The Financial Crisis and the Recession: Two Datapoints for the Skeptics

One of the most dramatic features of the financial crisis, for those who were following it obsessively in the autumn of 2008, was the near-freezing up of the commercial paper market. Commercial paper is short-term debt sold in markets rather than advanced by banks. It's mostly very short maturity -- days, weeks or months, not years. It's generally cheaper than other forms of financing, but firms that rely on it need to be able to borrow more or less continuously. Doubts about their financial condition, or even the suspicion that other lenders might have doubts, can quickly push them up against their survival constraint. This is what happened to a number of financial institutions -- most spectacularly Lehman Brothers -- in the third quarter of 2008. The breakdown in the commercial paper market was one of the things that convinced people the financial universe was imploding, and taking the real economy down with it.

The story, implicit or explicit, was that the suddenly reduced or uncertain value of financial assets, and the seizing-up of the interbank markets, left banks unable or unwilling to hold the liabilities of nonfinancial businesses, i.e., to lend. These businesses found themselves unable to finance new investment or even routine operations, leading to the Great Recession. This is essentially the same story that Milton Friedman told (and Peter Temin, among others, criticized), about the Great Depression, but it's also more or less the consensus view of the 2008-09 crisis among New Keynesian economists. For example:

A large decrease in the value of asset holdings of financial institutions resulted in dramatic intensification of the agency problems in those institutions ... Credit spreads widened and credit rationing became widespread. The diminished ability to finance the acquisition of capital goods resulted in huge cutbacks of all types of investment.

The same story was widespread in the business journalism world, with people like Andrew Ross Sorkin writing, "Commercial paper, the workaday stuff that lets companies make payroll, was suddenly viewed as radioactive -- and business activity almost stopped in its tracks." Most importantly, this was the view of the crisis that motivated -- or at least justified -- the choice of both the Bush and Obama administrations to make strengthening bank balance sheets their number one priority in the crisis. But is it right? There are reasons for doubt.

Data from FRED. 

See, here's a funny thing. I haven't seen it discussed anywhere, but it's very interesting. The commercial paper of financial and nonfinancial firms, normally interchangeable, fared quite differently in the crisis. Up til then, both had tracked the federal funds rate closely, except in the early 90s (the last by-general-agreement credit crisis) when both had risen above it. But as the figure above shows, in the fall of 2008, right around the Lehmann failure (the arrow on the graph), an unprecedented gap opened up between the interest lenders demanded on commercial paper from financial versus nonfinancial companies.

The implication: The state of the interbank lending market isn't necessarily informative about the availability of credit to nonfinancial firms. It's perfectly possible that lots of big banks had made lots of stupid bets in the real estate market, and once this became known other banks were unwilling to lend to them. But they remained perfectly willing to lend to everyone else -- perhaps even on more favorable terms, since those funds had to go somewhere. The divergence in commercial paper rates is hardly dispositive, of course, but it at least suggests that the acute phase of the financial crisis was more of a problem for the financial sector specifically than for the economy as a whole

Second. Sorkin calls commercial paper "the workaday stuff that lets companies meet payroll." This kind of language was everywhere for a while -- that the financial crisis threatened to stop the flow of short-term credit from banks, and that without that even the most routine business functions would be impossible.

One of the central political-economic facts of our time is that public discussion of the economy is entirely dominated by finance. The interests of banks differ from those of other businesses on many dimensions; one of them is banks' dependence on short-term financing. Financial firms are defined by the combination of short-term liabilities and long-term assets; they need to borrow every day; that's why they're subject to runs. The fear of not being able to make payroll if you're cut off, even briefly, from financial markets, is perfectly reasonable, if you're a bank.

But if you're not?

In fact, short-term debt is large relative to cashflow only for financial firms. Nonfinancial firms don't finance operating expenses through debt, only investment. (And inventories and goods-in-progress, which are largely financed by credit from customers and suppliers, rather than from banks.) From Compustat:

Short-term debt as a fraction of total debt

Sector	Median	Mean
FIRE	0.56	0.55
Non-FIRE	0.16	0.23

Short-term debt as a fraction of cashflow

Sector	Median	Mean
FIRE	7.53	15.1
Non-FIRE	0.35	0.71

Short-term debt as a fraction of revenue

Sector	Median	Mean
FIRE	0.78	1.64
Non-FIRE	0.04	0.08

(FIRE is finance, insurance and real estate. Short-term here means maturities of less than a year. Cashflow is defined as profits plus depreciation.)
This isn't a secret; but it's striking how different are the financing structures of financial and nonfinancial firms, and how little that difference has penetrated into public debate or much of the economics profession. For the median financial firm, losing access to short-term finance would be equivalent to a 70 percent fall in revenues; few could survive. For the median nonfinancial firm, by contrast, loss of access to short-term finance would be equivalent to a fall in revenues of just 4 percent. Short-term finance is just not that important to nonfinancial firms.
So, the breakdown in short-term credit markets was largely limited to financial firms, and financial firms are anyway the only ones that really depend on short-term credit. I don't claim these two pieces of evidence are in any way definitive -- I've got a long paper on this question in the works, which, well, won't be definitive either -- but they are at least consistent with the story that the financial crisis, on the one hand, and the fall of employment and output, on the other, were more or less independent outcomes of the collapse of the housing bubble, and that the state of the banks was not the major problem for the real economy.



