Meeting, The State We Need

The next meeting of Economists Against Austerity is pleased to have Michael Meacher MP to make a presentation on his book, The State We Need .

The economic alternative outlined here is posed as a necessary first step in the replacement of the failed neo-conservative market model. In effect it argues for a thorough-going reform of the capitalist system.

We are also pleased that discussant will be Geoff Tily, the author of Keynes Betrayed .

The State We Need
Michael Meacher MP
June 17,
Portcullis House, Thatcher Room 6.30-8.30pm

The prior EAA meeting agreed to affiliate to Euro-pen (the European network of progressive economists) and to try to emulate some of the success of our French colleagues in Les économistes atterrés by producing a short manifesto to address the economic crisis. We can begin this discussion at the next meeting.

NB: Security at Parliament has been very slow recently. Please aim to arrive at 6pm for 6.30pm

We look forward to seeing you at the next meeting.

Prof Victoria Chick, Convenor EAA
Michael Burke, Secretary


Prof. Mariana Mazzucato

The next meeting of Economists Against Austerity is pleased to have Prof. Mariana Mazzucato as the key speaker on what really happens in the process of innovation. Andrew Simms (Global Witness) will respond.

This promises to be a different take on the relationship between innovation and inequality: it’s not about skills but value extraction.

The talk will focus on the relationship between the State and the Market. I will argue that the State not only ‘fixes’ different problem/failures in the market (of which there are many) but also actively shapes and creates markets. It does so in the face of extreme risk and uncertainty. The different implications of this will be considered (theoretical, empirical, and ‘political’) of the blindness of economics (as a discipline) to understanding the State as market maker and lead risk-taker in capitalist economies— beyond the traditional ‘market failure’ framework.


The talk will build on her recent book The Entrepreneurial State: debunking private vs. public sector myths as well as recent work with Bill Lazonick on the relationship between innovation and inequality.

The Entrepreneurial State and the Risk-Reward Relationship

April 1,

Portcullis House, Thatcher Room 6.30-8.30pm


 The EAA network is growing in size but we always welcome new members.  We aim to build on the success of recent meetings with Rethinking Economics and the Women’s Budget Group with this and future meetings. Please remember to tell colleagues who may be interested, and feel free to forward this invitation to them.

NB: Security at Parliament has been very slow recently. Please aim to arrive at 6pm for 6.30pm. Meetings are open to the public, no invitation required.

Diary dates

April 29 Ozlam Onaran and Engelbert Stockhammer will speak on wage-led growth.

May 20 Dany Lang of Les Économistes Atterrés will speak on the European crisis and the solutions to it.

We look forward to seeing you at our meetings.

Prof Victoria Chick, Convenor EAA

Michael Burke, Secretary

Finance and Criminality

The following is a chapter-length version of a presentation given by Professor John Weeks to a meeting of EAA.

For a full account of the arguments (and access to illustrative graphics) interested readers are encouraged to consult the book, How Mainstream Economics Serves the Rich, Obscures reality and Distorts Policy (Anthem Press).

