The nature and cause of economic development

The History of “Underdevelopment”

Underdevelopment Theories Have Generated Disastrous Policies

By Stephen Davies

Perhaps the most important feature of the modern world is its sustained, intensive economic growth. This produces most of the other distinctive features of modernity. Although there were earlier episodes of such economic efflorescence (to use Jack Goldstone’s term), it was only with the “industrial revolution” of late eighteenth-century Britain that it became a permanent and prominent feature of the world economy. Following the advent of this transformative process, questions soon arose elsewhere. The first was that of how to achieve the same kind of growth and dynamism. Soon this led to further questions: why other parts of the world did not show these qualities and why their attempts to do so ended in failure.

The debate engendered by these questions and the answers given has been one of the most important of the last 200 years. Known as the “development debate,” it consists of such topics as the nature and causes of economic development and the reasons it occurs at some times and places but not others. This is not simply an academic debate. It has obvious implications for public policy and, through its impact on policy, for the lives and circumstances of ordinary people.

Since the early 1950s much of this debate has been dominated by “dependency theory” and its offshoot “world system theory.” Developed by several people, this was a theory that explained the economic success or failure of different parts of the world by the nature and structure of the economic relations among them. The argument is that the relations of trade between different parts of the world are inherently exploitative and inevitably create inequality and lack of development in certain places. Certain parts of the world (the “core”) dominate high technology and high profit activity such as manufacturing. The rest (the “periphery”) is left to produce raw materials and primary products.

Central Bankers of the World Unite

Gadhafi’s Gold-money Plan Would Have Devastated Dollar

BY ALEX NEWMAN      

It remains unclear exactly why or how the Gadhafi regime went from “a model” and an “important ally” to the next target for regime change in a period of just a few years. But after claims of “genocide” as the justification for NATO intervention were disputed by experts, several other theories have been floated.

Oil, of course, has been mentioned frequently — Libya is Africa‘s largest oil producer. But one possible reason in particular for Gadhafi’s fall from grace has gained significant traction among analysts and segments of the non-Western media: central banking and the global monetary system.

According to more than a few observers, Gadhafi’s plan to quit selling Libyan oil in U.S. dollars — demanding payment instead in gold-backed “dinars” (a single African currency made from gold) — was the real cause. The regime, sitting on massive amounts of gold, estimated at close to 150 tons, was also pushing other African and Middle Eastern governments to follow suit.

War is the Health of the State

Iran: Oh, No, Not Again

By Chris Martenson

Randolph Bourne

In each of the years 2008, 2009 and 2010, significant worries emerged that Western nations might attack Iran. Here in 2012, similar concerns are once again at the surface.

Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world’s daily seaborne oil passes, oil prices will spike, the world’s teetering economy will slump and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third-largest exporter of oil in the world after Saudi Arabia and Russia.

Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran would deliver.

The True Believer

Ron Paul: “we can take this party back.”

Patrick J. Buchanan

Last May, Ron Paul filed his financial disclosure form, and The Wall Street Journal enlisted financial analyst William Bernstein to scrutinize his investments.

“Paul’s portfolio isn’t merely different,” said an astonished Journal, “it’s shockingly different.”

Twenty-one percent of his $2.4 to $5.5 million was in real estate, 14 percent in cash. He owns no bonds. Only 0.1 percent is invested in stocks, and Paul bought these “short,” betting the price will plunge. Every other nickel is sunk into gold and silver mining companies.

Bernstein “had never seen such an extreme bet on economic catastrophe,” said the Journal.

“This portfolio,” said Bernstein, “is a half step away from a cellar-full of canned goods and 9-millimeter rounds.”

“You can say this for Ron Paul,” conceded the Journal. “In investing as in politics, (Paul) has the courage of his convictions.”

Indeed, he does. Paul’s investments mirror his belief that the empire of debt is coming down and Western governments will never repay — in dollars of the same value — what they have borrowed.

And here we come to the reason Paul ran a strong third in Iowa and a clear second in New Hampshire. He is a conviction politician and, like Barry Goldwater and George McGovern, the candidate of a cause.

