Monday, November 13, 2006

Money Matters

Elevator goin’ up

Saturday’s NY Times had an article on the increase of Junk Bonds being issued and how more and more firms are getting less than investment-grade credit ratings, yet aren’t having problems getting capital. The same Times had write-ups on the highest amount ever paid for a painting - Jackson Pollock, $140 million, sold in the last couple weeks to whom it is a mystery - and the most for a pre-modern era American painting (they usually aren’t that interesting but it still fetched I think around 40 mil.) Plus as we all know, the stock market has gained 15% in the last few months.

What this all has in common is money. Most people think the Fed controls money through its interest rates, but there is more than meets the eye. The money supply (dollar bills in circulation) is also going up, although the Fed has stopped reporting this figure (known as M3). This means more money chasing the same amount of goods – or more realistically more money chasing a little less more goods. Therefore, yes prices are going up and money is available for less than stellar business uses. Thus the problem. This is what causes business cycles.

When too much money is pumped into the economy unsound investments are made. Then when the “animal spirits” (Keyne’s words for human psychology) get wind that something is amiss, the downward cycle is worse than it should be because of these bad business investments (I am not saying a Pollock is a bad investment, as wouldn’t know, still whoever owns it sure pays a lot per each time he or she looks at it!).

When the economy takes a downturn investments which shouldn’t have been made because money was overly available turn bad quickly – and we are stuck with the fall-out. If the money supply isn’t tampered with then investments are more sound and economic growth (and jobs) more steady and solid.

Workers doesn’t like to sound-off negatively on the economy as humans have a remarkable tendency to grow and prosper despite setbacks along the way, still as someone once said, “what has the government done to our money?”.

Economic Temptation

The social science

Greetings Workers readers. One of the teachers at the New School (Duncan Foley) just had his new book (Adam's Fallacy) reviewed in the New York Review of Books by Nobel Laureate Robert Solow (he of the Solow growth model in macroeconomics). I wrote a response to the Solow review because he didnt take into consideration the moral underpinnings of the Austrian School of Economics in his review. Find the letter below.

New York Review of Books

To the Editor,

I am only a first year graduate economics student at the New School for Social Research (where Duncan Foley is one of our professors) so am hardly in the position to comment authoritatively on Economic Nobel Laureate Robert Solow’s critique of Foley’s Adam’s Fallacy in your November 16, 2006 issue. However, there is something that might be pointed out. Solow writes very wittily that instead of economics containing a fallacy which separates values from economic science perhaps a better concept of this idea could be called “Duncan’s Temptation,” where economists are tempted to “leave it to the market” instead of looking at larger “distributional and other ethical considerations.”

Professor Solow then falls prey to this temptation himself in the very next paragraph of his review. Solow writes that “the theological free-marketeer likes to omit” starting-point wealth distributions and ignore the fact that ”First Theorem of Welfare Economics” outcomes (free market outcomes) are “socially desirable only if the allocation of initial endowments was socially desirable.” Free-market economists, of which the Austrian School is probably the most profound, look very much at ethical considerations and hold property rights – the right to the fruits of one’s labor – as a moral imperative, an idea which goes back to the writings of John Locke. These property rights are the ethical and moral (spiritual?) base for free market “theologians” and are considered part of the sound institutions needed for economic growth, and therefore necessary for the ethical and moral distribution of income and wealth, despite the accumulated starting points since the time of Adam and Eve. To say that free-market economists ignore “distributional and other considerations” is to misread a very strong, and growing, heterodoxical economic school of thought. One of these free-market Austrians, another Nobel Laureate, Freidrich Hayek, is a subject in Professor Foley’s book.

Cameron M. Weber
New York City