Chapter 3: Finance and Criminality
And Jesus went into the temple of God, and cast out all of them who sold and bought in the temple, and overthrew the tables of the moneychangers… [The New Testament , Matthew 21, 12-13]
Why a Financial Sector?
When I grew up in East and Central Texas, people disparaged another person’s
judgment with the comment, “if you believe that, I like the chance to sell you a used car”.
In that spirit, I might that ask if anyone remains in the known world who believes in the
efficiency of financial markets.  If so, he or she should not enter a used car lot
In the 1930s the Great Depression brought banking collapse to North America and
Europe.  In 1929 on the eve of collapse, over 26,000 banks operated in the United States.
When the newly elected president Franklin D Roosevelt suspended banking operations on
March 5, 1933, the total was less than 15,000, with five thousand bankruptcies (quite
literally) in 1932 alone.  The suspension brought a temporary end to a nation-wide run on
banks by depositors, quickly followed on March 9 by the US Congress passing the
Emergency Banking Relief Act.
Three months after the emergency law, Congress passed the Banking Act,
commonly know as the Glass-Steagall Act of 1933 (not to be confused with the relatively
trivial Glass-Steagall Act of 1932).  It is the mildest of exaggerations to say that we owe
the Glass-Steagall Act the distinction of preventing another US banking collapse for fifty
years.  For most Americans, the importance of the Act lay in the creation of the Federal
Deposit Insurance Corporation, which protected households against loss of deposits when
a bank collapsed.
The protection of depositors was not the part of Glass-Steagall that prevented
another systematic banking crisis for half a century.  That great achievement came from
the Act’s strict and direct regulation of bank behavior.  Perhaps most important, the Act
prohibited banks from engaging in a range of speculative activities, including playing the
stock market.  Making banking a safe and relatively dull function represented the great
achievement of the Act.  Today with US Representative and Senators from the Old South
almost all reactionaries, it come as a surprise to many that Senator Carter Glass hailed
from Virginia and Representative Henry Steagall from Alabama.
Financial Fiascos in Our Times goes about here
The first important step towards reversing Glass-Steagall came with the
Depository Institutions Deregulation and Monetary Control Act of 1980, which, far from
controlling anything, ended regulation of interest rates on deposits by the Federal Reserve
System.  This encouragement set the US financial system off and running to its first crisis
in over fifty years, the savings and loan debacle.
In a textbook demonstration of the Law of Unintended Consequences, the end of
the Federal Reserve System’s (aka, the Fed’s) regulation of interest rates resulted directly
in the collapse of almost 750 of the 3,234 savings and loan associations in the United
States.  This collapse cost to the public budget about $90 billion, or about $150 billion at
2012 prices (getting on toward two percent of national income).  Modest this would seem
cost of compared to the financial devastation of the late 2000s.
As a general rule, financial crises never lack a silver lining for the bankers
themselves.  The Savings and Loan disaster had the beneficial effect of reducing
competition, which set the large US banks on a path to a market dominance beyond their
hopes as long as the Glass-Steagall Act operated fully.
Even if we restrict ourselves to cases in United States, the list of financial fiascos
remains impressive (see box, Financial Fiascos in Our Times).  What makes financial
markets so unstable?  If we clear away the propaganda fog from the financiers
themselves, propaganda enthusiastically endorsed by the econfakers, the answer is quite
simple.  It has two parts, the nature of finance and the nature of speculation.  To reveal
the nature of finance we need to begin, as they say, at the beginning.  Why is there
finance, and why are there banks?
The media and the econfakers would have us believe that the gambling
speculators that chase after a fast buck are “investors”.  This implies the absurd, that
buying a Greek bond to sell it within the hour is a “investment”.  Not withstanding this
loose usage, sensible people understand the word “investment” to mean the creation of
new productive capacity, which is a major determinant of the sustainable growth
potential of an economy.  In a market economy a very specific difficulty faces a company
that wants to invest in expanding its current production facilities or creating new ones.
The funds for the investment come from (or will come from) the profit generated
by the sale of the products that the investment will create.  For the economy as a whole,
new investment cannot exceed business profits over any prolonged period, and typically
falls considerably below this.  The profit constraint is obvious if we think of the economy
as one big company.  After it pays its bills to suppliers (itself in this case) and its
employees, what remains is profit.  If the company distributes part of the profit to share
holders, potential new investment will be considerably less than profit.  After World War
II in both the United States and Western Europe governments employed tax measures to
discourage payments to stockholders to increase the incentive for companies to  invest.
In the 1980s this began to change.  In the United States dividends paid to stockholders
accounted for 39 percent of corporate income in the 1960s, and almost 65 percent in the