Aware it is unlikely he will ever be president, the 76-year-old soldiers on in the belief that this cause will one day triumph in a party where he was, not long ago, seen as an odd duck, but a party where today he speaks for a national constituency.

It is easy to understand why the young are attracted to him. There is a consistency here no other candidate can match.

Republicans may deplore the GOP Great Society of Bush 43. Paul stood almost alone in voting against every Bush measure. By two-to-one, Americans now believe the Iraq War was a mistake. Paul, alone among the candidates, opposed the war.

The Command-and-Control Economic Model

Dangerous Historical Myths

By Stephen Davies

One of the most powerful influences on human affairs is historical myth—beliefs about the past that are simply wrong. Some historical myths have far-reaching and baleful effects because they shape the way people understand not only the past but also the present, leading them to make harmful or even dangerous decisions. This seems to be especially so with economic history.

Take the standard account of the Great Depression and the New Deal. In many ways the New Deal itself was one result of another historical myth: the widely received account of what had happened to the German economy in the first half of the twentieth century, particularly during World War I and the Third Reich. That myth probably did more harm than almost any other in that century.

In the case of the Third Reich, the widely held perception even now is that whatever else may be said about his regime, Hitler managed to bring about a dramatic revival of the German economy. After 1933 Hitler and his finance minister Hjalmar Schacht stabilized the economy and managed to solve the huge unemployment crisis that had destroyed the Weimar Republic’s legitimacy. This was partly due to Schacht’s imaginative monetary policy and partly to massive public works programs, such as the autobahnen. There was a sharp move away from free markets to a much more interventionist economy that worked better than what had gone before. During World War II this economy was able to achieve great success in terms of war production, notably under Hitler’s armaments minister, Albert Speer.

First-class passengers on the Titanic

Massive Iceberg Ahead for the European Monetary Union
By MARSHALL AUERBACK

In the past, I have called the euro zone a “roach motel”. But as usual, I’ve been outdone in the metaphor design department by the Italians: Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. The underlying message is the same: You can be sailing in coach or you can be in the 1st class compartment. But when the ship hits the iceberg, everybody goes down together — Germans, Italians, Greeks, Irish and French alike. All euro zone members have an institutional wide problem of not being able to fund deficits, given that the countries of the euro zone have all acceded to impose gold standard conditions on themselves by forfeiting their fiscal freedom.

To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean “profligates”. Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about “special circumstances” or something without admitting the whole system they imposed on the area is the cause of this crisis.

In the words of Stephanie Kelton:

The risk for the fiscal authorities of any member country is that the ‘dismal arithmetic’ of the budget constraint leaves few palatable alternatives. If the yield on government securities demanded by markets exceeds a country’s nominal income growth, then interest expense on the outstanding debt must become a relatively larger burden (Jordan, 1997: 3).

Why Do Zombie Banks Hate Writing Off Bad Loans?

Financial Frankness Is a Bad Dream for a Bank

By Jonathan Weil

There’s a simple explanation for why the world’s zombie banks remain so reluctant to write off worthless assets and tap the equity markets for fresh capital. They don’t want to end up like UniCredit SpA. (UCG)

This month has been a nightmare for the Italian bank’s shareholders. Since embarking last week on a 7.5 billion euro ($9.7 billion) stock sale at a steep discount to its Jan. 3 closing price, UniCredit shares have fallen 39 percent to 2.56 euros. It seems no good deed goes unpunished when it comes to lenders besieged by Europe’s debt crisis. A little bit of candor about the true state of a company’s finances can hurt a lot.

That undoubtedly is the message some other lenders facing large capital shortfalls will take from UniCredit’s troubles. The incentive now, just as most banks are undergoing their year- end audits, will be to stick with the pretense that all is well and there’s no need to raise additional capital.

Not that a lot of them have better options. There’s only so much private-sector capital available to go around. As sickening as the plunge in its share price may be, UniCredit secured an early-mover advantage by acting when it did. Even that might not be enough to ensure its survival without a taxpayer rescue.

