Someone, long ago misplaced a decimal point when reporting the iron content
of spinach. This careless mutation led to the birth of Popeye. From spinach
to myth on the placement of a small dot.
We will hear many times over the next weeks and months from the likes of
Bill Clinton and Alan Greenspan the phrase, "the economic fundamentals are
sound." We will also hear the media repeatedly use the metaphor, "financial
meltdown." Paper is not plutonium.
Are the fundamentals sound? What are the fundamentals? The so-called
fundamentals are price and production statistics reported in isolation from
other information. The presumed soundness of these fundamentals relies on
the convenient fiction that the same statistics could as readily be produced
in isolation from the other information. Of course they can't. Prices and
production aren't independent of changes in credit availability and
financial analysis any more than body temperature is "independent" of
respiration.
A few days ago Alan Greenspan addressed the American Economics Association,
taking about the dangers of deflation. It's important to understand what
Greenspan is saying (and not saying) -- not just get mad at it.
In his address, Greenspan imagines a world of prices, markets, measurement,
allocation, assets, products, institutions, investments, risk, information,
money and policy in which labour almost doesn't exist. There is one point in
Greenspan's address where labour makes a brief cameo appearance: his concern
that resistance to nominal wage cuts will lead to rises in real wages and,
as a consequence higher unemployment in equilibrium:
> But deflation can be detrimental for reasons that go beyond those that
> are also associated with inflation. Nominal interest rates are bounded at
> zero, hence deflation raises the possibility of potentially significant
> increases in real interest rates. Some also argue that resistance to
> nominal wage cuts will impart an upward bias to real wages as price
> stability approaches or outright deflation occurs, leaving the economy
> with a potentially higher level of unemployment in equilibrium.
The consignment of labour to the outer fringe of the economy is not a
personal peculiarity of Greenspan's. It is the fundamental premise of the
financial accounting system. Treating labour as a variable cost is rational
from the short-term perspective of the firm. One can only imagine that it is
still rational from a social perspective if one insists that the economy is
nothing more than an aggregation of firms.
Greenspan follows all the "right" steps and makes a big boo-boo. There is no
place on financial accounting's balance sheet for the depreciation of
labour. Since there's no place to report it, it doesn't exist.
The fundamentals are not sound. They can only be made to look good by
wishing away "labour as an overhead cost" [to use J.M. Clark's terminology].
This recalls the criticism leveled at socialism by von Mises and echoed by
the post-mortems of East Bloc economies -- managers of state enterprises
could mask economic inefficiencies by valuing inventories and capital
equipment at current prices regardless of any prospects of realizing those
prices.
The financial accounting myopia has produced the mirror image of that
incomplete socialist accounting. Instead of discounting capital depreciation
and assigning fictional values to inventory, it discounts the social costs
of labour and thereby enormously inflates the value of financial assets. The
"way forward" according to such a distorted view is to further depreciate
labour.
The lesson of the Asian crisis is that the limit of fictional accounting has
been reached. Humpty-dumpty has fallen off the wall.
Regards,
Tom Walker
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Know Ware Communications
Vancouver, B.C., CANADA
[EMAIL PROTECTED]
(604) 688-8296
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