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Mostafa Moini, Ph. D
Professor of Economics
Oklahoma City University
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Reflections on the Current Crisis
Posted 10/7/08 (My remarks that, due to my absence, will be read by a colleague in an informal gathering of the economics and finance faculty and students at the Meinders School of Business, Oklahoma City University, on Wed., 10/8/04)
The recurring real estate bubbles since 1980’s, and the 1987, the S&L, the LTCM, and the dot.com events, all these were tremors and preludes to this, which is the real one. As Jacob and I were discussing the other day, credit, credo, “I trust”, is the lifeline of a market economy. Disrupt the orderly process through which debts get created and extinguished through being paid off, and the whole economy will go to pieces!
I am blushing because there were two noble laureate economists on the board of LTCM. There is no mystery here. The mainstream economics has simply ignored an old and highly significant thread of research that leads to the result that: You cannot understand and manage money at the macro level unless you view it as the tip of the iceberg that consists of the entire system of credit. The pitiful official definition that “money is anything that serves as a medium of exchange” is antithetical to this eye-opening insight. The definition is not wrong but utterly vacuous: it says exactly nothing. It is as good as remarking that it is daytime while the sun is shining above the horizon. Greenspan & co. were focusing on money-market rates without paying any attention to the major tectonic pressures that were building deep beneath the foundation of the credit system, not only within the U.S. but also on the global scale.
How could capital be made so dirt cheap, and a toy in the hands of the infants in charge of the monetary policy? For a start, look at the current account surpluses of Japan, China, and the Persian Gulf states, holders of the bulk of the sovereign wealth. This would suggest that a multiplicity of interrelated factors were responsible for sucking U.S. into the black hole of her trillions-scale external debt. A big chunk of the problem could, however, be analytically tracked and related to two ills with which the U.S. economy has been afflicted. One is globalization and the other, the cursed position of having to serve as the world’s banker. I suspect that this lender of the last resort position was among the factors that finally did the British empire in.
Yes I advocate free trade but am utterly against globalization. The former benefits all participating nations; the latter destroys neighborhoods, towns, cities, and, in time, entire nations. The well-established conclusions of the Ricardian (as well as the Hecksher-Ohlin) theories of trade critically depend on the assumption of immobility of capital. Relax this assumptions and the conclusions are no longer valid. But globalization is driven by wholly by capital mobility. And how is it justified? On the basis of the classical and neoclassical trade models! What a fiasco! Are we economomists at least in part responsible for this mess?
Getting back to the issue of credit, it appears to be a privilege to be the world’s banker as it would enable the country to live lavishly beyond her means for some time by issuing IOU’s. But could we trust the politicians to resist the euphoria such addictive course before the inevitable day of reckoning arrives. Can we count on the existence of sufficient wisdom, leadership, and institutional resilience out there to enable the country to not go indefinitely beyond the optimal (and, therefore, prudent) levels of indebtedness? History answers no, and quite emphatically so. There is a Ponzi virus at work within every credit expansion that will give rise to the mania of a bubble unless it is understood, checked, and destroyed in a timely fashion. The existing concepts and institutions of monetary policy are anachronistic and reflect the 19th century misconceptions such as “commodity money”, the idea that money is a thing rather than a social relation. Such theoretical failure is a sufficient condition for the developments of the aforementioned tremors and the present big bang. What is needed is an institution that would formulate and oversee the enforcement of such well-designed rules that would be necessary for the operation and maintenance of the entire system of credit, of which the money markets are but a part. The constitution of the Federal Reserve System stands in need of a fundamental reexamination and proper amendments in order to accommodate this perspective.
In my Brown-Bag presentation of November 18 I will get into some depth with respect to these issues.
P.S. Did everybody notice the Orwellian lingo-gymnastic? The fast boys of "creative" finance are telling us to to call it a "rescue", not a "bailout". Protagoras must be having a great time in heaven seeing that his modern followers are so well-schooled in the black art of sophistry.
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Blunders in Economic Theory and the Crash of 2008 Topic of Brown Bag Lecture Behind the private and public institutional failures that brought about the current crisis lie the ideas that drove these institutions’ policies and actions. Although these involved much more than just economic ideas the latter played a prominent role. Specifically, aside from a few dissenting voices, by and large economists failed to recognize the dangers that inhere in two major developments within the world economy, namely, globalization of production and finance. Globalization has led to offshoring of manufacturing production and an increasing variety of services, including some high-end categories, thus severely limiting the economy’s export capacity, and diminishing the extent and variety of the higher-paying jobs. Lower export capacity has weakened the economy’s ability to overcome its external deficit, and loss of high-wage jobs has lowered tax revenues, thus worsening the budget deficit. Such malady could not have gone very far were it not for the reserve-currency status of the dollar that made it possible to finance the external and internal deficits by selling U.S. government securities to foreign central banks and other entities abroad. This allowed the country to live beyond its means for many years by increasing its outstanding external debt to levels that reached far beyond what would be prudent. Eventually the sheer volume of dollar assets held abroad began to exert downward pressure on the value of the dollar. And the worsening budget deficit left little hope for the prospect of U.S. putting its house in order anytime soon. During the entire period of development of this precarious course of events economists did little to awaken the public to its dire consequences. What is the nature of the two theoretical blunders that paved the way for the crash of 2008? Join us for the presentation, “Blunders in Economic Theory” by Dr. Mostafa Moini, Professor of Economics, Meinders School of Business where he’ll discuss these questions and other aspects of the current crisis.