Goods and Bads

Investment or Malinvestment?
by Igor Karbinovskiy

Every administration wants to create jobs. There can never be too many jobs, if you ask them, so they're always interested in making more, even in times of low unemployment. Every administration, therefore, proposes its own jobs bill. Last year, for example, President Obama spent some time touring the country to promote his own jobs bill as a way to address the deepening economic crisis. This seems like a no-brainer. After all, jobs are clearly and unambiguously a good thing, right?

Suppose I write an article on the economy that no one wants to read, much less pay me for. Now suppose that the government pays me for it anyway — as part of a jobs bill. Presto! A new job has been created; a person who was previously unemployed is now working. Better yet, that person is me! This job certainly increased my standard of living. But what have I produced? What have I contributed to the economy? Because no one wants my article, the value of my contribution to the economy is zero. The time I've spent in writing, and the money the government paid me, have been wasted. Worse, because this money allows me to consume things that I (and other people) want — things like food and shelter — the net effect on the economy is negative: zero value in, positive value out. This, then, is an example of a "bad" job.

People who bite the hand that feeds them usually lick the boot that kicks them

Plato Bets on Tyranny

By Ed Kaitz

It might be worth everyone's while in these troubled times to set aside an evening in order to carefully read Book VIII of Plato's Republic.  The dialogue is nothing less than chilling in its illustration of what happens in a popular government when corrupt politicians inflame the vices of undisciplined citizens in order to destroy the business class and establish a tyranny.

Here's a link to Book VIII.  Plato's objective is to show how highly self-disciplined regimes gradually devolve into more inferior and immoderate governments.  Socrates begins the discussion showing how Aristocracies (rule of the wisest) devolve into Timocracies (rule of the military) which then descend into Oligarchies (rule of the wealthy).  Oligarchies descend into Democracies (rule of the people) which in turn become Tyrannies.

Pay attention to the final section: how a Democracy becomes a Tyranny.  The process starts back when the rulers are Oligarchs.  A kind of Government/Business nexus (think Fannie Mae) figures out that certain undisciplined borrowers will be unable to pay back their loans.  The lenders acquire the property and recoup their losses with some kind of bailout.  Socrates says none of this crazy lending would have happened if the lenders had had to risk their own funds:

"For if it be enacted that voluntary contracts be as a general rule entered into at the proper risk of the contractor, people will be less shameless in their money-dealings in the city, and such ills as we have now described will be less common."

Democracy arises when those thrown out of their homes discover that the rich Oligarchs and their kids are soft and lazy.  They rebel and set up popular rule.  The people want freedom more than anything else, so they are highly sensitive to any kind of "master" including objective standards of behavior, merit, and manners.  Therefore, the people's desire for freedom makes anyone in a position of authority highly suspect. 

Look out for the Pension Bomb

Europe’s $39 Trillion Pension Risk Grows as Economy Falters

By Rebecca Christie and Peter Woodifield

Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

No end in sight to the European debt crisis

For Europe, Every Day Is A New Adventure

by JOHN RUBINO 

Europe’s parade of surreal financial news just keeps coming. This week, investors are paying Germany to take their money by accepting negative interest rates on new government debt:

Germany Issues Bills With Negative Yields As Economists Agree Country Is In Recession

Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before.

As per the FT: “German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas…The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday.”

The empire will be stabbed in the back by its own protectors.

World’s Biggest Zombies

by Bill Bonner

Not much action at the end of last week… Gold closed the week over $1,600. Oil remained over $100.

The show goes on!

We are watching the destruction of an empire. All empires must go away sometime. They are natural things. And nature puts a time bomb in everything she creates.

The US empire is doomed. Just like all the others that went before it. It is doomed by nature herself – condemned by the gods to blow up and die.

None of this should be surprising to you, dear reader. We’ve seen this movie before. Hundreds of empires have come and gone. We know how this movie ends. More or less.