EDIT: For the life of me, I can't get either graphs or tables to look good in Blogger.

Summers on Microfoundations

From The Economist's report on this weekend's Institute for New Economic Thinking conference at Bretton Woods:

The highlight of the first evening's proceedings was a conversation between Harvard's Larry Summers, till recently President Obama's chief economic advisor, and Martin Wolf of the Financial Times. Much of the conversation centred on Mr Summers's assessments of how useful economic research had been in recent years. Paul Krugman famously said that much of recent macroeconomics had been "spectacularly useless at best, and positively harmful at worst". Mr Summers was more measured... But in its own way, his assessment of recent academic research in macroeconomics was pretty scathing.

For instance, he talked about all the research papers that he got sent while he was in Washington. He had a fairly clear categorisation for which ones were likely to be useful: read virtually all the ones that used the words leverage, liquidity, and deflation, he said, and virtually none that used the words optimising, choice-theoretic or neoclassical (presumably in the titles or abstracts). His broader point—reinforced by his mentions of the knowledge contained in the writings of Bagehot, Minsky, Kindleberger, and Eichengreen—was, I think, that while it would be wrong to say economics or economists had nothing useful to say about the crisis, much of what was the most useful was not necessarily the most recent, or even the most mainstream. Economists knew a great deal, he said, but they had also forgotten a great deal and been distracted by a lot.

Even more scathing, perhaps, was his comment that as a policymaker he had found essentially no use for the vast literature devoted to providing sound micro-foundations to macroeconomics.

Pretty definitive, no?

And that's it it -- I promise! -- on microfoundations, methodology, et hoc genus omne in these parts, at least for a while. I have a couple new posts at least purporting to offer concrete analysis of the concrete situation, just about ready to go.

The Bond's Eye View of the Ivory Coast

I joked a while back that any statement in the business press that something is good or bad needs to be followed with an implicit "for bondholders." But it's not really a joke. Here's the Financial Times with the view from the bonds of the civil war in the Ivory Coast:

[Laurent Gbagbo's] generals are negotiating a ceasefire at pixel time while the French think he’ll probably leave Ivory Coast within hours, after a heavy cost in bloodshed. But a brand new day for the Ivorian state?

If you’ve been watching the levitating prices on the country’s (defaulted) 2032 bond, you might think that. Having been rallying for some time, the bond is now priced more generously than before a $29m coupon payment failed in January... This is quite some faith in the ability — willingness — of Gbagbo’s successor, Alassane Ouattara, to resume debt service.

There it is: A new day for the Ivoirian state = resumption of debt payments.

But there's a more serious point here, too. The only people in the rich world who have both an interest in what happens in the Ivory Coast, and the resources to act on it, are the owners of Ivoirian government bonds.

Of course this isn't strictly true. There might be foreign owners of private Ivoirian assets. But in fact there doesn't seem to be many: Of the country's $11 billion in external debt, $8.5 billion, according to the BIS, is public and all the remaining $2.5 billion private debt is publicly guaranteed. And of course there are firms and speculators in the cocoa industry, but they aren't going to as interested in the Ivory Coast specifically, and more importantly, they don't have the same access to the peak institutions of capitalism. It's the Financial Times, not the Commodities Times or even the International Trade Times. So it's perfectly natural for the FT to take the bond's eye view; to a first approximation, the bondholders are the representatives of the capitalist class as a whole with respect to the Ivory Coast.

Why Do We Need Heterodox Economics Departments?

A comrade writes:

Economics is too important to leave it to the mainstream. Economic ideas and economists are very powerful at shaping and influencing the societies in which we live. We, heterodox economists, are a minority and we need our voice be heard. I’m afraid that the radicalism of “I don’t care the mainstream, I do my own thing” is the most conservative strategy. It leaves us as college professors teaching mainstream stuff with a heterodox twist but without any significant influence in the real world. Please, don’t take this wrong. I respect and admire those who like teaching at colleges as a way of life. I’m just saying that as a collective output is a suicide. Our battle is at research universities, central banks, finance ministries, international institutions and think tanks, where the presence of mainstream economist is overwhelming. We need to challenge and persuade them and for that we need to know their theories and methods.

