they work to pay the bills and finding meaning and value in other aspects of their lives. Marx, of course, chalked this sort of thing up to alienation and false consciousness and the like, but I’m more of pluralist about what a dignified and fully human life looks like. At a minimum, __I don’t have all the answers, and have a healthy distrust of letting my own tastes and proclivities get in the way of respecting other’s ability to determine what they value about their lives on their own terms.__

This is reminiscent of my exchange with [Reihan Salam](http://www.peterfrase.com/2011/07/to-be-a-productive-labourer-is-not-a-piece-of-luck-but-a-misfortune/) from a couple of months ago, and I don't find this argument any more compelling from the left than I did from the right. I'll just note that by framing the issue in this way, DJW totally effaces the real nature of work in a capitalist society. To pretend that the existence of many people who work as supermarket checkers reflects their "ability to determine what they value about their lives on their own terms" is to ignore the reality that for the worker without independent wealth, the only "choice" is between obtaining the wage they need to get by, or starving in the streets. You don't see a lot of trust-fund kids or lottery winners working as supermarket checkers.

Moreover, there's no principled rationale here. If the menial jobs we have are good, then why wouldn't more would be better? we could solve the jobs deficit through a campaign against technology throughout the economy. This would also have the effect of lowering our material standard of living, but to this way of thinking that's presumably a good thing.

I doubt the LGM bloggers really endorse such a program, though. As I said, I don't think the argument is based on an ideological principle at all; rather, it's the result of a pragmatic calculation:

> First, let’s be clear that __this is some deeply utopian stuff.__ This makes third party advocates seem downright practical. We’ve had a modern capitalist economy for quite some time now, in many different countries, and I can’t think of any that have come anywhere close to this, or made it a meaningful priority. Of course __some unpleasant and meaningful jobs have been largely eliminated, and more probably will be in the future, but when this does occur it is almost always with indifference or actual malice toward the eliminated worker__, rather than compassion. And while the overall mix of jobs in a society may improve for the better over time, __it’s virtually never the case that workers in eliminated fields end up better off. If the elimination takes place in a moment of robust employment they may be OK, but for the most part those who lose the jobs are going to be worse off for a good long while.__ Even in the most robust and humane welfare states the modern world has developed, unemployment is generally associated with a decline in living standards, sense of self-worth, and so on.

Leave aside for a moment that this argument sort of implies that no-one should ever lose their job, which is inconsistent with the assumption of a capitalist economy; I'm willing to chalk that up to a sloppy formulation. The general principle being expressed here isn't unreasonable or irrational: sometimes it's better to help a few workers here and now than to run off after utopian pie in the sky, and we should be wary of the slippery logic that it's OK to impose hardship on a few workers for the sake of the greater good. This is the same thinking that's at work in defenses of [licensing cartels](http://thinkprogress.org/yglesias/2011/07/19/273414/the-distributional-impact-of-barber-licensing/) that protect some workers at the expense of consumers and excluded laborers, and in attacks on investments in urban infrastructure that [may have the effect](http://current.com/green/92560577_david-harveys-urban-manifesto-down-with-suburbia-down-with-bloombergs-new-york-fast-company.htm) of pricing some people out of their neighborhoods. These aren't silly things to be worried about--if you can't achieve anything positive, you should at least do no harm. And as the left has gotten weaker and weaker, such arguments have gotten more and more plausible. But we've reached a point where some people seem to be opposed to any policy at all that imposes a burden on any group of workers.

It's an attitude that bespeaks an intensely conservative and defensive politics, and one which has internalized the great right-wing motif of the past several decades: there is no alternative to neoliberal capitalism. To Loomis and DJW, the possibility of a historically novel progressive alternative is literally unthinkable. For them, the only choices are a) an intensification of neoliberalism's logic of inequality and joblessness; or b) a desperate struggle to hold on to the remnants of the 20th century Keynesian social compromise. Given those options, I'd take the second choice as well.

But I don't think those are the only options, and moreover I don't think that in the long run this position is really as pragmatic as it seems. It commits the left to an endlessly reactive, defensive struggle over a shrinking commons, while leaving us bereft of any compelling vision to offer people. And trying to fight off automation won't be a matter of a few rear-guard skirmishes, but of all-out societal-scale war: see Farhad Manjoo's [ongoing series](http://www.slate.com/id/2304442) on the pervasive effect of robotization throughout all sectors of the economy.

That isn't to say that I'm always opposed to defensive struggles--sometimes that's the best you can do, and sometimes winning a small human-scale victory is worth compromising our broader vision a bit. But the LGM authors go a good deal farther than this: Erik Loomis's original post didn't say that de-automation was a good second best outcome, he said that he was "very glad" to see the self-checkout machines disappear, because they are "a calculated plan by grocery stores to employ less people." DJW, meanwhile, straightforwardly embraces Luddism. I'm taken aback by a worldview that would make such defensiveness and conservatism central to its ideology. That's not what the left has been about at its best--and as Corey Robin [explains](http://coreyrobin.com/2011/09/27/revolutionaries-of-the-right-the-deep-roots-of-conservative-radicalism/), it's not even what right-wing "conservatism" was ever about.

Left out of consideration in these anti-technology arguments is any conception that increased productivity could be used to benefit the masses rather than the elite. The decoupling of rising productivity from rising fortunes for workers is, after all, only [a phenomenon of the past 30 years](http://rortybomb.wordpress.com/2011/03/17/epi-on-lagging-wages-rising-productivity/). In the period prior to that, rising productivity went with rising wages: this was the heart of the postwar Keynesian social compact. And in the period prior to *that*, rising productivity went along with a shortening of the working day, through a long series of [bitter struggles](http://books.google.com/books/about/Our_own_time.html?id=h8P-uuyYe_YC). It's odd, and a bit sad, to see the LGM bloggers ahistorically naturalizing the left's weakness, especially given that at least one of the authors I'm discussing is [a college professor](http://dl.dropbox.com/u/11112580/loomiscv--lgm.doc). I thought it was the professors who were supposed remind us of history, and to cling to impractical utopianism. But to find an antidote to the timid conservatism of the professor, we have to turn to the harebrained utopian dreaming of....dockworkers.