12:15 p.m., MSB 117 Attendance is Free · Box lunches available for $6. Register online: www.okcu.edu/business/register.aspx or contact Debra Smith @ 208.5458 or dasmith@okcu.edu
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Oklahoma City University
Vision
Oklahoma City University, a private, church-related institution, aspires to be a premier university for the liberal arts and the professions, with respect to:
• Academic excellence that cultivates character,
• Student success and welfare,
• Personalized education that encourages service, leadership, and spiritual growth,
• Local community and economic development, including the use of global relationships, and
• Cultural leadership in our community and state.
Our mission:
Oklahoma City University
embraces the United Methodist tradition of scholarship and service and
welcomes all faiths in a culturally rich community that is dedicated to
student welfare and success. Men and women pursue academic excellence
through a rigorous curriculum that focuses on students’ intellectual,
moral, and spiritual development to prepare them to become effective
leaders in service to their communities.
Research:
My primary area of research is Theory of Money. The following article is a comprehensive report of my findings as of December 2001.
Mostafa Moini. "Toward a General Theory of Credit and Money". Review of Austrian Economics. Vol 14, No. 4, Dec. 2001
Kluwer Academic Publishers.
Click here for a PDF file of the full text of the article. Click here to go to the publisher's site.
Abstract
Oklahoma City University's
Creativity Festival
A Panel Discussion:
Scholars and Poets
Why and How Academics Write Creatively
November 3, 2005, Walker Hall
Mostafa Moini, Ph.D., Professor of Economics
Lloyd Musselman, Ph.D., Professor of History
Brandy Tyler, Professor of English Literature
Rotary Presentation
Click Here for selections from some
recent and past public lectures
My Economic Philosophy
"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." John Maynard Keynes
Note: This is an evolving document. Yellow fonts will be gradually linked to other sites or pages in this site.
Exchange is the most effective and humane mechanism available for coordination of economic activities and resolution of the conflicts that arise in connection with economic interdependence between individuals within a nation and between different nations. Indeed the market economy, being both the means as well as the result of the evolution of the process of exchange, is the only economic system that is capable of solving the Value Problem. (Mises).
However the powers and limitations of the exchange system are yet to be fully understood. A much deeper exposition of the nature and modus operandi of the market system was provided (than was hitherto available) in the course of the brilliant defenses that were put forth by Mises and other Austrian-School economists in countering the century-long barrage of ideological attacks on the system coming from its opponents on the left. But it would be a mistake to think that we now know all that we need to know about the system.
For one thing the boundaries that separate various disciplines (of economics, psychology, ethics, sociology, politics, anthropology, etc) are mere methodological constructs, devices that make it possible to focus on and carry out specialized work on certain aspect of the social process. But the underlying reality whose different aspects are studied by individual disciplines is an integral whole that knows no boundaries.
In the absence of a process in which the results of specialized work, carried out by different disciplines, are integrated into an internally consistent body of knowledge whose parts are mutually validating, the methods and paradigms of the individual disciplines betray the unitive character of the object of their study. Such methodological gap has serious practical implications.
For what may appear reasonable and desirable from the perspective of, say, economics may prove disastrous in terms of its consequences in the areas of ethics, politics, etc. Thus actions and policies launched based on their positive anticipated results seen from the tunnel-view of a specific field will, in time, lead to such consequences in other fields (and even often in the original field itself) whose costs may far outweigh the short-sighted benefits that justified them in the beginning.
Applied to the the market system, this means that a partial and short-term view of a problem generally leads one to overestimate its benefits and underestimate its costs. Furthermore, such view tends to divert one's attention from the non-economic costs and benefits of a policy or action.
To safeguard against such disadvantages one must turn to a higher concept of value than the one in use in standard economics. This may be found in Perennial Values, or more generally, in an Integral Theory of Value (axiology), which provides a framework within which economic value stands as a species of value next to many other species, as a distinct but integrated part of a hierarchical system of values. So critical is the work toward such Integral Theory of Value that in its absence the market system may be expected to (consume and) destroy the very physical and moral foundation upon which it rests.