I disagree.

Of course we don''t want to be cloistered. But there are many possible channels by which our work can reach public policy, social movements and the larger world. Shifting the mainstream of economics is only one possible channel and not, in my judgment, the strongest or most reliable one.

To take a personal example: I recently agreed to do some research work for a couple of state-level minimum-wage campaigns,giving them numbers on the distribution of workers who would be covered by the bills by industry and firm size and the profitability of the major low-wage sectors in those states. The people organizing the campaigns are now using those numbers for position papers, talking points for canvassing, op-eds, etc. I even went down to Maryland a couple weeks ago to testify before the legislature.

Of course you need some basic knowledge of econometrics and the relevant literature to do this kind of work. But do you need the kind of knowledge you'd need to be a cutting-edge labor economist? No, obviously not; I'm not a labor economist of any sort. And yet, I would argue, this kind of direct work with practical political campaigns/organizations is at least as likely -- more likely, IMO -- to produce concrete policy changes and to shift the public debate, than an effort to master the techniques of mainstream labor economics, publish sufficiently on the minimum wage to move the consensus of the profession, and then count on the "official" representatives of the profession to pass the message on to policymakers. Fundamentally, I don't agree that our battle is at research universities, central banks, etc. Our jobs may be at those places. But our battle is with people engaged in practical political work and organizing. This isn't (just) a moral stand; I think the implicit assumption that the consensus of the economics profession is first shaped by the quality of the arguments made on various sides, and then transmitted to politics, is not applicable to the real world. If you want to contribute to political change, you need to be part of a political project; winning debates within the economics profession doesn't help. The recent history of macroeconomics shows that clearly, no?

There's a second point. The idea that we should be orienting our training around learning to persuade the mainstream assumes that "we" already know what we want to persuade them of. But that's not the case. On most of the big questions, we don't have any consensus on what the right answers are, even if we're confident they're not what's taught in most programs. And the project of developing an alternative economics is very different from the project of persuading people of an alternative economics. The second would require talking -- and having the tools to talk -- with others. But the first requires primarily talking among ourselves. And the first has to come first. Economics is hard! And Marxist, post-Keynesian, feminist, institutionalist economics is just as hard as mainstream economics. (Albeit in different ways -- less math, more fieldwork & history.) Unless we -- meaning we heterodox/radical economists -- are systematically building on each others' work, there will never be an alternative view to persuade the mainstream of. Which means there needs to be spaces for conversations within radical economics, where we can critique and develop our own approaches, and for getting the training necessary to take part in those conversations.

All of us tend to exaggerate our own intellectual autonomy. (It's a legacy of the Enlightenment.) We think we're rational beings, who know what we want and choose the best tools to get it. But , means and ends don't always separate so cleanly. You say you want a prestigious position only in order to have a better platform from which to advance progressive ideas, but soon enough the means becomes the ends. (I've seen it happen!) There can't be left ideas without a sociological left -- without a group of people who feel some objective connection with each other, have shared experiences and interests, share a common identity. Because ideas will accomodate to the situation of the person who holds them. (Erst kommt das Fressen, dann die Moral.) We all think, no not me, but yes us too. If there aren't at least a few settings in which specifically radical economics is professionally rewarded, we shouldn't take it for granted that it will continue to exist.

On Other Blogs, Other Wonders

... or at least some interesting posts.


1. What Kind of Science Would Economics Be If It Really Were a Science?

Peter Dorman is one of those people who I agree with on the big questions but find myself strenuously disagreeing with on many particulars. So it's nice to wholeheartedly approve this piece on economics and the physical sciences.

The post is based on this 2008 paper that argues that there is no reason that economics cannot be scientific in the same rigorous sense as geology, biology, etc., but only if economists learn to (1) emphasize mechanisms rather than equilibrium and (2) strictly avoid Type I error, even at the cost of Type II error. Type I error is accepting a false claim, Type II is failing to accept a true one. Which is not the same as rejecting it -- one can simply be uncertain. Science's progressive character comes from its rigorous refusal to accept any proposition until every possible effort to disprove it has failed. Of course this means that on many questions, science can take no position at all (an important distinction from policy and other forms of practical activity, where we often have to act one way or another without any very definite knowledge). It sounds funny to say that ignorance is the heart of the practice of science, but I think it's right. Unfortunately, says Dorman, rather than seeing science as the systematic effort to limit our knowledge claims to things we can know with (near-)certainty, "economists have been seduced by a different vision ... that the foundation of science rests on ... deduction from top-level theory."