Containerization and automation have drastically decreased the need for human labor in America's ports, as anyone who's watched Season 2 of *The Wire* knows. But among some longeshoreman the response wasn't to resist the machines, but to accept them--[with conditions](http://www.nytimes.com/2002/10/06/weekinreview/the-nation-the-100000-longshoreman-a-union-wins-the-global-game.html):

> In modern times, far more than other unions, the longshoreman have used technological change to their advantage. In 1960, the West Coast longshoremen agreed to far-reaching automation that replaced inefficient break-bulk cargo, which relied on hooks to move the cargo, with containerized cargo, which relies on cranes. __In accepting automation, the union recognized that productivity would soar and the number of longshoremen needed would plunge__; there are now 10,500 West Coast longshoremen, down from 100,000 in the 1950's.

> In exchange, __the union received an unusual promise: port operators pledged to share the fruits of the new automation. Management promised all longshoremen a guaranteed level of pay, even if there was not work for everyone.__ Management also promised to share the wealth.

Bill DiFazio [wrote a book](http://books.google.com/books/about/Longshoremen.html?id=33aaAAAAIAAJ) about some longshoremen like this in New York, and he makes a case against the view that without wage labor, our lives will lose meanings and we will drift into dissipation. He found instead that the lives of the longshoremen were greatly enriched, as they were freed from dangerous labor and became more deeply involved with their neighborhoods and their families.

Basically, I think this is the deal we need to strike throughout the economy: automation (and relatedly, free trade) in exchange for compensating the displaced. However, the longshoremen were only able to achieve this victory because they occupy an unusual strategic choke-point in the economy. Shutting down the ports can cripple wide swaths of business, and this gives dockworkers a kind of negotiating leverage that isn't available to, say, supermarket checkers. Which is why I think that the demand to compensate workers for technological change now has to be fought out politically and electorally, at the level of the state, rather than in the individual workplace. That's the essence of my argument for the [Basic Income](http://www.peterfrase.com/2011/09/the-basic-income-and-the-helicopter-drop/): just like the dockworkers' agreement, it ensures a level of pay whether or not there is work for everyone, only it generalizes the principle to encompass the whole economy.

You can dismiss that as utopianism if you like. Certainly the call for work reduction and the decoupling of income from employment has been made many times through the generations, from [Paul LaFargue](http://www.marxists.org/archive/lafargue/1883/lazy/) to [André Gorz](http://books.google.com/books/about/Paths_to_paradise.html?id=5wTsAAAAMAAJ) to [Stanley Aronowitz](http://www.amazon.com/Jobless-Future-Second-Stanley-Aronowitz/dp/0816674515). But the left does itself no favors by remaining in a defensive crouch, clinging to nostalgia for a political order that was rooted in a very different political economy--and which wasn't even [all that great](http://www.amazon.com/Golden-Age-Illusion-Rethinking-Capitalism/dp/0898625734) to begin with. Despite what William F. Buckley once said, the right didn't win by "standing athwart history yelling 'stop!'"--and on issues where they *did* do that, like racial segregation and gay marriage, they have lost or are losing. The modern right provided an offensive strategy and a grand vision of what was wrong with the society that existed and what had to be done to turn it into something better: [one market under god](http://www.amazon.com/One-Market-Under-God-Capitalism/dp/038549503X).

Their dream of unrestrained capitalism, of course, turned out to be a nightmarish fraud. But that's all the more reason to demand something new and better, rather than merely clinging to what's left of the old.

I haven't been a regular reader of [Steve Randy Waldman](http://www.interfluidity.com/), which I now realize was a big mistake. I just discovered a [post of his](http://www.interfluidity.com/v2/918.html) from last year that relates to one of my political preoccupations: the idea that everyone should receive a ["Basic Income"](http://www.basicincome.org/bien/) to which they are entitled as citizens and which is not in any way conditional on whether or how much they work. In the process of figuring out his argument, I also realized that the debate we've been having between "fiscal" and "monetary" solutions to the employment crisis is kind of a distraction from the real issues.

The Basic Income is, obviously, a fairly radical demand, and one that may seem implausible in the context of American culture and its Protestant work ethic. However, there are reasons to think that you could build a diverse political coalition around it. One reason is that the Basic Income is embraced not only by left-wing socialists, but by some [right-wing libertarians](http://crookedtimber.org/2006/06/01/charles-murrays-in-our-hands-left-or-right/). Of course, the right wing version of the policy is different, because right-wing proponents want it to do different things; in particular, they don't want a basic income so high that it discourages people from working, whereas I regard that as a [feature rather than a bug](http://www.peterfrase.com/2010/02/do-they-owe-us-a-living/). Nevertheless, there is potential for alliances in the short run.

But thanks to Waldman, I now see that there is another argument for basic income; this one comes neither from the socialist left nor the libertarian right, but from the technocratic liberal center. For as Waldman explains, a form of Basic Income could be used by the Federal Reserve as a tool of macroeconomic stabilization and regulation of the business cycle.

Recall that the Fed is supposed to use its policies to keep unemployment as low as possible, while also keeping inflation under control. As Waldman explains in [this post](http://www.interfluidity.com/posts/1256656346.shtml), there have been two different periods of Federal Reserve policy in the United States: one in which inflation was controlled by causing mass unemployment (and thus there was a direct tradeoff between the employment and price stability mandates), and one in which they focused on controlling asset prices and access to credit:

> __Prior to the Great Moderation, central bankers had to provoke recessions in order to control inflation.__ Broad-based wage growth led to increases in nominal cashflows by "spenders" that could only be tempered by creating unemployment or other conditions under which workers would accept wage concessions. In the post-Reagan world, growth in the sticky component of disposable income shifted to the wealthy, who tend to save rather than spend their raises. __The marginal dollar of consumer expenditure switched from wages to borrowed money.__ The great thing about consumption funded by credit expansion, from a central banker's point of view, is that it is not sticky downward — no one who gets a loan today assumes that she will be able to expand her borrowing by the same amount every year. __Credit-based consumption is susceptible to monetary policy with far less impact on employment than wage-based consumption.__

In other words, the stagnation of median wages and the funnelling of income growth to the top 1% is directly related to the pattern of credit expansion and asset bubbles that we've seen over the past 30 years. See Waldman's post for an explanation of why, while it's *possible* to have an ongoing dynamic where economic growth is fueled by repeated bubbles followed by debt cancellation, this isn't a desirable state of affairs. What I'm interested in is the [later post](http://www.interfluidity.com/v2/918.html) where Waldman gives a third stabilization strategy: having the Fed hand out free money, the mythical ["Helicopter Drop"](http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html):

> We should try to arrange things so that the marginal unit of CPI is purchased with "helicopter drop" money. That is, __rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public.__ During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the "zero bound", but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do "fiscal policy" in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of "helicopter money" in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will "reduce credit availability". __The idea is to replace the macroeconomic role of bank credit with freshly issued cash.__

He further elaborates that he thinks "central banks should make equal transfers to all adult citizens irrespective of income, job, or tax status." Although he doesn't use the term, this is just basic income by another name--the only difference (and obviously, it's a significant one) is that the level of the the BI grant fluctuates rather than being set at a stable level. So you could say that there are now three distinct versions of the basic income, coming from across the political spectrum: the leftist version demands a high BI, the rightist version wants a low BI, and the centrist version advocates a varying BI.

