Wednesday, August 25, 2010

michael perelman's analysis of the economic crisis

I watched the above video, which is part of a series he is making on the economic crisis. The video presentation is of poor quality but I quite like his calm or laconic style of delivery. Here is a summary of the main points:

The overall or inherent tendency of the economy is towards falling marginal costs and high fixed costs, in other words for the economy to enter a deflationary spiral. (aka the tendency for the rate of profit to fall, although Perelman does not use that phrase) Perelman outlines 6 reasons for this and also discusses the contradictions involved in some of the factors. Another central point he stresses is the importance of competition between companies in the trend towards lower prices. When faced with this reality companies or governments have these options:

1) Launch price wars without reinvestment, keep that going for as long as possible.

2) Global labour arbitrage, cutting wages and benefits, by off shoring

3) Compete by investing in new technology. This increases output (overproduction, although he does not use that word) and causes prices to fall. One of the problems here is that in a competitive environment business throws away technologies before they have paid for themselves, to replace them with even newer technologies.

4) Governments may intervene to blunt the effects of competition by fiscal and monetary policy. One negative of this is that when the economy is going well then companies will tend to not invest in new technology and the economy then stagnates on the supply side. Another tendency is for governments to indulge in military spending for mainly economic reasons, aka military Keynesianism

5) The strengthening of intellectual property law, creating cartels, is another response to increased competition. One effect of this is to severely limit the development of science and technology. There is a disencentive for others to follow in the footsteps of the original creators. The violation of intellectual property rights leads to high legal costs for those who try to break through this barrier and creates uncertainty.

6) Growth of the financial sector. Once again this is contradictory. It is true that many companies need credit to get off the floor. However, valuable resources are siphoned off into the financial system. For example, during the dot com era a good number of physicists and mathematicians went into the financial system, rather than doing anything directly productive. Finance itself becomes a disciplinary force on business. Business ends up following finance more than it follows markets. A business may cut back on R&D because that creates a cost with an uncertain payoff. If your profits are low then financial players may come and take over your company.

The Invisible Handcuffs is the name of Michael Perelman's forthcoming book. For his intellectual biography and descriptions of his other books see his intellectual biography page. On that page, summarising one of his books, he again stresses the problem associated with competition:
On a deeper level, this book calls the conception of competition into question. I show that intense competition is equivalent to a depression, yet most economists believe that competition is good and depressions are bad.

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