The mechanisms vs. equilibria point is, if anything, even more important, since it has positive content for how we do economics. Rather than focusing our energy on elucidating theoretical equilibria, we should be thinking about concrete processes of change over time. For example:

Consider the standard supply-and-demand diagram. The professor draws this on the chalkboard, identifies the equilibrium point, and asks for questions. One student asks, are there really supply and demand curves? ... Yes, in principle these curves exist, but they are not directly observed in nature. ...

there is another way the answer might proceed. ... we can use them to identify two other things that are real, excess supply and excess demand. We can measure them directly in the form of unsold goods or consumers who are frustrated in their attempts to make a purchase. And not only can we measure these things, we can observe the actions that buyers and sellers take under conditions of surplus or shortage.

One of the best brief discussions of economics methodology I've read.


2. Beware the Predatory Pro Se Borrower!

In general, I assume that anyone here interested in Yves Smith is already reading her, so there's no point in a post pointing to a post there. But this one really must be read.

It's a presentation from a law firm representing mortgage servicers, with the Dickensian name LockeLordBissell, meant for servicers conducting foreclosures that meet with legal challenges. That someone would even choose to go to court to avoid being thrown out of their house needs special explanation; it must be a result of "negative press surrounding mortgage lenders" and outside agitators on the Internet. People even think they can assert their rights without a lawyer; they "do not want to pay for representation," it being inconceivable that someone facing foreclosure might, say, have lost their job and not be able to afford a lawyer. "Predatory borrowers" are "unrealistic and unreasonable borrowers who are trying to capitalize on the current industry turmoil and are willing to employ any tactic to obtain a free home," including demands to see the note, claims of lack of standing by the servicer, and "other Internet-based machinations." What's the world coming to when any random loser has access to the courts? And imagine, someone willing to employ tactics like asking for proof that the company trying to take their home has a legal right to it! What's more, these stupid peasants "are emotionally tied to their cases [not to mention their houses]; the more a case progresses, the less reasonable the plaintiff becomes." Worst of all, "pro se cases are expensive to defend because the plaintiff’s lack of familiarity with the legal process often creates more work for the defendant."

If you want an illustration of how our masters think of us, you couldn't ask for a clearer example. Our stubborn idea that we have rights or interests of our own is just an annoying interference with their prerogatives.

Everyone knows about bucket lists. At the bar last weekend, someone suggested we should keep bat lists -- the people whose heads you'd take a Louisville slugger to, if you knew you just had a few months to live. This being the Left Forum, my friend had "that class traitor Andy Stern" at the top of his list. But I'm putting the partners at LockeLordBissell high up on mine.


3. Palin and Playing by the Rules

Jonathan Bernstein, on why Sarah Palin isn't going to be the Republican nominee:

For all one hears about efforts to market candidates to mass electorates (that's what things like the "authenticity" debate are all about), the bulk of nomination politics is retail, not wholesale -- and the customers candidates are trying to reach are a relatively small group of party elites.... That's what Mitt Romney and Tim Pawlenty have been doing for the last two-plus years... It's what, by every report I've seen since November 2008, Sarah Palin has just not done.

Are you telling me that [Republican Jewish Committee] board members are going to be so peeved that Sarah Palin booked her Israel trip with some other organization that they're [going to] turn it into a presidential nomination preference, regardless of how Palin or any other candidate actually stands on issues of public policy?

Yup. And even more: I'll tell you that it's not petty. They're correct to do so. ... if you're a party leader, what can you do? Sure, you can collect position papers, but you know how meaningless those are going to be.... Much better, even if still risky, is assessing the personal commitment the candidates have to your group. What's the rapport like? Who has the candidate hired on her staff that has a history of working with you? Will her White House take your calls? ...

It's how presidential nominees are really chosen. ... Candidates do have to demonstrate at least some ability to appeal to mass electorates, but first and foremost they need to win the support of the most active portions of the party.

It's not a brilliant or especially original point, but it's a very important one. My first-hand experience of electoral politics is limited to state and local races, but I've worked on quite a few of those, and Bernstein's descriptions fits them exactly. I don't see any reason to think national races are different.

It's part of the narcissism of intellectuals to imagine politics as a kind of debating society, with the public granting authority to whoever makes the best arguments -- what intellectuals specialize in. And it's natural that people whose only engagement with politics comes through the mass media to suppose that what happens in the media is very important, or even all there is. But Bernstein is right: That stuff is secondary, and the public comes in as object, not subject.

Not always, of course -- there are moments when the people does become an active political subject, and those are the most important political moments there are. But they're very rare. That's why someone like Luciano Canfora makes a sharp distinction between the institutions and electoral procedures conventionally referred to as democracy, on the one hand, and genuine democracy, on the other -- those relatively brief moments of "ascendancy of the demos," which "may assert itself within the most diverse political-constitutional forms." For Canfora, democracy can't be institutionalized through elections; it's inherently "an unstable phenomenon: the temporary ascendancy of the poorer classes in the course of an endless struggle for equality—a concept which itself widens with time to include ever newer, and ever more strongly challenged, ‘rights’". (Interestingly, a liberal like Brad DeLong would presumably agree that elections have nothing to do with democracy, but are a mechanism for the circulation of elites.)