But I'm not sure where any of these proposals would fit into Mike Konczal's [typology](http://rortybomb.wordpress.com/2011/09/21/a-topological-mapping-of-explanations-and-policy-solutions-to-our-weak-economy/) of ways to fix the economy. This is obviously a "demand side" argument, but it sort of cuts across the argument between people who think we can get back to full employment [purely through monetary policy](http://thinkprogress.org/yglesias/2011/07/12/266468/atlantic-jobs-quasi-debate/) and those who think we need [fiscal stimulus](http://lbo-news.com/2011/07/16/the-limits-of-easy-money/) and/or [debt deleveraging](http://kantooseconomics.com/2011/09/12/mein-unbehagen-mit-quasi-monetarismus-my-discomfort-with-quasi-monetarism/). Waldman is making a monetary policy argument in the sense that he's advocating stimulus via Federal Reserve control of the money supply. But this isn't anything like the way the Fed currently operates--indeed, as Waldman acknowledges, you'd have to [change the law](http://www.interfluidity.com/v2/2110.html) to allow the Fed to do what he's advocating here, since at present they're only allowed to exchange money for assets, and can't just give it away.

So rather than break things down into "monetary" and "fiscal" camps, maybe it's better to think of the situation as follows:

- The big divide is between people who want to reflate the economy by continuing to channel money to the top of the income distribution and expanding debt for everyone else, and those who want to do it by a broad-based, redistributive program that puts money in the hands of the masses.
- Within the "give more money to the rich" camp, there is a split between people who want to rely on tax cuts, fiscal austerity, and deregulation of business, and those who want to have the Fed print money and use it to [inflate the price of risky assets](http://www.businessinsider.com/preview-of-the-fed-meeting-and-operation-twist-2011-9).
- Within the "give more money to everybody else" camp, there is a split between people who want the government to directly employ people with some kind of jobs program, and people who just want to start giving everyone money.

While I would prefer the job-creation version of egalitarian stimulus to either of the inegalitarian alternatives, I think it would be even better to have a smaller amount of job-creation spending for things we really do need (like infrastructure), combined with the Basic Income/Helicopter Drop plan. This woud be both more just and more radical; and as Waldman also points out, in some ways guaranteed income is a substitute for the declining labor movement:

> If people grow accustomed to getting sizable checks from the central bank, that would change behavior. But not all changes are bad. For example, it may be true that __many workers would be pickier about what jobs to take__ if government transfers generated incomes they could get by on without employment. __Employers would undoubtedly have to pay people who work unpleasant jobs more than they currently do.__ But that’s just another way of saying that __workers would have greater bargaining power in negotiating employment, as their next best alternative would not be destitution.__ That we’ve spent 40 years increasing the bargaining power of capital over labor doesn’t make it "fair", or good economics. __Supplementary incomes are a cleaner way of increasing labor bargaining power than unionization. Unionization forces collective bargaining, which leads to one-size-fits-all work rules and inflexible hiring, firing, and promotion policies, in addition to higher wages.__ If workers have supplementary incomes, employment arrangements can be negotiated on terms specific to individuals and business circumstances, but outcomes will be more favorable to workers than they would have been absent an income to fall back upon.

Of course, there are other important things that unions do, like intervene in politics and advocate for better conditions in the workplace. For that reason, I won't go all the way to the "unions bad/redistribution good" argument that Waldman seems to be making and which characterizes a lot of progressive neoliberalism. However, I do think this is a useful counter to [the argument of people like Doug Henwood](http://lbo-news.com/2011/07/16/the-limits-of-easy-money/) that stimulus via monetary policy doesn't do anything to increase the power of labor. It all depends just what kind of "monetary policy" you're talking about.

Capital strike. Now that's a name I've not heard in a long time. But it's not dead...not yet.

The idea of a "capital strike" has been around forever. It's the obvious complement to the labor strike: just as workers can shut down production by refusing to come to work, capital can shut down the economy by refusing to invest and hire workers. You can find discussions of capital strikes [during the Great Depression](http://marginalrevolution.com/marginalrevolution/2008/12/the-capital-str.html). But as a theoretical concept, the capital strike was popularized by the neo-Marxist theorists of the 1970's and 1980's. Adam Przeworksi used it in *Capitalism and Social Democracy* to explain why reformist projects of redistribution ultimately run up against a revolutionary limit. He notes that:

> Under normal circumstances it can be expected that the increase of aggregate demand should stimulate investment and employment. Redistributional measures . . . are usually justified by appeals not only to justice but also to efficiency. ([Przeworski](http://books.google.com/books/about/Capitalism_and_social_democracy.html?id=F5BsIDS3ntwC), p. 44)

But as long as investment decisions are left in private hands, there's a problem:

> Such a program cannot be successful, however, when economic demands grow spontaneously and when they are accompanied by structural transformations. . . . Increased government intervention means precisely that non-market rationality is imposed upon the process of accumulation, that is, that capitalists are forced to make allocations which are suboptimal with regard to profit. Measures of nationalization, distribution of land, and monopolization of credit and foreign exchange by the state threaten the very institution of private profit. Under such circumstances, rational private capitalists will not invest. (p. 45)

Likewise, Claus Offe used the possibility of capital strike to identify the limits of the welfare state:

> __The constraints that the capitalist economy imposes upon the state__, thereby disorganizing its capacity to maintain 'order' by responding effectively to political demands and requirements, __are based upon capital's *power to obstruct*__. As long as investment decisions are 'free', that is, as long as they obey the rule of maximum expected profitability, the decisive variable constraining 'realistic' political opinions is what Kalecki has called 'business confidence'. The ultimate political sanction is non-investment or the threat of it (just as much as the ultimate source of power of the individual capitalist *vis-à-vis* the individual worker is non-employment or termination of employment). __The foundation of capitalist power and domination is this institutionalized right of capital withdrawal, of which economic crisis is nothing but the aggregate manifestation.__ (Offe, [*Contradictions of the Welfare State*](http://books.google.com/books?id=9aMgAQAAIAAJ), p. 244)