The hitherto recorded performance of the market system reveals that from a system-theoretic perspective it lacks dynamic stability. The periodic financial mania (of which the credit bubble of the late 1990s is only one instance), the environmental crises, the decay of the family institution, the extremes of income and wealth distribution, the dominance of industrial and financial interests over governmental policies and programs at all levels, anti-democratic trends manifested in the emergence of closely-allied financial and political oligarchies, extending domestically as well as internationally, these are only few of the manifestations of the many self-destructive tendencies that lie deep within the market economy.
It appears, therefore, that mankind is faced with an insurmountable Paradox: On the one hand the market system is the only economic system that can work, and on the other hand its working falls so short of human ideals that even mere survival of humanity on this planet can no longer be taken for granted, let alone matters of quality of life.
Whereas it is quite true that, theoretically and practically, alternatives to the market system are inconsistent with the aspirations of a free society, it is by no means an established fact that the market system guarantees a free society. Unless it is sufficiently understood with respect to its potentials for good and evil, and unless corrective ideas and institutions are created to address the roots of its dynamic instability, the market system could degenerate into an instrument of oppression of the mass of mankind by a financial oligarchy and a number of other power complexes which would, in time, use their economic power to establish and sustain their social and political hegemony. The falsehood and deception -- the information war against the common humanity -- made necessary for this purpose would produce at best a mockery of democracy. Jefferson's prophetic remarks in this connection are quite revealing.
Although potentially as coercive in character as its historical predecessors (such as slavery and feudalism), such degenerated market system would put the former to shame with respect to the potency of its means and methods. For, among other things, it would differ from the former by the nature, scope and intensity of its reliance on information processes in order to attain and sustain ever higher degree of stupefaction and of the mass of mankind.
Whether the decentralization of information due to the Internet can provide an antidote to this tendency remains to be seen. One cannot be optimistic without qualifications. For generation and dissemination of information requires resources, and those with more resources are more likely to obtain relative advantages for themselves in this area; just as they have managed to do with respect to the more traditional information media and technologies.
It is the opinion of this writer that the inherently "out-of-control" nature of the market economy cannot be cured by government regulation. More government simply means more agencies created at the taxpayers' expense to serve this or that interest group. The idea that the state is a panacea for all human problems has already been tested in the former Soviet Union and elsewhere, with horrendous outcomes. Social engineers have already had their day, whether on the planning boards of the the centralist governments or within the bureaucracies of the democratic and semi-democratic states. Theirs is a record of failure.
That the idea of total state has been fully discredited historically is no protection against the dangers of the creeping rise of the state witnessed all over the world, under the mask of democracy. The Argentine and Brazilian brands of democracy is in reality no more than an oligarchic order quite convenient for and supported by the international corporations.
And even in those places in the world where the legacy of democratic ideals and institutions are the strongest, no serious observer of the social scene can fail to recognize the presence of significant erosions in the conditions of democracy. The likelihood of major institutional and political realignments in favor of statism in these parts of the world can no longer be ruled out without qualification.
Now this is quite disturbing, because these are the countries which the rest of the world has been desperately trying to emulate for better than a century now. Democracy, its spirit, institutions, and written and oral traditions are a part of humanity's stock of moral wealth, great gift of classical liberalism to all generations of mankind to come. Its erosion or loss is no less (and perhaps much more) a loss of a Public Good, belonging to all of mankind, than such things as clean air or the right to live and work in an environment free from violence and other danger.
The highly encouraging research results in Property Rights Economics and Public Choice Theory, indicate that government is at its best when it focuses on defining cheaply enforceable and fully transferable (not necessarily individual) property rights to the society's resources as clearly as possible, and where it limits its direct involvement in the economy to the production of that class of Public Goods in which it has comparative advantage. Much clarification is expected to still emerge from the vibrant field of Public Choice Theory in this respect.
Prima facie the prospects of applying Property Rights Economics and Public Choice Theory to the class of more fundamental values, the Perennial Values, appear dim at present. Many environmental problems become meaningful in reference to time horizons that are much longer than those currently meaningfully in economic analysis. The market economy has no mechanisms to make it responsive to such long-term concerns as the property rights of future generations of humanity to a safe, clean, wholesome, and sustainable physical environment.
Also inherently inconsistent with the market system appears to be those Perennial Values that relate to the moral and institutional capital of the society. For example, film, music and game producers capitalize on the "entertainment" value of breaking the social taboos against murder, use of drugs, profanities, sex, cheating one's partner in marriage, or business, etc., as a means of making their products more marketable. But this amounts to dipping into the stock of moral and civil values. Such degradation of moral capital of humanity is a negative byproduct of the market economy as understood and practiced today.
