[The following was cobbled together from notes, some newish and some oldish, while the author was under the influence of a mounting fever (mild flu, nothing serious). Nations are advised not to reform their financial markets on the basis of it without first consulting a credentialed economist, who should, of course, not really be trusted, either.]
In a chapter midway through Jane Austen’s Mansfield Park, the characters sit down to an early-nineteenth-century card game called Speculation. The spice of the game seems to have been that players had a chance to bid on cards that might prove useful to them later; it seems to have offered a chance to play at capitalism, the way the Monopoly board game does today. The game of Speculation is new to some of the characters, and Henry Crawford , an heir and something of a dandy, is obliged to manage the hand of the dotty matron Maria Bertram as well as his own. The cognitive burden of this double hand hardly weighs him down. To the contrary, in simultaneous conversations he not only details his plan for improving his friend Edmund Bertram’s parsonage but also flirts with Edmund’s naïve cousin Fanny Price. He’s playing, in other words, not only two hands but also three games at once: cards, real estate, and love. Austen renders his dangerous ease as a monologue:
“The air of a gentleman’s residence, therefore, you cannot but give it, if you do any thing. But it is capable of much more. (Let me see, Mary; Lady Bertram bids a dozen for that queen; no, no, a dozen is more than it is worth. Lady Bertram does not bid a dozen. She will have nothing to say to it. Go on, go on.) By some such improvements as I have suggested, (I do not really require you to proceed upon my plan, though by the bye I doubt any body’s striking out a better)—you may give it a higher character. You may raise it into a place. From being the mere gentleman’s residence, it becomes, by judicious improvement, the residence of a man of education, taste, modern manners, good connections. All this may be stamped on it . . . You think with me, I hope—(turning with a softened voice to Fanny).—Have you ever seen the place?”
Henry Crawford’s moral defect is the same in all three fields: he doesn’t play for any higher purpose—only to take the next trick. Edmund high-mindedly objects that tastefulness isn’t a merit in a parsonage, and Fanny is immunized against Crawford’s romantic attractions by her apparently hopeless but nonetheless devoted affection for Edmund. But though Crawford does no serious damage in this scene, he is nonetheless condemnable, according to Austen’s moral laws, by the evidence the scene provides. He is in real estate a flipper, and in romance a flirt.
Every historical period has its predominant economic metaphors, and they seep into its culture. Not long ago, I had coffee with an undergraduate who reported that he had just read Derrida and Lacan on Poe and was excited by the idea that criticism might be the new literature. Twenty years ago, when I read Derrida and Lacan on Poe, my professors teased me the same exciting possibility. It occurs to me now that the idea is about as old as, and has certain structural parallels to, the notion that finance is the new manufacturing. Like criticism over literature, finance traditionally supervised manufacturing yet was thought to be parasitic upon it and less “creative” than it. And then at some moment, often specified on Michael Lewis’s authority as the 1980s, finance began to have the reputation of requiring more intellectual acumen than manufacturing and to attract the brighter and more modish talents. Similarly (though hard numbers are very hard to come by), academic criticism started to pay better than the creation of literature—certainly it offered more stability and social prestige. For a young American to ignore the economic signaling and go into manufacturing or literature rather than finance or criticism, he would have to be either idealist or dunderheaded.
But I’m digressing, from a topic I haven’t even announced yet. A more familiar economic metaphor of our day is that of depression and stimulus. The metaphor goes like this: There is a mystifying complex system (the brain, the economy), and when the system is running well, a perspicuous diagnostic index is maintained by the system at a high level (personal happiness, Dow Jones industrial average). If misfortune blights the system, this index drops, and sometimes, for somewhat mysterious reasons, the same self-regulating feedback loops that sustain the index against minor buffeting in good times can hold it down at a new low level after a crisis (unhappiness, recession), depriving the system of the opportunity to recover fully. Science, according to the metaphor’s logic, has the answer. By a temporary stimulus (Prozac, the American Recovery and Reinvestment Act), the index can be “re-set” to its earlier, higher level. The stimulus is not supposed to last; it is to be understood as a course of treatment; the individual is not being addicted to a drug, nor the nation to welfare. Once the system has been reset to the proper level, the stimulus can be safely discontinued.
Thus is a reductive idea of Keynesian economics assimilated to a popular understanding of Prozac, or vice versa. It seems, however, to be wrong, at least about Keynesian economics.
I should admit here that I am more or less illiterate about economics, and that what I understand of Keynes derives from my reading of articles by Richard Posner, Aaron Swartz, and Paul Krugman, further stimulated by Ben Kunkel’s essay “Full Employment” (excerpt here) and reinforced by articles like this one by Joseph Stiglitz. I shall now proceed to blog with impressive and daunting authority nonetheless.