Today, however, this leftist argument isn't heard much, probably because real challenges to the power of capital are so thin on the ground. But lately I've noticed that "capital strike", like "capitalism" before it, seems to have gone from a left-wing pejorative to a term that is proudly claimed by Capital and its agents. Here's Charles Krauthammer explaining that Capital is on strike against the Obama administration (he says the phrase right at the end of the clip):

And just yesterday, John Boehner said in a speech that "job creators" (Republican code for capitalists) are [on strike](http://www.speaker.gov/News/DocumentSingle.aspx?DocumentID=260229):

> I can tell you the American people -- private-sector job creators in particular --- are rattled by what they’ve seen out of this town over the last few years. My worry is that for American job creators, all the uncertainty is turning to fear that this toxic environment for job creation is a permanent state. __Job creators in America are essentially on strike.__ The problem is not confusion about the policies. . .the problem is the policies.

Thinking in terms of a capital strike is also helpful in understanding the debate in economics between, on the one hand, liberal technocrats like Brad DeLong and Paul Krugman, and on the other hand reactionary economists like Robert Lucas and Robert Barro. Barro, for example, [argues that](http://www.nytimes.com/2011/09/11/opinion/sunday/how-to-really-save-the-economy.html?_r=1&pagewanted=1&ref=opinion) investment requires "Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on." He then proposes a series of policies that he believes will reassure investors and create such a "sound" economy, including cutting Social Security, abolishing corporate and estate taxes, and of course cutting income taxes.

In response, DeLong, Krugman, and others have spent plenty of time showing that business is not [overly worried](http://delong.typepad.com/sdj/2011/09/mark-thoma-sends-us-to-gary-burtless-on-how-it-is-not-regulatory-and-tax-uncertainty-that-has-depressed-the-economy.html) about uncertainty, but rather is concerned about weak consumer demand. Tax rates are at historically low levels; the rich are richer than ever; corporations are sitting on their cash hoards; and so on. All true: but none of these arguments really matter.

People like Barro aren't neutral, objective economic analysts--they're advocates for one side in a power struggle between capital and labor. It may well be true that capital is not, in fact, on strike against taxes and regulations. Given the incoherency of the capitalist class that I've [previously discussed](http://www.peterfrase.com/2011/08/the-decay-of-the-capitalist-class/), it's hard to imagine capital getting its act together in this way. And for all the fulmination of the teabaggers, we're certainly not in the position Przeworski described, where "the state threaten[s] the very institution of private profit". But just as in a labor strike, sometimes you don't actually have to go out on the picket line: you just have to convince the other side that you're ready and willing to strike. Just as a union might use a strike authorization vote to increase its leverage at the bargaining table, so the the right's economic propaganda is designed to tilt the political playing field away from labor and toward capital.

But "capital strike" started out as the left's term, and it might be to our benefit to reclaim it. Doing so would give us an additional answer to the austerity faction, one that goes one step beyond the technocratic liberal answer that "there is no capital strike/all we need is to increase aggregate demand". We can go on to point out that, if there *is* a capital strike, that doesn't imply that we should just give in to Capital. When labor goes on strike, the boss can give in to the workers' demands, but the alternative is for the [Pinkertons](http://en.wikipedia.org/wiki/History_of_union_busting_in_the_United_States) or [the President](http://www.npr.org/templates/story/story.php?storyId=5604656) to break the union. Likewise, when faced with a capital strike, we have alternatives to capitulation; these range in severity from wealth redistribution, through to debt forgiveness, and all the way to outright [expropriation](http://www.nytimes.com/2009/01/23/business/worldbusiness/23sweden.html).

There's a perpetual argument, among people who care about intellectual property law, about whether unauthorized copying (downloading mp3s, say) is properly called "stealing", and whether it's morally equivalent to taking a physical object from someone. There are powerful forces that want to draw an equality between copying and stealing, as we recently saw in comical style in the [Aaron Swartz](http://www.peterfrase.com/2011/07/artificial-scarcity-watch-arrested-for-downloading-from-jstor/) case. The contending positions in this debate reflect fundamental differences of opinion about how we should view the circulation of immaterial goods like musical recordings or software; I want to draw out some of these differences by contrasting three recent posts from three different authors on the copying-versus-stealing issue.

[Matt Yglesias](http://thinkprogress.org/yglesias/2011/09/01/310455/copy-digital-files-still-isnt-the-same-as-stealing-physical-objects/) recapitulates the standard argument of intellectual property critics, which is the one I've always been most sympathetic to: copying and stealing are totally different things. This position turns on the distinction between what economists call "rivalrous" and "non-rivalrous" goods. A good is rivalrous if you can't give one person access to the good without reducing someone else's access to it. If I walk into a store and take a pair of shoes, for example, then I have more shoes than I had before, but the store has less shoes. With non-rivalrous goods, on the other hand, you can expand access without reducing anyone's ability to enjoy the good. So if I copy an mp3 file, then I have one more mp3 than I had before, but nobody else has less mp3s. The upshot of this argument is that it doesn't make sense to restrict the distribution of non-rivalrous goods unless such restrictions are necessary to encourage people to create the non-rivalrous goods in the first place. That latter rationale is the one written into the part of the constitution that permits copyrights, but IP critics today hold that copyright has expanded far beyond this original purpose.

Yglesias was responding to a post from [Gavin Mueller](http://jacobinmag.com/blog/?p=1465), which stakes out the position that copying and physical stealing are basically the same. But rather than take the IP lobby position that copying is stealing, Mueller basically argues that stealing isn't really stealing either, because things like mass-produced shoes aren't scarce in the way the theory of rivalrous goods requires. I have some problems with Mueller's argument, so let me reconstruct it in a form that I think is more defensible.

In a capitalist economy, manufactured commodities aren't "scarce" in the narrow sense. That is, the quantity of shoes in the world isn't fixed. There are factories around the world that could ramp up production of shoes if they wanted to, especially in a recessionary period like this one. What constrains the supply of shoes at the margin is the lack of *demand* for them. But if some people go and steal some shoes from a store, then the owner will have to order more shoes sooner than she otherwise would have, and as a result there will be more shoes in the world than there would have been otherwise. As long as the amount of shoplifting is small relative to the amount of shoes that are sold, the result will not be to put the shop out of business; rather the loss will be absorbed through some combination of reduced profits or higher prices for paying customers.