2000s (find these numbers in the Economic Report of the President 2012 ).
Real economies consist of many companies, some that expand, others that
contract, a few that flat-line, and some newly created.  New enterprises need to borrow,
and the same holds for existing ones.  If an existing company wants to invest beyond its
current profits it must either accumulate its profits from previous investments, or raise
funds from outside the company.  Companies do this either by borrowing or creating
ownership shares which they sell to the public (mostly to the rich).  The same applies to
households when they take a mortgage to buy a house.  Both borrowing and selling newly
created stock bring about the redistribution of the economy’s total profit from declining
and flat-lining companies to expanding ones.  This redistribution makes borrowing and
lending essential for the dynamics of a market economy.
Borrowing to invest creates the need for institutions that specialize in this
function.  This first occurred on a substantial scale in Western Europe and the United
States in the mid-nineteenth century.  Institutions superficially similar to investment
banks existed for hundreds of years, lending for trade rather than funding productive
facilities.  Credit financed investment frees company from the limits of its profits, and
facilitates the rise of the strong and decline of the weak.
Credit also produces its own problem, institutions (banks) whose profitability
requires lending on uncertain outcomes.  Bank lending is inherently uncertain.  Banks
have limited control over the circumstances that the business decisions of the borrower,
and almost no control over the environment in which the borrower operates.  Extreme
circumstances, such as the Financial Crisis of 2008, may make repayment impossible no
matter how wisely or foolishly the borrower may behave.
Uncertainty is inherent in the financing function in a market economy, and
frequently misunderstood or misrepresented.  Robust growth dramatically reduces market
uncertainty.  At the operational level uncertainly remains about the distribution of the
aggregate growth among companies seeking to maintain or increase market shares.  But
when “all boats rise” as the cliché says, winners out-number losers in the commercial
struggle.  When a recession strikes, the uncertainty turns systemic with a vengeance and
the losers swamp the winners.  More than anything else, the state of the economy
determines risk and uncertainty.   What appears as bold entrepreneurship, grabbing an
opportunity and becoming rich from it, is mostly the luck of the draw.  It is one thing to
“float” the shares of a new company in a boom, and quite another to do so during
recession (e.g., Facebook in the summer of 2012).
Many people, not least financiers themselves, consider lending by banks a noble
activity essential to the health, wealth and happiness of economies.  A concrete example
dismisses this self-praise.  Consider the case of a company that develops a new product,
such as an easily portable, touch-screen computer device.  Partly with its profits from
other products and partly with a bank loan, the company brings together the plant and
equipment to turn the design into a product ready for the buyer.
Through its own retail stores, via the internet or in the retail outlets of other
companies, it markets the new product.  The product that the buyer receives by mail or
collects from a store represents the work of many people, those who designed it, those
who directly produced it, those who supervised the design and production, those who
transported it, and the on-line or in-store people who sold it.
What did the bank do?  The bank did not design, produce, transport or sell.  The
bank certainly did not create any of the resources by which the product arrived in the lap
of the buyer.  The role of the bank was important but modest.  It helped bring together the
new plant, equipment and employees by providing credit.  The bank provided credit
through a bureaucratic process.  It first created a checking account for the company, and
then assigned a specific amount that the company could withdraw.  The company used
these withdrawals to pay suppliers, employees, and other costs associated with the
prospective investment.  The bank did not lend the company “its own” money.  It created
credit on the basis of country-specific legal rules governing the relationship between its
assets and its liabilities.
In practice banks lend far more than what they receive from depositors.  In all
market societies, governments restrict banks to lend a legally specified multiple of the
deposits they hold.  In the United States the ratio in the 2010s was ten to one for all but
the smallest lending institutions.  Banks extend borrowers credit that they, the banks,
create literally out of thin air.  This credit allows the borrower to spend more that her or
his current income flow.  While this is a very useful function, it is a quite minor one that
could be carried out through many types of institutions, which need not and have not
always been driven by the profit motive.
Making profit on money one creates out of nothing would not seem an activity
worthy of great status.  Quite consciously I do not write, “earning” profit.  If the word
“earning” has a useful meaning, it refers to a productive activity, which finance,
necessary as it might be, is not.  The garbage or rubbish collector that works in the hot
sun or bitter cold all day earns her/his pay.  The financier who shifts entries in an
electronic data base reaps her/his gains.
A second aspect of finance, speculation, involves banks, or “finance” and