What we know for sure is that the US is going broke. There is hardly any other plausible outcome. We’ve gone over the numbers so often we don’t need to repeat them.

Yes, it is true that the feds could still save themselves….if they had the will. They could cut taxes to a flat 10%…and spend only what they raised in tax revenue… That would do the trick from an economic point of view.

Slip-Sliding Into Tyranny

This is how it happens…

by Charles Goyette

President Obama found a moment of reduced visibility, in an unwatched hour on New Year’s Eve, to sign the latest assault on the Fifth Amendment. In signing the National Defense Authorization Act of 2012 on New Year’s Eve, Obama knew the nation’s attention would be elsewhere, diverted by revelry, football, New Year’s Day, and a Monday national holiday.

In case you haven't heard, the National Defense Authorization Act allows the government to detain people indefinitely – yes, it includes American citizens who can be taken even on our native soil and imprisoned – merely on the basis of accusations.

The measure is "so radical," says Human Rights Watch, "that it would have been considered crazy had it been pushed by the Bush administration." And although Obama appended a signing statement as he put his name to the act, solemnly assuring the nation that the power he insisted on having won’t be used recklessly, it is a political gesture that has no more force of a law than attaching a little yellow sticky note to the bill. If the clear language of the Constitution itself cannot bind the governing classes, it is hard to imagine a post-it note having much effect on the current or future presidents now that the indefinite detention of Americans without trial has been legislatively countenanced.

There you have it in a nutshell, the new American way: Guilty until proven innocent.

This is how once-free people slip into state tyranny and slide into martial law.

Political figures are always careful to paper over their power grabs with spurious legalities and midnight measures, granting themselves the rights they are appropriating. No matter how flimsy the pretext, no matter how forbidden the act, everything must be formalized and enabled. Overturned rights and the pretext of legality.

That is how the Fourth Amendment was trashed… marginalized by a document called the Patriot Act.

And now the Fifth Amendment is under attack.

The Year of the Trojan Water Dragon

News on January 11 2012

Harris & Ewing Listening to the Future September 12, 1938
Washington, D.C. "Acting Czechoslovakian Minister listens to Hitler speech. Dr. Karel Brejska, Charge d'Affaires and acting Minister in the absence of Minister Vladimir Hurban in Czechoslovakia, is pictured listening to Adolf Hitler's radio address today at the legation. He refused to comment on the speech"

By Ilargi

Hmm.

Right, markets are up. Wonder what they're so happy about? A newfound source of suckers, perhaps, or the same old one that still has some juice left? Yeah, US jobs numbers, housing numbers, yada yada, I know. But does anyone with a sound mind have the guts to risk their wealth on that? 

Merkel and Sarkozy are doing emergency meeting 1000, the next one, number 1001, is on January 20. What do they talk about by now? US jobs numbers? Hard to imagine.

Hungary perhaps? It’s fast becoming a major threat to Europe's finances, since Austrian banks are deeply embedded in the country. And in Bulgaria, Romania.

And the Magyar government pushes through one new law after the other, including some concerning the central bank that the IMF and EU don't like one bit. The central bank's independence is under threat, is their complaint. But can anyone name even one example where the IMF stood up to protect a central bank's independence from the IMF? Or doesn't that count?

Hungary’s constitution and democracy are "trampled on", say the headlines. Yes, well, what's new? Are we sure this indignation is well directed? For one thing, not that far from Budapest, Italy and Greece have installed unelected technocrat governments, under pressure from the same IMF and EU. Certainly undemocratic, and almost certainly contrary to their respective constitutions. 

I have little sympathy for a government that also writes up new laws that take issues like abortion and gay rights on a journey back in time, but I do think we must ask ourselves who exactly is doing the trampling these days.

In America, anybody at all can now be arrested without any recourse at all, no lawyer, no trial, no formal accusation. Constitution, anyone? A few years back in Europe, a new EU constitution was voted down repeatedly by voters in several member countries. It still went through. Merkel and Sarkozy push hard to change that constitution again, to allow for a two thirds majority to suffice for far reaching "reforms". Democracy, anyone?