You could therefore make the argument that a certain amount of shoplifting is welfare-improving for society as a whole, particularly if the owners and paying customers are richer than the shoplifters, and thus able to afford absorbing the cost of the shoplifted loot. Moreover, shoplifting is good Keynesian stimulus! The problem, of course, is that it's heinously unfair to decide who gets free shoes on the basis of who's crafty and daring enough to be a good shoplifter--but that's a different kind of argument, a *moral* argument, and I'll get to that below.

For the third position in this debate, we have [Kevin Drum](http://motherjones.com/kevin-drum/2011/09/it-stealing-or-sharing), who also takes the position that copying and stealing aren't so different--but he touches down close to the IP lobby position that copying is like physical stealing, and both are always wrong. Drum bases his argument on the monetary cost of copying or stealing. If you steal shoes from someone, you've deprived them of the retail price of the shoes (or perhaps somewhat less than that if the shoes were bought on discount, old and worn, etc.) Likewise, if you copy somebody's album, then "his loss is the royalty payment he won't get on the album you didn't buy."

The problem with this line of argument is that Drum has redefined "stealing" in a way that makes it almost infinitely expansive: whether you steal a person's shoes or copy their album, he says, "in both cases, you're causing [them] to take a financial loss." But the right not to take a financial loss is not a right that capitalist societies have traditionally recognized--indeed, the notion that property owners should be guaranteed a revenue stream from their property is a [rentier logic](http://www.peterfrase.com/2011/07/slouching-towards-rentier-capitalism/). It's a bogus argument when it's made by German banks demanding full payment on their [crappy loans](http://yglesias.thinkprogress.org/2010/12/the-questionable-prudence-of-the-savers/), and it's equally bogus in this context.

By the "financial loss" criterion, all kinds of things that we think of as legitimate constitute "stealing". If I badmouth a bad auto mechanic on the Internet and reduce his business, I'm "stealing" his reputation. If Apple introduces a really popular new iPhone that causes people to switch from Android, it's "stealing" Android's market share. Drum recognizes this and admits that "there are lots of ways of causing people to take a financial loss, and not all of them come under the rubric of stealing." But he doesn't make a real case for why copying is more like shoplifting than it is like posting negative Yelp reviews. Instead, he blows off the whole argument by saying that "it mostly seems to be a way of avoiding the very real fact that you've caused someone a financial loss by appropriating something you haven't paid for." But this just begs the question: the whole issue under debate is about *what it's legitimate to make people pay for*.

My take on all of this is that these issues can't be resolved by appeals to economics or financial damage. This argument is really about two conflicting sets of values about how culture and knowledge should be treated, or two different "moral economies". The term "moral economy", as used by historians, refers to the beliefs people hold in common about what constitutes legitimate and proper behavior by economic actors, and what is unacceptable even if it is legal or profitable. As E.P. Thompson said in a [famous essay](http://libcom.org/history/moral-economy-english-crowd-eighteenth-century-epthompson) about English bread riots in the 18th century:

> It is of course true that riots were triggered off by soaring prices, by malpractices among dealers, or by hunger. But these grievances operated within a popular consensus as to what were legitimate and what were illegitimate practices in marketing, milling, baking, etc. This in its turn was grounded upon a consistent traditional view of social norms and obligations, of the proper economic functions of several parties within the community, which, taken together, can be said to constitute the moral economy of the poor. An outrage to these moral assumptions, quite as much as actual deprivation, was the usual occasion for direct action.

Thompson goes on to observe that at this time, "bakers were considered as servants of the community, working not for a profit but for a fair allowance"; hence their behavior was constrained not just by what was legal or profitable, but by what was considered morally right.

Moral beliefs about what is legitimate economic behavior are not unique to early capitalism, but exist even in a hyper-marketized age like our own. As Karl Polanyi [argued](http://www.scribd.com/doc/24760408/Karl-Polanyi-s-Concept-of-Embeddedness-Fred-Block), all economies are embedded in a broader set of social relations. And moral economies are very much in play in the debate over copying and stealing. In the Aaron Swartz case, for example, a lot of the outrage was about a moral assumption: that academic work done mostly for free, by professors who are often supported by taxpayer money, shouldn't be locked up behind an incredibly expensive paywall.

In the general debate over intellectual property, I discern two antithetical moral economies, which I think lie beneath many of the contending positions.

The first views the wealth of human culture and knowledge as something that is the shared cultural wealth of all of us. It recognizes that all new works of art and science are built on the foundation of older works, and go on to influence future works in their turn. It regards sharing, adapting, and improving older works as a positive value, and restricting access to existing culture as a negative value. Thus, in this moral economy, it is of the utmost importance that we be able to share and copy freely. Any restriction on the right to share and copy must be rigorously justified and shown to be in the interest of increasing our cultural wealth overall--as in the U.S. Constitution's statement that copyright is allowed if it serves "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." While it isn't inherently incompatible with intellectual property, the trajectory of this moral economy is to create a new kind of [class struggle](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=586463) and to put us on the road to [dotCommunism](http://emoglen.law.columbia.edu/my_pubs/dcm.html).

The contrasting moral economy holds that when someone participates in generating a new work of culture or knowledge, then that person has the inherent right to control the distribution and reuse of that information, and to receive payment for any profitable use to which that information may be put. Far from seeing pervasive restrictions on copying as a necessary evil, it sees them as exalting and honoring the hard work and creative genius of those who make new art and science. In this moral economy, to appropriate the creations of another is to violate the creator. But that way lies [anti-Star Trek](http://www.peterfrase.com/2010/12/anti-star-trek-a-theory-of-posterity/).

I think the debates about intellectual property would be a lot more productive if we recognized that they are fundamentally about two different and competing moral orders. I know that whenever I talk about these issues with normal people--i.e., not geeks who are obsessed with IP law--they aren't very interested in arguments about economic efficiency or rentier capitalists. They're interested in what's *right*, and views about that range from the demand that culture should be [free as in freedom](http://www.gnu.org/philosophy/free-sw.html) to the insistence that above all else, you must [pay the writer](http://www.youtube.com/watch?v=mj5IV23g-fE).\*

\* *Which, to be clear, I'm in favor of. I just have other ideas about how [the writer should get paid](http://www.cepr.net/index.php/publications/reports/the-artistic-freedom-voucher-internet-age-alternative-to-copyrights/).*

Yesterday I saw Doug Henwood [interview](http://lbo-news.com/2011/08/22/me-interviewing-david-graeber-2/) the anthropologist David Graeber about his new [book about debt](http://www.mhpbooks.com/book.php?id=308). It was a fascinating discussion, and it made me decide that I'm going to have to read the book, despite it coming in at 500 pages and being a bit overpriced in its e-book edition.