I don't know how far Bernstein would go with Canfora, but he's taken the essential first step; it would be a good thing for discussions of electoral politics if more people followed him.

EDIT: Just to be clear, Bernstein's point is a bit more specific than the broad only-elites-matter argument. What candidates are selling to elites isn't so much a basket of policy positions or desirable personal qualities, but relationships based on trust. It's interesting, I think it's true; it doesn't contradict my gloss, but it does go beyond it.

Who Paid for the Paper?

Yglesias weighs in on the New York Times paywall:

It’s always worth emphasizing in these discussions that the widespread view among journalists that readers have traditionally paid for journalism is a mistake. Readers have traditionally paid for paper, ink, and distribution of physical media. The price goal of subscriptions is to cover costs so that you can maximize subscribers without going bankrupt. Then you make money by selling ads.

True that. There's this idea that what's killing journalism is that people won't pay for it now that they have access to free online news sources. But that's wrong. Circulation revenue is holding up ok for newspapers. What's collapsed is advertising revenue.

Newspaper Revenue by Source, 1956-2009 ($ Millions)

Source: Newspaper Association of America

The problem isn't that the public aren't willing to pay for journalism; it's that advertisers aren't. Over the past decade, newspaper subscription revenues are down 5 percent. But display ad revenues are down by a third, and classified ads are down by two-thirds. No doubt it's emotionally satisfying for newspaper executives to frame the question as whether journalism is worth paying for. But from an economic standpoint the paywall strategy is exactly backwards; it can only accelerate the collapse of advertising revenue that is the real cause of the crisis.

John Lanchester had a useful discussion of this in the LRB:

classified advertising ... was for years the secret weapon of the newspaper business. Classifieds are not the most glamorous aspect of the newspaper trade... What they are, however, is fabulously lucrative. For decades, whole sections of the newspaper industry were kept afloat by the classifieds. ... In the US, the importance of advertising was even greater: a fact which remains true, to a startling extent, when you look at the data which show the balance between revenue earned via sales and advertising. In the UK, which is roughly in the middle of the OECD range, the balance is 50-50. (The global average is 57-43 in favour of advertising.) In the US, the balance is 87 per cent advertising, 13 per cent sales.

I'm not sure where Lanchester gets this exact number; the NAA gives around 80% advertising, before the collapse of the past few years. But the bigger problem with the piece is the suggestion that the problem is finding a new business model for journalism. The whole point is that journalism as such never had a business model, it was only ever a loss leader for the classifieds. That is, it was cross-subsidized by the network rents from connecting buyers and sellers in thin markets. Now those rents are cross-subsidizing Internet search, free email, social networking, for that matter this humble blog. I'd be the last to say the trade was entirely for the better. But no one with a gmail account should say it was entirely for the worse.

Cross subsidies from monopolies are an important and underappreciated form of public good provision in modern capitalism. An interesting aspect of this is the subsidy by its nature is never the result of any straightforward optimization, in the way business decisions are supposed to be. It needs a sociological link with the source of the subsidy. Whether it's "All the news that's fit to print" or "Don't be evil," the principle only performs its function of legitimating the underlying monopoly if it is, on some level, sincerely held.

All of which is to say that saving newspaper journalism can't be a matter of restoring its status as a profitable commodity, because it never was.

What Do Bosses Want?

The New York Times paywall is here. Felix Salmon has the details, and what looks like the definitive critique:

What does all this mean for the New York Times Company? I can’t see how it’s good. The paywall is certainly being set high enough that a lot of regular readers will not subscribe. These are readers who would normally link to the NYT from their blogs, who would tweet NYT articles, who would post those articles on Facebook, and so on. As a result, not only will traffic from these readers decline, but so will all their referral traffic, too. The NYT makes more than $300 million a year in digital ad revenue, so even a modest decline in pageviews, relative to what the site could have generated sans paywall, can mean many millions of dollars foregone. On top of that, the paywall itself cost somewhere over $40 million to develop.

Against all that, how much revenue will the paywall bring in?... extra revenues of $24 million per year.

$24 million is a minuscule amount for the New York Times company as a whole; it’s dwarfed not only by total revenues but even by those total digital advertising revenues of more than $300 million a year. ... So by my back-of-the-envelope math, the paywall won’t even cover its own development costs for a good two years, and beyond that will never generate enough money to really make a difference to NYTCo revenues. ... I just can’t see how this move makes any kind of financial sense for the NYT. The upside is limited; the downside is that it ceases to be the paper of record for the world. Who would take that bet?