“financiers”, creating their own uncertainties, independent of the productive investment
process.  The lure of profits induces financiers to create this uncertainty or risk, which
garner gains of a very specific and peculiar type, speculative profit.  On inspection the
difference between speculative financial profit and the profit generated out of sales
among businesses and between businesses and households proves simple and straight-
A company produces a commodity or service and sells it.  From the sales it pays
its workers, supplies and other claimants, and what remains is profit.  The difference in
prices at the wholesale and retail level results from services that must be compensated,
transport, storage and marketing.  There are several theories to explain profit and all of
them agree that its source is production.  Therefore, it exists before the product is sold,
and realized in the sale.  Disagreement arises over which elements of production generate
the profit and the process by which distribution occurs throughout the economy.
While a company must produce something to generate profit, speculators can lose
or gain through buying and selling without producing anything.  They achieve this profit
grabbing by betting on changes in prices.  Most people at some time or other speculate on
prices.  For example, in most parts of the United States in 2008 the canny house buyer
would wait, anticipating a decline in property prices.  However, this would probably
bring no profit, because for most buyers purchase the house to live in it.  Grabbing profit
through exchanges requires that you buy for the purpose of selling.  The clumsy and old-
fashion way to do this involved buying the thing whose sale will bring the speculative
gain.  At an auction the primitive speculator buys a sack of potatoes, carries it off, brings
it back to the auction some time later in hopes of selling it at a higher price.
To avoid the bother of transporting, storing and transporting again, the speculator
takes an “option” on potatoes, a piece of paper (very twentieth century) or an electronic
document (twenty-first century) guaranteeing the right to purchase a specified amount of
potatoes at a specified price on a future specified date.  A concrete example helps to
understand the process.  I purchase a contact that requires a potato farmer to sell me one
ton of potatoes in Des Moines, Iowa, on 31 January 2012 for $275.  The farmer is
“hedging” against potato prices falling below that price, while I am betting that prices
with go above $275.  Comes 31 January 2012.  If the price of potatoes in Des Moines has
risen to $350 (the “spot price”), I am in the chips (though not potato chips, because I plan
to sell them on).  People who actually want potatoes for some useful purpose would be
willing to pay me upwards toward $350 for my contact.  Without approaching a spud
within intent to stew, fry or boil, I make a profit on potatoes.  If, on the contrary, the end
of January price has dropped to $125, I find myself stuck with a lot of very expensive
potatoes or a contact worth less than half that I paid for it.
This speculation using “derivatives” (something linked to something else) occurs
without personal contact with the object of the speculation.  The imagination of
econfakers and financial charlatans provides us with various justifications of speculation,
all of which allege that such market exchanges protect against risk and uncertainty.  They
peddle the improbable argument that by purchasing “options” to buy and sell at various
prices a person or company can “hedge” (protect) against unpleasant market surprises.  If
anyone believed such nonsense before mid-2008 (and many did), I hope they learned
their lesson.
When the price of potatoes in Des Moines goes to $350, from where does my
profit come?  The answer is quite clear:  I gain what the farmer would have received had
there been no derivative contract.  It is a straight redistribution of profit between the
producer and the speculator.  Less clear is the source of my loss when the spot price falls
to $125.  I suffer a money loss ($150 maximum), because I have engaged in no useful
activity (production, transport or commerce).  Having produced nothing, I cannot be the
source of the loss.
Income from some useful activity in society must cover my loss.  The gain-and-
lose process is not symmetrical.  The speculator’s gain has comes from a specific useful
activity (the production of potatoes in my example).  The loss is borne by useful activity
in general, with the rest of you left to carry the can.
If this seems fanciful, that speculators can grab profits from the useful activities of
society, and those useful activities must cover their losses, reflect on the Great Financial
Fiasco of 2008.  In March 2008 employment in the United States was 146 million men
and women.  When time came to celebrate the Christmas holidays in 2009, total
employment was 138 million, a fall of over eight million men and women (5.6 percent
lower).  As everyone knows, the 2009 Christmas present of eight million more
unemployed resulted from the collapse of the financial sector.  This, the sector that
boasted of bringing us The New Economy that hedged against uncertainty and generated
prosperity-without-end, had collapsed under the moribund and unproductive weight of its
endemic ponzi scheme of speculative mania.  The result was a massive transfer of income
and wealth from useful and productive Americans to useless and feckless finance. Read
more on these losses in the next section.
Financial speculation involves no productive activity on the part of the speculator,