One of the themes that came up a lot in the discussion was the way that debt has historically functioned as the foundation of economic domination in a lot of different social formations. As Graeber wryly put it, conquering invaders will happily tell their new subjects that they now owe a debt that must be repaid for the cost of conquering them. And rulers in various times and places have canceled debts as a way of keeping the peace, as in the tradition of the [Jubilee year](http://en.wikipedia.org/wiki/Jubilee_(Christianity)).

Graeber cited the historian Moses Finley, who [identified](http://books.google.com/books?id=qryPvhlXlSIC&pg=PA80&lpg=PA80&dq=finley+revolutionary+program+antiquity&source=bl&ots=XXxFnTew1P&sig=dxokevFInfWf5C7CAiBEWVvQnsE&hl=en&ei=_UFVTu2ENsnc0QHSntnCAg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBkQ6AEwAA#v=onepage&q&f=false) "the perennial revolutionary programme of antiquity, cancel debts and redistribute the land, the slogan of a peasantry, not of a working class". And as Mike Konczal (who was also there last night) [notes](https://twitter.com/#!/rortybomb/status/106417920141295616), "The balance-sheet recession policy for USA is basically: 'abolish the debts, and redistribute the land.'".

But if we seem to be returning to a millenia-old politics of debt, that only highlights the anomaly of the past two centuries. In at least some places, "cancel the debts, redistribute the land" hasn't been the primary slogan. Rather, the demands were for ["eight hours labor, eight hours recreation, eight hours rest"](http://en.wikipedia.org/wiki/Eight-hour_day), and later for more jobs, or higher wages, or more job security.

These demands, of course, all presuppose a society of generalized wage labor, in which people think of it as normal or inevitable to work for a boss in order to procure the means of subsistence. And it is the presence of generalized wage labor--and therefore, of capitalism--that marks out the 19th and 20th centuries as anomalous. When we think about this in relation to debt, we can see that one of the distinctive features of capitalism is that it is a system that can, in principle, control the exploited classes *without* pervasive debt relations. That is, the archetypal wage laborer does not necessarily have any debt. But they also don't have the means of production to produce for themselves, hence they are forced to work for a wage. Thus, [the worker is](http://www.marxists.org/archive/marx/works/1867-c1/ch06.htm) "free in the double sense, that as a free man he can dispose of his labour-power as his own commodity, and that on the other hand he has no other commodity for sale, is short of everything necessary for the realisation of his labour-power."

In practice, of course, individual debt has always been an important part of capitalism, and debt and credit are indispensable to other parts of the system as well. Nevertheless, it seems to me that there is something significant about the increasing [importance of debt](http://www.washingtonpost.com/blogs/ezra-klein/post/its-the-household-debt-stupid/2011/08/12/gIQApqWcZJ_blog.html) in our political economy. It may be indicative not merely of a short-term debt bubble, but a longer-term shift away from the canonical form of capitalism I just described. This is related to my previous [discussions](http://www.peterfrase.com/2011/07/slouching-towards-rentier-capitalism/) of rentier capitalism, since one of the problems I've spent a lot of time thinking about is how one could maintain relations of class power if it becomes possible for people to survive outside of wage labor. I've mostly been concerned with the way in which the state can create artificial scarcity through intellectual property laws and the like (e.g., [anti-Star Trek](http://www.peterfrase.com/2010/12/anti-star-trek-a-theory-of-posterity/)). But debt is an equally important part of the picture, and one which I think I've tended to overlook.

This suggests one source of the left's political confusion today. Leftists and liberals are used to viewing issues of jobs, hours and wages as the core problem facing workers. And insofar as most people are still wage laborers, that still appears to be the case. Yet it seems to me that we could easily arrive at a situation where it is technically possible for people to opt out of wage labor (due to the wonders of the Internet, [3D printers](http://reprap.org/wiki/Main_Page), small-scale [communal production](http://www.julietschor.org/2010/05/welcome-to-plenitude/), and so on) but where people are still compelled to work for bosses in order to pay off their debts. (And we can only guess at what new forms of debt will be concocted to cement this system in place. Perhaps we will all one day be born with debt, for the privilege of being born in America?) In that situation, it might appear that the fundamental problem was inadequate demand, or low wages, or something else to do with the labor market. But the real problem would be the existence of all this inviolable debt.

Indeed, widespread and large debt loads are one of the most important ways in which [my generation](http://books.google.com/books?id=9NcOLMKJxKsC&lpg=PT2&ots=7A0xNx0EKm&dq=kamenetz%20debt&pg=PT2#v=onepage&q&f=false) differs from those that immediately preceded it. The need to service debts--chiefly student loan debt, but also credit card debt in many cases--shapes every decision people make in their early adulthood. People who might otherwise want to sacrifice some income in order to pursue their goals are forced into corporate careers in order to pay off their debts. This has direct implications for the left: more than once, older comrades have noted to me that it has become much more difficult to live in the kind of bohemian poverty that sustained an earlier generation of young radicals and activists.

As a matter of political consciousness, it's important to drive home the point that insofar as we are burdened with debt, we are not free people--not even in the impoverished sense in which Marx spoke of the "free" laborer. In the spirit of Corey Robin's [call](http://www.thenation.com/article/159748/reclaiming-politics-freedom) to reclaim the politics of freedom, it's time to demand freedom from debt.

And there may be some advantages to a politics centered around debt rather than wage labor. The problem confronting the wage laborer is that they are, in fact, dependent on the boss for their sustenance, unless they can solve the collective action problem of getting everyone together to [expropriate the expropriators](http://www.econlib.org/library/YPDBooks/Marx/mrxCpA32.html). Debt, on the other hand, is just an agreed-upon social fiction denoting an obligation for some act of consumption that has *already occurred*. The only way to make people respect debt is through some combination of brute force and ideological legitimacy--a legitimacy that we can only hope is [starting to slip away](http://www.rollingstone.com/politics/blogs/taibblog/obama-goes-all-out-for-dirty-banker-deal-20110824).