The popular story about the Great Depression is that America pulled itself out of it by the great stimulus of World War II, and insofar as I understand what the latter-day Keynesians are saying, the popular story is wrong, or at least, insufficiently descriptive. World War II did stimulate the American economy, but the treatment was successful not merely because it provided America with an enormous new demand for goods. The decisive nostrum was a change in the terms of the social contract between the few and the many. For the sake of winning the war, the elites of America (and other democracies) ensured the cooperation of their working and middle classes by giving them a more dignified place at the economic table. Wages rose; the distribution of wealth in America became more egalitarian. To be numerical about it, during World War II, the share of income that went to the richest tenth of Americans dropped from 45 percent to 32.5 percent, and didn’t rise again until the 1970s. In other words, during the long period of American economic growth sometimes referred to as the Golden Age (unsatisfactory libertarian explanations of whose demise Kunkel deftly explodes in his recent n+1 essay), the country shared its wealth more broadly than before or after.
Why did this help? According to classical economics, it shouldn’t. Buying power is buying power, and if more of it is in the hands of the rich, so what. Their money is just as good. But according to Keynes, there is a problem with concentrating wealth in the hands of the rich: they don’t spend as much of it. They aren’t, after all, in need. “Consumption — to repeat the obvious — is the sole end and object of all economic activity,” writes Keynes, in a sentence quoted by Swartz. That is, money in the bank is for the interim worthless; its value is suspended until it is put into use. Give a rich person ten dollars, and he is likely to put nine dollars in his savings account. Give a poor person ten dollars, and he will have spent all ten by lunchtime on food and services, and its beneficiaries will be people who have to work for a living and who are therefore more likely to spend it themselves. The original ten dollars, if spent by a person of modest means, will multiply their value as they work their way through the economic system.
A large GNP, Keynes believed, isn’t enough to keep an economy ticking if too great a share of the profits goes to the rich, because the rich will just hoard, and hoarding cancels money’s value. “It is . . . conceivable,” writes Kunkel, “that the rich could spend enough to maintain a sufficient level of consumer demand”; Kunkel notes that “the US approached just such a strategy over the last dozen years, with help from the delirious increase of asset prices.” Conceivable, Kunkel writes, but not likely. The strategy would only work if the rich could be induced to spend on a scale of inhuman grandiosity—if, Keynes writes (in another quote from Swartz), “millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions.” The successful stimulation of a national economy is much more likely if, instead, workers are paid a living wage, and use it to buy T-shirts, I-pads, flour, and eggs. Posner summarizes: “It is consumption, rather than thrift, that promotes economic growth.”
To return to literature for a moment, to adopt the Keynesian perspective is to prefer Henry James’s understanding of the world over Jane Austen’s. In Austen’s Mansfield Park, Fanny Price wins out because she modestly expresses no desire, keeping her love hidden in the confidence that by chance Edmund will some day recognize it. She hoards. Lucky for Fanny, she lives in a novel by Jane Austen, who rewards her abstention from desire by bestowing Edmund upon her in the end. But in real life, as opposed to novels, young people grow old, and habits of solitary life calcify. Hoarding is a poor strategy for love, or so runs the moral of Henry James’s Spoils of Poynton, in which Fleda Vetch restrains herself, much like Austen’s Fanny, from acting on a wish to seize the objects of her desire—a man and his lovely furniture—only to have them perish, never properly appreciated by anyone.
Did the rich cause the recent recession and ongoing world economic crisis by keeping too large a share of profits for themselves and then hoarding it? Why would they do such a thing? It could be because, as Keynes also suggests, we’re approaching an era of sufficient capital and the euthanasia of the rentier class. In other words, thanks to global competition, it may have become nearly impossible in recent years to find a return on investment that paid more than the costs of risk and inflation. In desperation, the rich threw their capital into wasteful, essentially usurious schemes. As Thomas Geoghegan explained in an April 2009 Harper’s article,
With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking. When banks get 25 percent to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing.
If the money thrown away by the rich had been given to the poor, the poor would have bought things with it that actual people actually needed and wanted. It could be argued that by buying securities of low-quality mortgages, or by raising the credit-card limits of people who wouldn’t be able to make good on their debts, the rich somehow were giving their money to the poor. But the rich didn’t give the money, is the rub; they bought with it the right either to long repayment of usurious debt or to repossession of overvalued property—in either case, to something not worth its stated value. Without anyone having wanted it to happen, the government became the default investor in the fall of 2008, as Keynes foresaw would happen when the rentiers panicked.
The moral of the story seems to be that when the rich have most of the money and hoard it, the symbolic value of money becomes somewhat unreal—the conversion of money, which is imaginary, into value, which is real, breaks down. I wonder [here the patient’s temperature was decidedly triple-digit—ed.], further, whether a continuing of the process of hoarding might precipitate a reversion to something like feudalism—to a system in which force is deployed to perpetuate a rigid system of economic obligations. New feudal lords would look to our modern eyes like mafiosi, not like dukes and duchesses, because viewed through a lens of bourgeois morality, aristocrats are mafiosi. They think a different ethic applies to them than to others in society, they are proud of their history of using force and terror to ensure profits, and they think of economic enterprise as largely a zero-sum game. If the super rich can’t get a return out of productive investment in a free market, why not buy force and political power so as to keep a class of people in long-term economic bondage? Occasionally, one could also make a small killing on the side by seizing the hoard of a rival. This sounds melodramatic, but feudalism remains a compelling way of life psychologically, as much popular entertainment attests, and the absurd flowering of corruption in, say, the New York State legislature hardly reassures one that civic virtue will be sufficient to protect America from it.