and economically and socially unproductive in another, more basic sense.  Almost all of
the risk and uncertainty that feeds profit to speculators need not exist.  It is not inherent in
a market economy.  Purposeful public regulation of markets comes close to eliminating
all the important opportunities for unproductive and destabilizing speculation.
Perhaps the most important of these opportunities arise in currency markets.  Each
day trillions of dollars, pounds, euros, etc . chase each other in a frantic race for the
impossible, creating profit out of nothing.  The Bank for International Settlements, a
global institution serving national central banks (located in Basel, Switzerland, about
eighty kilometers west of the Gnomes of Zurich) estimated that the average daily
turnover in currency markets in 2010 was about four trillion US dollars
( ).  On generous estimation perhaps ten percent
of this turnover involved exchanges related to a useful activity, such as a company
switching currencies to pay suppliers.  From the start of speculative trading at a minute
past midnight on a Monday (these markets dysfunction 24 hours a day), the trading
turnover would have matched total annual commercial sales in the United States or the
European Union sometime before breakfast on the Thursday of the same week.
A great myth about currency speculation, as fanciful as allegations of it positive
contribution to global finance, presents it as a competitive market free from manipulation,
conspiracy and collusion, something close the fakeconomics “prefect competition”.  From
this mythologizing comes the fiction that currency changes result from impersonal
market forces.  This view qualifies as pure propaganda.  While there are many currency
traders, a few large global banks carry out the vast majority of transactions.  Both in the
United States and in Europe the limited competition, indeed, collusion, in currency
markets has prompted calls for regulation.
In 2005, well before the meltdown of global financial markets, a UK regulatory
agency, the Financial Services Authority, identified conflicts of interest within and
between centers of currency speculation ( The Scotsman , 17 March 2005).  Independently
of that, in the mid-2000s, Hugh Thomas, a banking expert, did the numbers on banking
concentration and reached the following conclusion:
[The largest] 100 banks include over 67 percent of the world’s banking assets.
Within the top 100 banks, there is also substantial concentration, with the top 20
banks accounting for 50 percent of profit and 45 percent of the aggregate assets
and capital.  Bank concentration is likely to increase in future as national
boundaries to the flow of capital decrease and nationally fragmented institutions,
markets and instruments succumb to globalization.
Global finance is not an exciting field in which bold young traders thrill to the
game off survival-of-the fittest-competition.  Assets and power are highly concentrated,
whose purpose is unproductive speculation cynically managed through fraudulent
collusion.  In 2012 the grossness of this cynicism became obvious by the revelation that
the masters of finance, with Barclays Bank in the lead, had for years conspired to
manipulate global interest rates.  One expert called it the largest commercial fraud ever,
“This dwarfs by orders of magnitude any financial scam in the history of markets”
(, a price fix
deal that indirectly affected (and affects) every one who borrowed from credit
institutions, for  mortgages, automobiles, you name it.
Adam Smith famously wrote, “People of the same trade seldom meet together,
even for merriment and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices” (An Inquiry into the Nature and Causes of
the Wealth of Nations , Book 1, Chapter 10, paragraph 82).  For no trade is that truer than
[I make the argument of this section on video at, search John Weeks, “It’s About Wall St. but it’s Not All About Speculation”, at
Financial Fiascos in Our Times
Senator Glass and Representative Steagall, 1933. Where are you when we need you?
In the early 1980s several major developing countries staggered to the brink of default on loans taken from the major US banks, defaults that would have bankrupted the US financial sector.  The origins of this, the Sovereign Debt Crisis, came well before the dismantling of the Glass-Steagall Act.  The Debt Crisis of the 1980s demonstrated the clear need for strict regulation.  The unsustainable lending by commercial banks to governments resulted because this activity was not regulated by Glass-Steagall.   Free from the prying eyes of the regulators, the big banks, Wells-Fargo, Citicorp (as it is known now), Bank of American and others could make loans to foreign governments as recklessly as they wished and did.  Had the US government not saved them from folly through several interventions, they would have gone the way of dodos (though less mourned).  The Debt Crisis had two clear lessons: 1) if the government does not regulate it, the banks will make a mess of it;  and 2) the clearing and cleaning of the mess must be done by the public sector.  Neither lesson would be remembered in the years to come.
1987 Black Monday, the largest one day decline in US stock market history, due in great part to the Securities & Exchange Commission’s non-regulation of new stock trading practices (e.g. computer-based trading). 1989-1991 The Savings and Loan Crisis, costing  what would prove to be a rather modest $90 billion. 2001-2002 The “” speculation bubble bursts, wiping as much as $5 trillion off the value of the funny-money “e-stocks”, driven by reduced public regulation of financial institutions. 2007