NPR has a [nice little feature](http://www.npr.org/blogs/babyproject/2011/08/08/139121410/parental-leave-the-swedes-are-the-most-generous) on parental leave policy in Sweden. This relates to my own research on working time, and I think parental leave is a particularly interesting case when it comes to the politics and sociology of time. That's because I've come around to thinking--partly under [the influence](http://realutopias.org/the-real-utopias-project/gender-equality) of my adviser, [Janet Gornick](http://web.gc.cuny.edu/liscenter/pages/gornick.html)--that the issue of reducing working hours is connected to feminism and gender equality at a fundamental level.

That's because paid work time isn't the only working time we need to think about--there's also the unpaid cooking, cleaning, shopping, care of children and elders, and so on, that's done for free. This work is still disproportionately done [by women](http://economix.blogs.nytimes.com/2011/03/10/women-lead-in-unpaid-work/?partner=rssnyt). Given that fact, it's highly likely that any reform that makes it easier to reduce paid working time will inadvertently tend to reinforce the gender division of labor, in which men do paid work and women do unpaid work in the home that is not as highly valued. This moves us away from the ["dual caregiver, dual earner"](http://www.ces.fas.harvard.edu/publications/docs/pdfs/GornickMeyers.pdf) model that I think would be preferable from the standpoint of gender equality.

As things stand now, women will generally be more likely to reduce their hours than men when the opportunity presents itself. Women may then face discrimination in the labor market because employers start to assume that men will work longer hours. This is a concern even in [a country like the Netherlands](http://www.nytimes.com/2010/12/30/world/europe/30iht-dutch30.html), which has a lot of protections for part-timers and a huge number of part-time jobs, and hence is a beguiling model for shorter-hours advocates like me.

Even if men and women do reduce hours equally, there's no guarantee that the man will contribute to the unpaid labor of the household even if he's around. In the long run, the only solution to this dilemma is to figure out how to make men do their share of the housework--which means that to some extent this is a matter of cultural change that the state doesn't have much control over. Still, getting the guy to spend time in the home is a good start, and so there is still a role for well-designed policy that facilitates reductions in paid working time for everyone.

This brings us back to the Swedish parental leave model: Swedish couples are guaranteed a total of 480 days of paid parental leave, but 75 percent of this is taken by women. The Swedes are aware of this imbalance, which is why 60 of the 480 days are set aside specifically for men, and cannot be used by the woman in a couple. This is a good start, and it seems to be having some genuine impact on the gender division of labor, although it would probably be even better if we could move closer to a 50/50 split.

But since traditional gender roles are a pretty tough nut to crack, more aggressive policy is probably warranted. For instance, [this article](http://www.law.upenn.edu/journals/jbl/articles/volume9/issue2/Ayanna9U.Pa.J.Lab.%26Emp.L.293(2007).pdf) suggests a policy that doesn't just replace a man's wage when he's on paternity leave, but actually pays *more* than he was making at his job. I'd be in favor of that kind of approach if that's what it takes to make us guys take equal responsibility for unpaid work.

And if Don Peck [is right](http://www.theatlantic.com/magazine/archive/2011/09/can-the-middle-class-be-saved/8600/) that men are likely to face increasing difficulty in the labor market as the transition away from an industrial economy proceeds, then us guys may have no choice but to rethink our relationship to wages and labor.

Michael Lewis's [new article](http://www.vanityfair.com/business/features/2011/09/europe-201109) about Germany is getting some play (although Kevin Drum [hates it](http://motherjones.com/kevin-drum/2011/08/michael-lewiss-lazy-take-germany)), so I figured this was a good time to dust off and extend some notes I wrote after I read Lewis's *The Big Short*. After some general reflections about the financial crisis, I deal specifically with the Germans at the end.

*The Big Short* tells the story of the financial crisis by following a few individuals who saw it coming early and placed bets against the edifice of home mortgage-based structured finance. This personalization has clear storytelling benefits, but it tends to occlude the structural basis of the entire system; nonetheless, it's possible to back out a more interesting institutional story from the book.

Throughout the book there is an implicit tension between two ways of seeing the crisis. This tension turns on the distinction between idiots and crooks--or to put it another way, between rationality and madness. One popular interpretation of the crisis, and of Lewis's book, is that the explosion of sub-prime lending and securitization was the result of mass stupidity, and that huge numbers of people simply failed to understand or account for the incredible financial risks they were taking. This is basically [the approach Ezra Klein takes](http://voices.washingtonpost.com/ezra-klein/2010/04/michael_lewis_and_the_idiots.html) when he quotes Larry Summers' famous remark that "there are idiots" and concludes that the crisis was a consequence of human weakness and error in the context of a system with few regulatory restraints. He reiterated this claim later, in a post [criticizing](http://www.washingtonpost.com/blogs/ezra-klein/post/what-inside-job-got-wrong/2011/05/19/AGgGoJgH_blog.html) the documentary *Inside Job*.

Yet idiocy does not stand up as a the central causal factor behind the crisis. For one thing, it seems odd that there would be such a concentration of idiocy in the most lucrative field of the American economy, one which has been leeching the brightest minds out of the rest of the society for decades. Moreover, it is necessary to explain not only the preponderance of idiots, but the tendency for their idiocy to work systematically *in the same direction.* At one point in Lewis's book, Greg Lippmann, the Deutsche Bank trader who made millions short-selling subprime mortgage debt, refers to the market as a "tug of war", with him and the other short sellers pulling against all those who were promoting and buying mortgage-based financial instruments. Yet up until fairly late in the game, almost everyone was pulling in one direction, to the extent that Lippmann and others actually had to call new financial instruments into existence in order to short the market after 2005. This is not what we would expect from people who were just being stupid. In academic finance, the technical term for idiots is "noise traders", and they are thought to provide erratic and irrational actions that may destabilize markets but do not systematically move them in one particular direction.

As it turns out, the story Michael Lewis actually tells is about something much worse than idiots. The two most significant lines in the book are this one:

> If you wanted to predict how people would behave, [Warren Buffet's partner Charlie] Munger said, you only had to look at their incentives.

And this one:

> What's strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble [on subprime mortgages] left the table rich.

This last point bears reiterating, as it's what makes the story Lewis tells so infuriating. Though the financial crisis produced a great deal of institutional calamity--the disappearance of Bear Stearns, Lehman, and many smaller banks and investment houses--the individual people responsible for the worst decisions of the last decade managed to greatly enrich themselves even as they nearly annihilated the global economy. No doubt, some of them could have made even more money had they been more astute about the system they were building. And it's undeniable that some of them, particularly toward the end, were getting high on their own supply, taking the the bogus triple-A ratings on toxic subprime garbage at face value even though they had an inside understanding of the con game they represented.  But ultimately, these people--who in a just world would be penniless and serving extended prison terms--walked away with millions of dollars. There are plenty of apt descriptions for people like that, but "idiots" isn't the one I would choose.