(For the record, in the past couple weeks I devoted a few idle moments to considering just how much I would pay for digital access to the NYT, and decided that $15 a month was just about my upper limit. But in fact I won't pay it, since top news stories will continue to be free on the iPhone.)

What makes this bad decision so interesting is how many other companies seem to make the same kind of bad decisions. And in particular, how completely they overlook the value of the kind of free marketing and brand development that Salmon describes in the first paragraph.

For instance, here's an interesting new working paper by Yi Qian on the effect of counterfeit goods on clothing brands, which finds

heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales.

In other words, when someone buys a rip-off pair of Manohlo Blahniks, they may be foregoing a purchase of an authentic pair. But maybe not. And either way, their visible endorsement of the brand increases its appeal to others in a way that the company would otherwise have to spend scarce advertising dollars to achieve. Not surprising, it's the high-end brands that benefit on net from counterfeiters, since purchasers of counterfeit goods are less likely to be able to afford the real thing and the brand identity is more valuable. This is consistent with other research I've seen suggesting that in some cases, the advertising effect outweighs the substitution effect even at the level of the individual consumer -- buying a counterfeit handbag (or illegally downloading a piece of music, or whatever) makes a person more likely to subsequently buy that item legally.

(Qian is also co-author of this fascinating survey of the economics of counterfeiting, which identifies a remarkably broad range of theoretical and empirical cases where laxer IP protections turn out to benefit sellers. For instance, there's evidence that academic journals were able to charge higher prices as a result of the widespread availability of photocopiers starting in the 1980s, because the greater value of journals to subscribers who were now able to make copies of articles outweighed the loss of sales to people who read the copies.)

Sellers of branded goods can't be unaware of this research, or at least of these general effects. Yet we see sellers of branded goods going to ridiculous lengths to strengthen IP proections, even sellers of high-end goods who are least likely to be harmed by infringement. In effect, these companies, like the New York Times, are going to great lengths to deprive themselves of free advertising. It's almost like they put a higher value on controlling their brand, than on profiting from it.

Which they probably do.

It makes one think about the Marxist literature on the labor process, and the idea that for capitalists, maximizing the surplus they extract from workers is secondary to maintaining the conditions under which surplus can be extracted at all. This is Stephen Marglin's argument in his classic article What Do Bosses Do? -- that the factory system was not initially adopted because it was any more technically efficient than alternative forms of worker-controlled production, but because of the strategic leverage it gave the owner of capital. He quotes a contemporary article in The Spectator observing that worker-managed cooperatives were competitive with capitalist enterprises:

Associations of workmmen could manage shops, mills and all forms of industry with success, and the immensely improved the conditions of the men, but then they did not leave a clear place for the masters. That was a defect...

Similarly, bloggers and social media may successfully generate immense traffic for the Times, and counterfeiters may successfully build the value of the brands they rip off; but the owners of these properties may not be (only) confused when they object, since this uncontrolled activity has a less of a clear place for the masters.

As Kalecki famously said,

"Discipline in the factories" and "political stability" are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound.

Profits come second to power. So when the results of productive labor aren't appropriated as private property, the class instinct of the bosses of the information industries must tell them this is unsound, even if it's more immediately profitable than the alternative. As Kalecki says in the same essay, "The fundamentals of capitalist ethics require that 'you shall earn your bread in sweat' -- unless you happen to have private means." That, I suspect, is fundamentally why the Sulzbergers et al. object to free ice cream, even when they can make more money by giving it away than by selling it.

Henwood on Fitch

Doug Henwood remembers Bob Fitch in The Nation. Read.

Just and Christian Arguments

In today's Times, Bank of America explains why there can't be any principal reductions for homeowners who aren't already in default:

Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. “There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan, the chief executive of Bank of America. “Our duty is to have a fair modification process.”

Of course. Bank of America isn't interested in maximizing the payments it receives from homeowners, it's just trying to be fair.

Even the most outspoken attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth.

God forbid that homeowners be encouraged to act in their own financial self-interest!

“There may be as much as $1 trillion worth of mortgages that are underwater,” said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?”

“This is an unsolvable question,” he said. ...

The comments by Mr. Moynihan and Mr. Laughlin came at a daylong meeting with investors and analysts in New York, the first of its kind for Bank of America since 2007. ... Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

One's heart goes out to those Bank of America executives, tossing and turning all night as they wrestle with the unsolvable question of how to help borrowers without imperiling the recovery or creating "moral hazard". The profound ethical dilemmas our betters must struggle with, as they try to do what's best for everyone. Laughlin, Moynihan and their fellow Bank of America executives must hardly have time to think about the "$35 to $40 billion a year" of profits they're expecting in coming years. Including -- much to their dismay, no doubt -- the payments from those homeowners whose principal they would love to write down, if only it weren't for their strict regard for fairness and the good of the economy.