The Mother of all financial crises swept the globe and we are still counting the cost, which unlike the previous, includes mass unemployment, which inspired a documentary narrated by Matt Damon, Inside Job (2011).
To Samuel Clemens (aka Mark Twain) is attributed the quip, “history never repeats itself, but it can rhyme”.  To hear history rhyme, listen to FDR’s 1933 Fireside Chat, as he explains the to Americans the need for the Emergency Banking Act, at,_ 1933)_Franklin_Delano_Roosevelt.ogg
Cost of the Financial Crisis
But the banks are made of marble, with a guard at every door, And the vaults are stuffed with silver that we have toiled for. [written by Pete Seeger; hear him sing it and see the video, at
Hurricane Irene will most likely prove to be one of the 10 costliest catastrophes in the nation’s history,” with damage estimated at US$ 7-10 billion.  [“Hurricane Irene Seen as Ranking among Top Ten,” The New York Times , 31 August 2011, 1]

How much did the financial crisis of 2007-2008 cost Americans (not to mention
the rest of the world)?  I can confidently assert that no hurricane, earthquake or other act
of nature has ever or will ever approach the potential of financial markets to generate
human disasters.  To match the devastation, suffering and dead-weight loss of the Great
Depression of the 1930s and the recent Financial Crisis, we move into the league of wars,
famines and pogroms.
Lest you think that I exaggerate, the statistics speak clearly.  From the beginning
of 2000 through the middle of 2008, US total output (“gross national product”) grew at an
annual rate of 2.5 percent.  Three years latter in 2011 total output stagnated slightly
below the peak of mid-2008.  Had the US economy “enjoyed” no growth over those three
years, and output held at the level of mid-2008, the income gain would have been almost
$5 trillion compared to the finance-driven debacle, or one-third of annual production.
Losing one-third of annual production to the follies of finance is appalling.
Worse, it is a gross underestimate, because during no three year period after the end of
World War II did the US economy stagnate at zero growth, even less did it decline.  Five
trillion dollars may far exceed the estimated cost of any earthquake or hurricane in the
history of humankind, but it is a considerable underestimate of what finance-out-of-
control can do and has done, before our eyes.
What if US output had continued to grow at 2.5 percent, as it did in the 2000s
before the catastrophe?  Despite all the prattle about a “New Economy”, this rate was not
unusually high, well below the average of 1946-1999, which was 3.6 percent.  What if
finance had not torpedoed the rather modest rate of growth of 2.5%? The answer is
shown in the chart.  It measures GDP at the price level of the first six months of 2011,
eliminating increases do to inflation.  Had the “natural” working of financial markets not
reeked havoc and the economy continued to grow at 2.5 percent, the annual GDP for
2011 would be almost twenty trillion dollars, rather than the stagnant level of 2008 of less
than fifteen.  The accumulated loss for 2008-2011, dead-weight because it can never be
recovered, is $8.2 trillion (striped region in the chart), well over half of GDP in 2008.
Actual and Trend US GDP, 2000-2011,  trillions of dollars adjusted to prices of 2011
Annual trend = 2.5%, based on 2000.1-2008.2
DEAD-WEIGHT LOSS $8.2 trillion
Calculated using statistics from the Economic Report of the President 2011 .
What about employment? The chart offers a simple way to estimate the jobs
effect of high finance.  The trend rate of GDP growth from 2000 until the financial
catastrophe was 2.5 percent, and this was associated with an unemployment rate of five
percent.  It is highly likely that if the trend had continued, the same unemployment level
would have also continued.  It is simple arithmetic to subtract the trend-implied
unemployment from actual unemployment, and obtain the dead-weight employment loss.
During 2009-2011, total unemployment averaged fifteen million men and women
per year, and the rate never fell below nine percent of the labor force.  Almost exactly
half of this unemployment, an annual average of 6.7 million, was above the trend.  Half
of the unemployment resulted directly from the financial crisis.  Imagine, if possible, a
natural disaster that could so devastate the society that it throws almost seven million
people out of work for three years, a loss of 21 million working years.  It would be the
Mother of All Hurricanes.  Its name is  “Market Forces”.
There are big difference between hurricanes and financial market catastrophes.
First, the financial market catastrophes are much more devastating.  Second, we can
prepare for hurricanes but we cannot prevent them.  In contrast, market catastrophes can
be prevented.  They need never occur except as minor annoyances.  Over six decades,
1950 through 2008, annual unemployment rose above nine percent in only two years,
1982 and 1983.  At the end of 2011, the count went from two to six.  The ways to prevent
market catastrophes are known, tight regulation of financial markets and “countercyclical
fiscal policy” (see Chapters 7 and 9).
Unemployment is the scandal of market economies. Unemployment wastes
human skills and implies goods and services never produced.  Idle, rusting factories are
an eyesore.  Idle people in despair due to system failure to provide livelihoods qualifies
as a crime.  The high unemployment in many developed countries in the twenty-first
century demonstrated a failure of institutions and democratic mechanisms to ensure all
people who wish to work can work.  In his once-famous Four Freedoms speech to the US
Congress in January, 1941, Franklin D. Roosevelt explained this with eloquence,
The basic things expected by our people of their political and economic
systems are simple.  They are: jobs for those who can work; equality of
opportunity for youth and for others; security for those who need it; the
ending of special privilege for the few; the preservation of civil liberties for
all; the enjoyment of the fruits of scientific progress in a wider and constantly
rising standard of living.
If they wish to serve their constituents, “Jobs for those who can work” would be a
minimalist start for the politicians of the 21st century throughout the developed world.  I
explain concretely how to meet this commitment in the final chapter.
To end on the follies of finance, why are financial market inherently unstable and
suitable candidates for strict regulation?  Because financial activities are in themselves
potentially useful but unproductive, and if left to themselves financiers abandon the
useful to run rampant with the unproductive.
The Next Financial Fiasco: Plan on it
The philosopher George Santayana wrote, “those who cannot remember the past
are condemned to repeat it”, which for bankers and speculators can be re-phrased, “those
who profit from the past are delighted to repeat it”.  In 2007, profits of all US
corporations stood well under 13 percent of national income, falling to ten percent in the