Such exploitative acts tend to neutralize much of the efforts made by parents, educational and religious institutions to maintain, sustain, and enhance the moral capital stock of the society. Should not the raiders of this part of the society's wealth be made to pay taxes and penalties to compensate the people for suffering from the damages directly traceable to their "entertainment products" ranging from broken homes, unruly children, disloyal business partners, feeling of shame because one does not fit the advertising or entertainment icons that define how should one be? That neither the tycoons of the entertainment and advertising world nor the general public may even be cognizant of the horrendous magnitude of these problems does not in any way detract from their destructiveness.
Should it appear to some that these are not economic values, the answer is that value in economics is defined as the significance of things, ideas, and events to a specific person. Should enough people get convinced that the society's inherited moral capital is a part of its wealth -- perhaps more than just a part, being itself the foundation of all other wealth -- then they would claim and enforce their property rights to this Public Good as they are likely to do, and indeed have done, with respect to many other such goods, say, clean air.
Attempts toward the identification and defense of this resource against undue exploitation is likely to generate concerns about censorship and loss of freedom. But is the liberty to destroy wealth of others -- in this case the moral wealth -- an invasion of individual liberties?
The theory that moral wealth may be viewed as a Public Good (just noted above in rough outline), and is, therefore, susceptible to the analytical tools of Property Right Economics must be developed fully before one turns to the problems of its implementation.
That up to the present time economic value has appeared to be "mindless" and intimately tied to the avarice for power and other means of gratification of the lower self, should not be disheartening. The Paradox of Survival is not insurmountable. Peace, human dignity and justice are consistent with the market economy. But only if this system is embedded within and made subservient to the Perennial Values, those concerned with ever improving Quality of Life for the present and all future generation.
In contrast, the un-embedded economy - and its intellectual counterpart, economics as usual -- will continue to lead to the destruction of the material and spiritual infrastructure of human life, and will continue to cultivate an international climate of domination, intrigue, conflict, and conquest.
The concerns expressed here do not seem to fall within the scope of any of the existing disciplines, certainly not economics as it is generally understood in the academia today, although the latter does offer important tools that could be applied quite usefully in this respect. Yet perhaps no other question of science has as much bearing on the present conditions and future of mankind than this.
Fortunately Perennial Philosophy is making significant contributions to the formulation of a framework of Perennial Values. Much work remains to be done before a satisfactory formulation of a General Theory of Value is completed.
This author hopes to bring a number economists and Traditionalist philosophers together through symposia, on-line electronic journals, public lectures and other means in the hope that the academia may begin to focus some of its attention and resources on this most fundamental and pressing of the problems that mankind faces.
For feedback, suggestions and supports: My email
My view regarding artificial intelligence: Contra Marvin Minsky: Consciousness is not reducible to matter, nor matter to conciousness
Thomas Jefferson: Notes on Virginia, 1784
“Mankind soon learn to make interested uses of every right and power which they possess, or may assume. The public money and public liberty…will soon be discovered to be sources of wealth and dominion to those who hold them; distinguished, too, by this tempting circumstance, that they are the instrument, as well as the object of acquisition. With money we will get men, said Caesar, and with men we will get money. Now should our assembly be deluded by the integrity of their own purposes, and conclude that these unlimited powers will never be abused, because themselves are not disposed to abuse them, they should look forward to a time, and that not a distant one, when a corruption in this, as in the country from which we derive our origin, will have seized the heads of government, and be spread by them through the body of the people; when they will purchase the voices of the people, and make them pay the price.”
Excerpt from: Frédéric Bastiat's
(1801-1850)
"THAT WHICH IS SEEN,
AND THAT WHICH IS NOT SEEN
In
the department of economy, an act, a habit, an institution, a law, gives birth not only to
an effect, but to a series of effects. Of these effects, the first only is immediate; it
manifests itself simultaneously with its cause -it is seen. The others unfold in
succession -they are not seen: it is well for us, if they are foreseen. ... Now this difference is enormous, for it almost
always happens that when the immediate consequence is favorable, the ultimate
consequences are fatal, and the converse. Hence it follows that the bad economist pursues
a small present good, which will be followed by a great evil to come, while the true
economist pursues a great good to come, -at the risk of a small present evil.
In fact, it is the same in the
science of health, arts, and in that of morals. It often happens, that the sweeter the
first fruit of a habit is, the more bitter are the consequences. Take, for example,
debauchery, idleness, prodigality. When, therefore, a man absorbed in the effect which is
seen has not yet learned to discern those which are not seen, he gives way to fatal
habits, not only by inclination, but by calculation.
This explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters-experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.
Winter Night in Tehran: Vali Asr Ave.
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Principles of Economics
Micro (2113)
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ECONOMICS 3113 (Money & Banking)
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