Where have I read about such scrupulously ethical creditors before? Oh, right, here:

Don Ramon ... made no secret of the business he conducted. ... The Mexican citizen, he explained, was free. Slavery was strictly forbidden and severely punished. No Mexican citizen, whether of Spanish, mestizo, or Indian descent, could be kept or sold as a slave.

But debt was not slavery. A man, any man, was as free to contract debt as not to contract it... Nobody compelled the Indian to get into debt, to drink, to set off fireworks in honor of the saints, or to buy his wife necklaces of glass beds and glittering earrings. There was no reason to call Mexico uncivilized because the dictatorship recognized debt and supported the creditor in exacting payments. He who has contracted a debt must pay it...

"And over and above all that, and however you look at it," don Ramon went on, putting forward the just and Christian argument for his trade, "the monterias and coffee plantations must have labor if the prosperity of the country is to be maintained... It's all aboveboard. There's no compulsion. But all the same it is made clear that debts must be paid. Business depends on convincing the people that their debts must be paid."

Fitch

I just learned that Bob Fitch has died. He broke his leg last month, and then a few days ago a blood clot went to his brain, causing a stroke that left him in a coma; he also suffered several heart attacks. He died yesterday.

I hadn't seen Bob in several years, maybe not since 2005 or 2006. But there was a time when I used to see him regularly, meeting at the Barnes & Noble on Union Square or his studio apartment around the corner on 17th St. There was a Japanese screen dividing his bed from the rest of the tiny space, and a huge portrait of Stalin on the wall. We'd talk about whatever he was working on at the moment -- the Nietzschean roots of the postmodern Left, his critique of Immanuel Wallerstein (two long, brilliant essays that as far as I know were never published), the status of the dollar, the politics of land use, the structural reasons for union corruption (the argument that eventually became Solidarity for Sale), the need for a new political party. "Let's start a party, Josh," he said to me on a couple occasions in that warm and yet somehow wheedling voice I can hear now so clearly in my head, that teasing tone he used in argument that always seemed to suggest that of course you already agreed with him and he was just humoring your perverse insistence on pretending that you didn't. "Well, don't you agree that..." he'd begin, socratically, when he realized you weren't with him. That makes him sound dogmatic, which isn't true at all; it's just, I think, that he was so caught up in his ideas that he genuinely couldn't understand it if you didn't share his enthusiasm. Once I walked with him as he took his laundry to the laundromat down the street; it seemed a little sad, this original, brilliant, genuinely important writer, probably nearing 60 then, still living such a penurious bachelor lifestyle. Like something out of Dostoevsky.

Fitch knew something about founding parties. In Berkeley in the '60s (Berkeley in the 60s!) he'd been friends with Bob Avakian, and helped him start the Revolutionary Union, which later became the Revolutionary Communist Party. Once, he recalled, the two of them were driving around Oakland and saw some police. "Let's shoot these cops," Avakian says. "They'll think the blacks did it, and when they crack down it will start a riot. We could make the revolution happen, we'd be like Lenin and Trotsky." "No," Fitch said," we're not Lenin and Trotsky. We're just Bob and Bob." No cops were shot; I'm not sure how long after that Fitch left the RU/RCP. He was a bit older than most of those Berkeley radicals, and had gotten there a bit differently; he'd been in military intelligence in the 1950s or early '60s, seconded, I only just learned, from the 82nd Airborne.

Not that that's why we'd admired him. Around the Grey City Journal at the University of Chicago, we mostly agreed that two of the most important areas to be thinking about were labor, and cities. We all read Jane Jacobs Death and Life and Mike Davis' City of Quartz, but The Assassination of New York was the book that made the deepest impression. It didn't just have an inspiring or dystopian vision of the city, it told a story, it had an explanation, a political theory for why New York had evolved the way it had.

Fitch was one of that small group of unaffiliated intellectuals who exist only in New York. (Or maybe I should write existed, since there doesn't seem to be a next generation.) Fitch, Doug Henwood, Barbara Garson, Dan Lazare, Steve Fraser. None of them academics (Fitch had a PhD and adjuncted, mostly at CUNY I think; I don't know if he ever had a regular academic job), all of them in the same broad region of the non-sectarian Marxist (or Marx-influenced) left. New York has a unique set of institutions that make that kind of milieu possible -- the Brecht Forum, the Socialist Scholars Conference (now the Left Forum); a handful of progressive, even radical, unions (Fitch worked for a while for CWA Local 1180; Arthur Cheliotes was impressed enough by The Assassination of New York to hire him to come up with an alternative economic development strategy for the city); and magazines like The Nation, Dissent and The Village Voice. Bob wrote a bunch of articles for the Voice, back when the Voice printed real political journalism and paid real money for it; Chris Lehmann also printed some of his op-eds when he was editing the opinion pages at Newsday.