depth of the recession a year later.  By the end of 2011 the corporate barons were doing
quite handsomely again, with profits rising above 14 percent of national income.  Those
businesses foolish enough to try to make money by producing and transporting things
saw an increase of a paltry 12 percent from 2007 to 2011, while the lords of finance
weighted in with an increase in their hard(ly)-earned speculative rewards of over thirty
percent (read it and weep or cheer at
It worked once.  After coming out of a disastrous collapse and public bailout
smelling like a rose, the bankers say, why not try it again?  The opportunity for finance to
give another go at profiting from everyone else’s economic suffering would be provided
with feckless abandon by the overlords of the Euro Zone (a sorry story told in Chapter 9).
Financial Markets: Folks like you and me
The thief or swindler who has gained great wealth by his delinquency has a better chance than the small thief of escaping the rigorous penalty of the law. [Thorstein Veblen, Theory of the Leisure Class , 1899, p. 117]
Well, as through the world I’ve rambled, I’ve seen lots of funny men, Some rob you with a six-gun, some with a fountain pen. As through this world you ramble, as through this world you roam You’ll never see an outlaw drive a family from its home [Pretty Boy Floyd the Outlaw, by Woody Gutherie, c. 1935]
With so much power bestowed on financial markets by the econfakers, the media,
and the titans of industry and finance (“malefactors of enormous wealth” Teddy
Roosevelt called them), it comes as no surprise that their worshippers should personify
them.  This personification serves as an essential part of the defense of a market economy
free from democratic oversight.  We find it applied across all types of markets, quite
memorably by US Presidential candidate Mitt Romney, who assured us that
“corporations are people” ( ).  We find
the most devoted application of this anthropomorphic principle in finance, “financial
markets” presented as independent, collective actors in society.
Treating financial markets as a person instead of real people as market
participants helps to create the mythology of competition.  Personification is nothing
more that a restatement of the absurdity that people individually have no market power.
It is integral to the justification of a socially dysfunctional financial system, national and
global.  Very much in the spirit of the global financial crisis of 2007-2008, the appalling
personification functioned as a key element in the misrepresentation of the disastrous
speculation in Euro bond markets during 2009-2011.
In a so-called analysis article, Timothy Heritage, a Reuters journalist, wrote that
“the European Union is struggling to convince financial markets it has got what it takes to
save the currency” (28 May 2010).  Presenting a speculative run on bonds and currencies
as a test of wills between government and markets ideologically locates the plight of the
Euro as human fecklessness versus elemental forces, with the inevitable winner obvious
(recall that “you can’t buck market forces”).
Personification to the point of heart-rending comes in an article by a certain Toby
Heaps, who described himself as president of Corporate Knights, the Company for Clean
Nothing makes presidents or CEOs quake in their boots quite like the wrath of
bond markets. That’s because bond markets have the power to cut off oxygen.
When bond markets are unhappy, they hit where it hurts in the form of higher
interest payments on debt.
[ ]
“Unhappy” bond markets would seem but a step away from assigning to the New
Securities Exchange Shylock’s famous challenge ( Merchant of Venice , Act III, Scene 1),
“If you prick us, do we not bleed?  If you tickle us, do we not laugh? If you poison us, do
we not die? And if you wrong us, shall we not revenge?”  Only the last would seem
relevant, indeed, with a vengeance.
Markets do not bleed, laugh or die, and their personification diverts attention
away from the real world of speculators.  It transubstantiates financial fraud into a force
of nature.  It facilitates the mythology that the dysfunctional financial system arises not
from the work of men and women (mostly the former) within institutions with anti-social
rules and norms.  On the contrary, personification of markets would have us believe that
speculation comes from the inexorable operation of the laws of nature that no
government can change.  This naturalization of speculative behavior manifests itself in
assertions that “bond markets want” the US/UK/Greek deficit reduced, or outrageously
high executive result from the impersonal operation of a mythical international market for
If fiscal deficits result in increases in the cost of public borrowing, this reflects the
actions of specific financial speculators whose behavior can be controlled through
regulatory measures.  Astronomical executive salaries have a more transparent cause and
cure.  They result from the power of top company officials combined with the
institutionalized weakness of stockholders.  Something as seemingly simple as changing
laws on corporate governance would reduce those salaries.
“Financial markets” are not in themselves the problem in any country.  The weak
and inappropriate rules and constraints on markets cause the problem.  This weakness
allows speculators, fraudsters and all-purpose crooks to behave recklessly with the
confidence of they will not be held accountable (caught, tried and locked up).  To take
but one appalling example, in response to all the fraud perpetuated by financial
speculators in the United States leading up to the global crisis of 2008, the US
government prosecuted not one fraudster from a large bank.   Even run-of-the-mill
financial fraud seemed to enjoy a post-crisis holiday from justice, with total federal
prosecutions in 2011 at a twenty year low (Alexander Eichner in The Huffington Post , 15
November 2011).
Rules are so weak because those that perpetrate the fraud have in many cases
themselves been writing the “reform” legislation, not only in finance, but in other fields.
The philosopher David Hume in the eighteenth marveled at “the ease with which the
many are governed by the few”.  Similarly, I marvel at the ease by which a system of
financial fraud created by a few goes largely unchallenged by the many.  In the next
chapter I go after the Big Lie of fakeconomics and free market ideologues, in hope of
provoking such a challenge.
Chapter 3 Further Reading: John Kenneth Galbraith, The Great Crash 1929: The classic account of financial disaster (New York: Penguin 1954) James K. Galbraith, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (New York:  Free Press, 2008) Ha Joon Chang, 23 Things They Don’t Tell You About Capitalism (London: Penguin, 2010) William Lazonick, Business Organization and the Myth of Market Economy ,(Cambridge: Cambridge University Press, 1991) (for the technical stuff simply presented:) Jan Toporowski, Why the World Economy Needs a Financial Crash and Other Critical Essays on Finance and Financial Economics (London: Anthem 2010)