I am thinking out loud (or online, anyway) here, not necessarily claiming that I’ve figured anything out. I think what I find most intriguing is the idea in Keynes that there is a mismatch between the real-world meaning of economic transactions and the nominal values assigned to them by monetary accounting. It’s very strange to think that if you put too much money into a few people’s bank accounts, the economy might falter.
As a thought experiment, while I couldn’t sleep the night before last [i.e., fever—ed.], I imagined an island with a hundred inhabitants, who live off of fish and breadfruit. Every so often an islander finds the shell of a whelk on the beach, and in time it occurs to the islanders to use these shells as a currency for trading fish and breadfruit. Breadfruit must be eaten while they’re ripe, and fish before they spoil, but shells last indefinitely. The durability of the shells misrepresents the nature of fish and breadfruit, but it makes possible new kinds of bargains. Thanks to shell-based trade, someone who catches two fish today can sell his extra fish for a shell, and use the shell to buy someone else’s extra fish tomorrow without having to predict in advance who among his peers is going to have caught an extra fish tomorrow.
Even in this simple model, there’s an obvious gap between the accounting that the shells make possible and the real exchanges of value on the island. Consider what happens when an islander stumbles across a previously undiscovered whelk shell. He as an individual and the island economy as a whole are suddenly one shell up, but he hasn’t added a shell’s worth of value to the happiness or well-being of the island. An islander who dedicates himself to hunting for shells might end up doing a shell’s worth of scavenging work for every shell he finds, but he still won’t be contributing a shell’s worth of value to the community.
Consider what happens when islanders strike a more complex kind of deal with one another. Suppose several islanders pool their shells and give ten shells to one among them, who buys the labor of other islanders and fashions a better canoe. With this canoe, the borrower is able to fish further from land and is able to repay the lenders with a quantity of fish equal in value to eleven shells a month later. Maybe, to keep the accounting square, he even trades his catch for eleven shells, and is able to return eleven shells for the ten he was given. Unlike the beachcomber, the lenders and the borrower in this case have added a shell’s worth of value to the common weal. They haven’t added any new shells to the number of shells in circulation, but the borrowers have added a shell to their official wealth, and this is the sort of complex, win-win transaction that makes currency and capitalism so desirable.
But the islanders might strike still another kind of bargain. A group might pool their ten shells and give them to an individual who proceeds to trade them over the next ten days for ten fishes procured by others, which he then simply eats. This improvident borrower promises to find another shell for every month that passes with his debt unpaid, but he doesn’t have a plan for how to pay it. He pays in dribs and drabs, and his repayments are often offset by the monthly addition of a new shell to his debt; maybe he never pays the full debt off in his lifetime. In essence the lenders have used their shells to turn a citizen into something like a slave. If the borrower keeps paying long enough, or the borrower’s family decide to rescue him with a large lump-sum payment, the loan may not in the end be unprofitable to the lenders. Let’s suppose, for the sake of argument, that the borrower pays back enough, in the end, to reward the lenders at a rate of interest equivalent to that obtained when one gets eleven shells a month after loaning ten. The lenders have added a shell to their wealth, but nothing has been added to the community. No fish have been caught that would not have been caught without the transaction. On the contrary, an islander has been put into a state of indefinite servitude and unprofitable (to him) overwork, which may affect his well-being, and in all likelihood the shell-piles of his friends and family have been diminished.
Productive investment and usury share a certain family resemblance and may even look identical when considered in terms of shells won and lost, but are very different in their real effects. All I’m trying to show, by these cases of shells found on a beach, earned by enterprise, or squandered in bad loans, is that there is a mismatch between real wealth and its measurement in money. In the short term, and in day-to-day transactions, the mismatch is so minor and the consequences so trivial that it is ignored, and the price of a thing feels like its real value, to most of us most of the time. Imagine, though, that the islanders continue to live happily for several generations, that one family is particularly thrifty, and after a couple of hundred years, it so happens that ninety-nine islanders have one shell each, and one islander has a billion. Are his billion shells really worth a billion shells? Leave to one side one’s intuitive sense that such a state of affairs must have been led up to by a long history of criminal exploitation. My point is that all the rich man really has is a billion shells. Each shell represents a portion of a fresh fish, or rather, a portion of the labor power that goes into catching the fish, but the fish don’t exist yet, and it is far from clear that the rich man will be able to trade all his shells for what they represent. Because the rich man and his ancestors have been hoarding their wealth, a lot of fish that might have been caught over the years haven’t been; the opportunity to catch and eat them is gone forever. What the rich man has is a set of claims on the labor of his fellow citizens, but he and his fellow citizens only have a certain number of days left to live, and his fellow citizens are only capable of catching a certain number of fish and gathering a certain number of breadfruit in excess of what they need every day to survive, so they might not be able to honor his claims, even if they wanted to. The rich man will never be able to cash his chits in. The value of his shells has become unreal.
[I had got this far in my argument when a friend from Porlock showed up, and I'm afraid I lost my train of thought after that . . .]