He didn't write that much, considering. An early book on Ghana; Assassination; and Solidarity for Sale. (I don't know what he was working on when he died.) There was also the long series of articles he wrote with Mary Oppenheimer for Socialist Revolution (later Socialist Review, still later Radical Society) on "Who Rules the Corporations". That should have been a book; it certainly had enough influence. David Kotz, well-known to most readers of this blog, was part of the radical political milieu in Berkeley at that point, making his living typing manuscripts. (A different world!) "Who Rules the Corporations" was one of the things he retyped; it inspired him to go to graduate school in economics, and his own dissertation, published as Bank Control of Large Corporations (a very good book) was essentially the working out of Fitch and Oppenheimer's argument.

If there's a theme that ran through his work, it's political agency -- an attention to the particular choices made by those with power. You could call it conspiracy theory, but in a positive sense, since after all there are real conspiracies, in the sense of decisions taken behind closed doors. There was a certain continuity from the question of how business was ruled by big banks, to how New York was ruled by the Rockefellers and their ilk, to how labor was ruled by ... well, here's where he lost me. "There are three great monopolies," he used to say. "The monopoly of capital, the monopoly of land, and the monopoly of labor." He'd written about the first in "Who Rules the Corporations," the second in Assassination, the third in Solidarity for Sale. Me, I could never accept the parallel. "Monopoly of labor" applies maybe to a certain kind of job-control craft labor, but where does that exist now? in a few big-city segments of the building trades, and in Hollywood. And it's under siege in both. This disagreement probably contributed to my not seeing him these past five years. I was working for the Working Families Party; I believed that the union movement, for all its flaws, was the only substantial American institution not ruled by money. He thought it was hopelessly corrupt, and needed to be replaced, refounded from scratch. "You could just as easily clean up a garbage pile by spraying it with attar of roses," he like to quote Debs, "as reform the AFL." (But didn't Debs spent years trying to arrange a merger of his own American Railway Union with the AFL-affiliated railroad brotherhoods?)

Conspiracies, that was in a sense what his work was about. He sort of acknowledges this point in the preface to Assassination. "A focus on the [Rockefeller] family may annoy academic Marxists," he wrote, "for whom the capitalist is only the personification of abstract capital and who believe, austerely, that any discussion of individuals in economic analysis represents a fatal concession to populism and empiricism. But New York is not capitalism in general..." His journalism on labor corruption in New York, however much he may have (in my opinion) overgeneralized it into a critique of unions in general, was incredibly valuable. "Orgies," I remember him excitedly whispering to me at one point, "orgies in the penthouse!" This was the top floor office of "Greedy" Gus Bevona, then-president of SEIU 32BJ, the giant NYC building-services local, whose corruption Fitch was one of the first people to expose. Soon enough Bevona was out and 32BJ became one of the best-led locals in the city; that same penthouse became the public meeting space for all kinds of progressive groups. I've been there on various occasions, looking out over lower Manhattan; no little credit to Bob.

Maybe he was too smart for his own good. He always had some project; there was always some question which he, finally, had found the no-one-before-recognized answer to. "You realize how conventional that is," he'd say to you, after you laid out what you thought was some original argument. Everyone read The Assassination of New York. Maybe it never established itself academically. But among radicals it was a touchstone.

All of us have an angel on our shoulder; all of us, doing practical politics on the left, have an angel asking if we aren't too ready to make compromises, if we aren't too quick to sacrifice principle for getting something done. Probably for almost all of us that angel has a name. For me it's Fitch. I learned as much sitting in that apartment as I ever did in a classroom. Maybe not concrete material -- altho there was enough of that -- as much as a sensibility. What it means to be an intellectual on the left. And what, more specifically, we need to demand from the labor movement. I hope I'll never commit myself to any organization without asking at some point, what would Fitch think?

Bob Fitch was a communist. He didn't, I believe, believe in any organized religion. But here is the moment when we have to acknowledge that something of the person does outlast the person. "From the first inspiration down the windpipe to the last expiration out of it, all that a male or female does that is vigorous, and benevolent, and clean, is so much pure profit to him or her in the unshakable order of the universe, and throughout the whole scope of it forever." What would Fitch have thought? I'm sorry I didn't ask him.

UPDATE: It's a real honor to have Jonathan Fitch and others use this space to share their memories of Bob. If you're reading this, please do read the comments as well.