Quote of the Day

The Glory of the Market vs. the Compulsory Monopoly of Bureaucratic Government

"The essence and the glory of the free market is that individual firms and businesses, competing on the market, provide an ever-changing orchestration of efficient and progressive goods and services: continually improving products and markets, advancing technology, cutting costs, and meeting changing consumer demands as swiftly and as efficiently as possible.

The libertarian economist can try to offer a few guidelines on how markets might develop where they are now prevented or re­stricted from developing; but he can do little more than point the way toward freedom, to call for government to get out of the way of the productive and ever-inventive energies of the public as expressed in voluntary market activity. No one can predict the number of firms, the size of each firm, the pricing policies, etc., of any future market in any service or commodity. We just know—by economic theory and by historical insight—that such a free market will do the job infinitely better than the compulsory monopoly of bureaucratic government."

                                                                    ~Murray Rothbard in "For a New Liberty"

A nation of dodos

The New Authoritarianism

By Fred Siegel

 “I refuse to take ‘No’ for an answer,” said President Obama this week as he claimed new powers for himself in making recess appointments while Congress wasn’t legally in recess. The chief executive’s power grab in naming appointees to the Consumer Financial Protection Bureau and the National Labor Relations Board has been depicted by administration supporters as one forced upon a reluctant Obama by Republican intransigence. But this isn’t the first example of the president’s increasing tendency to govern with executive-branch powers. He has already explained that “where Congress is not willing to act, we’re going to go ahead and do it ourselves.” On a variety of issues, from immigration to the environment to labor law, that’s just what he’s been doing—and he may try it even more boldly should he win reelection. This “go it alone” philosophy reflects an authoritarian trend emerging on the political left since the conservative triumph in the 2010 elections.

The president and his coterie could have responded to the 2010 elections by conceding the widespread public hostility to excessive government spending and regulation. That’s what the more clued-in Clintonites did after their 1994 midterm defeats. But unlike Clinton, who came from the party’s moderate wing and hailed from the rural South, the highly urban progressive rump that is Obama’s true base of support has little appreciation for suburban or rural Democrats. In fact, some liberals even celebrated the 2010 demise of the Blue Dog and Plains States Democrats, concluding that the purged party could embrace a purer version of the liberal agenda. So instead of appealing to the middle, the White House has pressed ahead with Keynesian spending and a progressive regulatory agenda.

Much of the administration’s approach has to do with a change in the nature of liberal politics. Today’s progressives cannot be viewed primarily as pragmatic Truman- or Clinton-style majoritarians. Rather, they resemble the medieval clerical class. Their goal is governmental control over everything from what sort of climate science is permissible to how we choose to live our lives. Many of today’s progressives can be as dogmatic in their beliefs as the most strident evangelical minister or mullah. Like Al Gore declaring the debate over climate change closed, despite the Climategate e-mails and widespread skepticism, the clerisy takes its beliefs as based on absolute truth. Critics lie beyond the pale.

The problem for the clerisy lies in political reality. The country’s largely suburban and increasingly Southern electorate does not see big government as its friend or wise liberal mandarins as the source of its salvation. This sets up a potential political crisis between those who know what’s good and a presumptively ignorant majority. Obama is burdened, says Joe Klein of Time, by governing a “nation of dodos” that is “too dumb to thrive,” as the title of his story puts it, without the guidance of our president. But if the people are too deluded to cooperate, elements in the progressive tradition have a solution: European-style governance by a largely unelected bureaucratic class.

The tension between self-government and “good” government has existed since the origins of modern liberalism. Thinkers such as Herbert Croly and Randolph Bourne staked a claim to a priestly wisdom far greater than that possessed by the ordinary mortal. As Croly explained, “any increase in centralized power and responsibility . . . is injurious to certain aspects of traditional American democracy. But the fault in that case lies with the democratic tradition” and the fact that “the average American individual is morally and intellectually inadequate to a serious and consistent conception of his responsibilities as a democrat.”