Much of the dramatic action in *The Big Short* turns on some variant of the old gambler's adage that if you don't know who the fool at the table is, it's you. His protagonists spend page after page desperately trying to find the fool in the financial markets, lest it be them. And yet reading between the lines, we can see why they had such trouble: the fool was not at the table. The fool was all of the *rest* of us: it was the taxpayer, and the U.S. government, which ultimately took responsibility for picking up the pieces and stabilizing the financial system after its cataclysmic meltdown. We've come to accept that the high ratings given to subprime mortgage bonds were a fiction or a fraud, but in a sense they were accurate: their risk had been implicitly moved elsewhere, to the government. The key participants in the events of Lewis's book were never in any great danger of not getting rich, and hence it could be argued that they correctly perceived their risk and that they successfully followed their incentives.

Nevertheless, there are some particular cases of idiocy that are interesting in their own right. One particularly important one concerns a recurring customer who became very important to the subprime market: German institutional investors, or as they are called at one point, simply "Dusseldorf". Lewis never really tries to explain their outsized appetite for murky subprime instruments. But if you know something about how German capitalism works, and how it differs from its Anglo-American counterpart, then passages like this make perfect sense:

> By early 2005 Howie Hubler had found a sufficient number of fools in the market to acquire 2 billion dollars' worth of these bespoke credit default swaps. From the point of view of the fools, the credit default swaps Howie Hubler was looking to buy must have looked like free money: Morgan Stanley would pay them 2.5 percent a year over the risk-free rate to own, in effect, investment-grade (triple-B-rate) asset-backed bonds. The idea appealed especially to German institutional investors, who either failed to read the fine print or took the ratings at face value.

In the language of the ["varieties of capitalism"](http://kisi.deu.edu.tr/muge.tunaer/VoC.pdf) school of comparative political economy, Germany is what is known as a "coordinated market economy" or CME, whereas the U.S. is a "liberal market economy" or LME. The structure of the market in a CME is fundamentally different in that it relies heavily on coordination between firms, based on tight long-term inter-linkages and above all, trust. This contrasts with the more ruthlessly competitive ethic of the LME, in which formal contracts take the place of reciprocal trust relations. As Peter Hall says in the linked essay:

> In coordinated market economies, firms depend more heavily on non-market relationships to coordinate their endeavors with other actors and to construct their core competencies. These non-market modes of coordination generally entail more extensive relational or incomplete contracting, network monitoring based on the exchange of private information inside networks, and more reliance on collaborative, as opposed to competitive, relationships to build the competencies of the firm. In contrast to liberal market economies (LMEs), where the equilibrium outcomes of firm behavior are usually given by demand and supply conditions in competitive markets, the equilibria on which firms coordinate in coordinated market economies (CMEs) are more often the result of strategic interaction among firms and other actors.

Both "failing to read the fine print" and "taking the ratings at face value" are therefore more defensible positions in a CME, event at the level of a purely pecuniary economic logic: deceiving one's counterparty would be counterproductive, since the cost of the long-run damages to one's trustworthiness and relations to other firms would outweigh any short-term financial benefit. Needless to say, that's not how things work in the United States; perhaps the best advice to the Germans in future negotiations is that when you're dealing with Americans, you should always read the contract carefully!

What's more, German banks were latecomers to the high-flying finance game. Says [Richard Deeg](www.temple.edu/polsci/deeg/documents/DeegGermanPolart.pdf):

> The reform and transformation of the German financial and corporate governance systems goes back to the mid-1980s when the large German banks launched a concerted effort to promote Germany's 'underdeveloped' securities markets. This effort accorded with the beginnings of a major reorientation in the banks' business strategies from a traditional focus on commercial banking to a focus on securities market-oriented investment banking. During the 1990s many large non-financial firms also became reform supporters because they, no longer relying on bank loans for external funds, instead preferred to see the introduction of modern capital market products in Germany that could increase their financial flexibility. Because German investors could not be expected to increase their demand for securities as rapidly as the banks needed, the strategy came to rest importantly upon wooing foreign institutional investors. The reform coalition thus found itself increasingly compelled to adopt many of the Anglo-Saxon market regulations and norms demanded by these investors.

So German bankers and investors were a) relative novices at modern securities wizardry; b) steeped in a capitalist culture quite different from the dog-eat-dog rapacity of the American version. Lewis hints at these explanations in places in his recent essay on Germany. Here's something about the Germans as latecomers:

> Everyone thought that German bankers were more conservative, and more isolated from the outside world, than, say, the French. And it wasn’t true. "There had never been any innovation in German banking," says Enderlein. "You gave money to some company, and the company paid you back. They went [virtually overnight] from this to being American. And they weren’t any good at it."

And there's this bit about a banker projecting his CME norms onto Americans:

> In the bargain, he tells me why the current financial crisis has left so unsettled the German banker's view of the financial universe. In the early 1970s, after he started at Commerzbank, the bank opened the first New York branch of any German bank, and he went to work in it. He mists up a bit when he tells stories about the Americans he did business with back then: __in one story an American investment banker who had inadvertently shut him out of a deal hunts him down and hands him an envelope with 75 grand in it, because he hadn't meant for the German bank to get stiffed.__ "You have to understand," he says emphatically, "this is where I get my view of Americans." In the past few years, he adds, that view has changed.

> "How much did you lose?" I ask.

> "I don't want to tell you," he says.

> He laughs and then continues. "For 40 years we didn't lose a penny on anything with a triple-A rating," he says. "We stopped building the portfolio in subprime in 2006. I had the idea that there was something wrong with your market." He pauses. __"I was in the belief that the best supervised of all banking systems was in New York.__ To me the Fed and the S.E.C. were second to none. I did not believe that there would be e-mail traffic between investment bankers saying that they were selling … " He pauses and decides he shouldn't say "shit." "Dirt," he says instead. "This is by far my biggest professional disappointment. I was in a much too positive way U.S.-biased. __I had a set of beliefs about U.S. values."__

What Lewis doesn't seem to get is that this trusting attitude isn't just some ineffable quality of Germanness. It's built into the structure of German political economy. And I think that's a better explanation of what happened in Germany than Lewis' appeal to national stereotypes.