The latest meeting of EconomistsAgainstAusterity will take place at 7pm to 9pm on Tuesday 19 November, at the House of Commons, Portcullis House, The Wilson Room.

The meeting will discuss the growth of creative and cultural industries and whether the government should be investing in them

The discussion will be led by Alan Freeman, London Metropolitan University Business School, Visiting Professor

To attend this or future meetings, EAA can be contacted at:




The second meeting of EconomistsAgainstAusterity will take place at 6.30pm on Tuesday 18 June, at the House of Commons, Portcullis House, The Grimond Room.

The second meeting will discuss the topical issue of ‘what to do with the banks’, after the enormous sums spent baling them out, and their continued inability or unwillingness to contribute to a meaningful economic recovery.

Professors Victoria Chick and John weeks will lead the discussion and it will be chaired by Andrew Simms.

To attend this or future meetings, EAA can be contacted at:

posted: 3 June 2013

The inaugural meeting of EconomistsAgainstAusterity will take place at 6.30pm on Wednesday 15 May, at the House of Commons Committee Room 6.

The first meeting will discuss the topical issue of ‘welfare’, with social protection entitlements coming under attack as part of the austerity offensive.

Fran Bennett and Howard Reed will lead the dicussion, including how social protection is comprised, its relationship to the economy the alternatives to austerity.

To attend this or future meetings, EAA can be contacted at: