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Larry Summers on the economic crisis « Previous | |Next »
March 17, 2009

Larry Summers, the Director of the White House National Economic Council, gave a speech to the Brookings Institute on the Obama Administration's approach to the historic economic crisis. Or more specifically their understanding of the roots of their current economic crisis, the rationale for the administration's recovery strategy, and connecting that recovery strategy to the central objective of sustained and healthy expansion.

An important paragraph in the speech is this one:

One of the most important lessons in any introductory economics course is that markets are self-stabilizing. When there is an excess supply of wheat, its price falls. Farmers grow less and others consume more. The market equilibrates. When the economy slows, interest rates fall. When interest rates fall, more people take advantage of credit, the economy speeds up, and the market equilibrates.This is much of what Adam Smith had in mind when he talked about the “invisible hand.” However, it was a central insight of Keynes’ General Theory that two or three times each century, the self-equilibrating properties of markets break down as stabilizing mechanisms are overwhelmed by vicious cycles. And the right economic metaphor becomes an avalanche rather than a thermostat. That is what we are experiencing right now.

So Summers' notices the mess that he helped create and his plan to clean up the wreckage connects the avalanche to the need for extraordinary public action to restore the capitalist market system to health.

The rest of Summers' speech was an effort to talk up both the economy and the administration's economic plans in the face of the avalanche. Somehow the response seems inadequate in relation to the economic metaphor, even if it is the boldest economic program in the US to promote recovery and expansion in two generations.

Not to worry. The Wall Street Journal's new theme is that things are looking up. Then again, in the late 1990s, Larry Summers, in his capacity as U.S. Treasury Secretary and Tim Geithner as the Under Secretary for International Affairs were literally touring around the world to “make the world safe for AIG”, as the slogan went. They stood in a tradition that asserts U.S. independence and implied its domestic superiority on global rulemaking.

They endeavoured to achieve the above by claiming that the U.S. financial system was superior to that of all other nations — in terms of such metrics as transparency and disclosure, general accounting standards, market depth and liquidity, as well as compensation practices. Secondly, they argued that other nations could only benefit from adapting U.S. practices in a dynamic fashion (and would fall onto the ash heap of history if they didn’t).Thirdly, they argued that emerging markets from China and the rest of developing Asia to Brazil and South Africa, should adopt market opening measures to provide access to U.S. insurance firms, investment banks and other entities keen to expand their presence in those markets.

Thsi is a tradition in which the IMF, which has a mandate to establish rules for the international financial system, has been used as an instrument of U.S. policy. The United States has used the IMF as a vehicle for delivering messages to other countries about their policy weaknesses.The United States behaves as if it alone knows best how to deal with every global economic challenge. The U.S. economic authorities have acted as if they believe they know everything about the regulation of markets continually evolving in ways that are, in fact, unknowable.

| Posted by Gary Sauer-Thompson at 8:09 AM | | Comments (6)


Can I be the first one to point out the Economics 101 truism that Summers is describing the economic behaviours of farmers who operate in a pure market where they are price takers and respond to changes in price. The agricultural industry of today is no longer the pure market of the 1940s. Farms are big business and some farmers like King Ranch are so large they influence government. Try Hussian in Northern Territory or big farmers in Brazil.
Corporations are now routinely larger than the governments they seek to influence by sending lobbyists to the halls of parliament.
Take the recent example of the attempted privatisation of NSW power where former Prime Minister Keating, Premier Carr, Iemma and union leaders were well paid for supporting the privatisation bid.
Clearly the large corporations have sought so much influence over governments that they have destabilised the economic system.

I pinched this from another place.
"An economist went back to his university to catch up with an old professor. While there, he saw a copy of an exam on his desk. Flipping through it, he commented that the questions were the same as when he took that exam.

The professor said "yes, that's true, but the answers are different."

"When there is an excess supply of wheat, its price falls."

Could it be that Summers still doesn't GET it? Could there be influential people out there still living in a dreamland?

This fiasco wasn't due to a hiccup in supply. It was not caused by a nasty turn in the blessed cycle. It happened because a bunch of self-absorbed clowns and con-men created a casino built on credit default swaps and other derivatives. Nothing as tangible or valuable like WHEAT. They created trillions of dollars out of thin air!!!

How the hell are you supposed to "stabilise" something that never really existed???

Someone please explain to this wanker that the “invisible hand” can't do anything with invisible money. And the taxpayers aren't too pleased about the “invisible hand” reaching into THEIR pockets.

But wait... it's possible Summers isn't as big a twit as he seems to be. Maybe he just thinks that we ARE.

OK OK I studied Economics then promptly earnt my living in another sphere and haven't read another Economics book since university

We can say that the economic models purporting to show only a minuscule risk of financial blow-out were flawed. They assumed the complexity could be captured by mathematics and science.

Standard neoclassical economics assumes that economic agents are perfectly rational; that is the basis of its predictive equilibrium-based models. Modern versions generally allow for certain types of information problem and market failure, and recognise that institutions and even history play a role; but they still assume that these factors do not call into question the underlying model of agents as rational utility maximisers within those constraints.

Economic agents are not just rational utility maximiser driven by self interest (greed), since they have passions, paranoias, dreams and delusions, and fears. Human beings do not always act rationally even when they think they are--Freud taught us that.

good points about economic power billie. I thought of Woolworths when I read your comments. They have the power to squeeze the small farmers. And Telstra. They use their market power given to them by the government to gouge customers.