Tag Archives: Capital

Inequality Causes Economic Collapse

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms.
By Sally Goerner – Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health. more>

Evidence for Tribalism in Economics

While economists like to pretend otherwise, humans are social animals.
By Blair Fix – The ideal of science is beautifully summarized by the motto of the Royal Society: nullius in verba. It means ‘take nobody’s word for it’. In science, there is no authority. There are no gods, no kings, and no masters. Only evidence.

In this post, I reflect on how ‘taking nobody’s word for it’ cuts against some of our deepest instincts as humans. As social animals, we have evolved to trust members of our group. Among these group members, our instinct is to ‘take their word for it’. I call this the ‘tribal instinct’.

When we do science, we have to fight against this tribal instinct. Not surprisingly, we often fail. Rational skepticism gets overpowered by the instinct to trust members of our group. If the group happens to be powerful — say it dominates academia in a particular discipline — then false ideas get entrenched as ‘facts’.

This is a problem in all areas of science. But it’s a rampant problem in economics. The teaching of economics is dominated by the neoclassical sect, which has managed to entrench itself in academia. Among this sect, I believe, tribal instincts trump the rational appeal to evidence. more>

Updates from McKinsey

A transformative moment for philanthropy
Here’s how the positive changes in individual and institutional philanthropy sparked by the COVID-19 pandemic can take root and grow.
By Tracy Nowski, Maisie O’Flanagan, and Lynn Taliento – The philanthropic response to the COVID-19 pandemic has shown the sector at its best. From the launch of community-based rapid-response funds to the development of diagnostics and vaccines, philanthropy is showing up both to help flatten the curve in the short term and to address the inequities the crisis will exacerbate over the long term.

What’s striking is not only the scale of capital being committed by major philanthropists (at least $10.3 billion globally in May 2020, according to Candid, which is tracking major grants) but also how it is being given: at record speed, with fewer conditions, and in greater collaboration with others. According to the Council on Foundations, almost 750 foundations have signed a public pledge to streamline grant-making processes, and individual donors are partnering with their peers to make sizable grants with less paperwork.

Confronted with the global pandemic, individual and institutional philanthropy has been responsive, engaged, and nimble. The challenge—and opportunity—for the sector will be to make those features stick. The gravitational pull toward old ways of working will be strong, especially as philanthropies grapple with the impact of an economic downturn on their own endowments. But many of the practices that have emerged during this pandemic, including the five that we highlight in this article, should be expanded and formalized as the world heads into the long process of recovery.

Over the past 20 years, the philanthropic sector has adopted a more data-driven and rigorous approach. While those developments have strengthened the field in many ways, they have made the process of seeking and managing grants more cumbersome, especially for small, community-based organizations. The COVID-19 pandemic has accelerated moves to reduce those hurdles, prompting many foundations to relax grant requirements, speed up decision making, and give recipients additional flexibility in how they use funds.

What would it take to simplify further the processes for grant approval and reporting? Looking to college admissions for inspiration, imagine a common application for grant seekers, similar to the Common App platform that enables students to apply to many colleges using a single application. more>

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China in the Firing Line

By Clare Goldsberry – A two-hour webinar held by the Alliance of American Manufacturing last Thursday provided a forum for four members of Congress along with a business owner, a representative from the United Steelworkers, and the President and CEO of the National Council of Textile Organizations to talk about bringing manufacturing back to the United States.

“Crisis Brings Consensus: Prioritizing U.S. Industrial Policy in a COVID-19 World” began with a Q&A moderated by Josh Rogin featuring Marco Rubio (R-FL) and Josh Hawley (R-MO). Rubio noted that the increased push to bring back manufacturing and the need to change U.S. policies regarding trade with China is not “unique to a pandemic,” which has exposed vulnerabilities in the supply chain across several industries.

“This issue needs more than anger at China,” said Rubio. “While the Chinese Communist Party’s efforts to dominate the world in key sectors are evident, we’ve allowed them to do this. We need a strategy, then tactics to put in place the strategy to bring back U.S. manufacturing.” That would include developing incentives for companies to return their manufacturing to the United States.

Hawley began his remarks by noting that we live in a very different world today than we did after WWII. “The economic order is very different, and we need to address the rise of imperialist China,” he said. “We need very serious reform to address this different world and different [economic] system.” Hawley is not in favor of abolishing the WTO, while that issue has been raised by some. “I would rather ‘fix’ it than ‘nix’ it,” he added.

Hawley, who said he’s heard more about bringing U.S. manufacturing back home in the past four months than in the 14 months he’s been in Congress, does not approve of isolationism. “We are a trading nation and will continue to be, but we need reforms such as dispute resolution, which is a mess,” he stated. “We need an American economy that is strong and a strong American worker. Manufacturing is vitally important to the future of the United States. We need to bring back our supply chains.” more>

Could “banksters” become bankers again?

By Lena Deros – The term “bankster” has become trendy recently due to the various financial problems governments and economies are facing. Problems arise and somehow get resolved, but only through financial ruses.

In the 1980s, I was working with one of the world top Investment Banks in Europe. At that time hedge funds, derivatives and all kind of paper products were traded through the capital markets and were the top theme for any sophisticated investor.

One of the most legendary traders in the bank at that time was recruiting the best minds in math and physics from the top schools in the UK to train them and create financial products (derivatives).

The profits that the boys were accumulating were out of proportion to what a normal business person or executive could earn in a normal business, especially as they were just coming out of the university.

Of course, they were all ecstatic. The simplified procedure was based on the real economy. They were creating products 3 or 4 levels over the real assets and these were bought and traded by hedge and pension funds. Since trading was done in big amounts, and on a daily basis, the profits were excellent, but the result when viewed from the perspective of the economy, was that strong minds were deprived from producing real services and products. Instead, profit was created through paper trading. This generated claims to real wealth without creating one potato.

This enhanced inflation and created bubbles. Of course, no banker, financial consultant, or investor wanted to use their logic at the time as they were all plunging into the flood of increased profits without thinking of the immediate future.

It took some years until the surprised sector began to see what it knew all-to-well to be wrong as it was going bankrupt. Everyone was looking for a scapegoat, and most of the solutions were, again, based on 2+2=5 logic. more>

Why Society’s Biggest Freeloaders are at the Top

No, wealth isn’t created at the top. It is merely devoured there.
By Rutger Bregman – This piece is about one of the biggest taboos of our times. About a truth that is seldom acknowledged, and yet – on reflection – cannot be denied. The truth that we are living in an inverse welfare state.

These days, politicians from the left to the right assume that most wealth is created at the top. By the visionaries, by the job creators, and by the people who have “made it”. By the go-getters oozing talent and entrepreneurialism that are helping to advance the whole world.

Now, we may disagree about the extent to which success deserves to be rewarded – the philosophy of the left is that the strongest shoulders should bear the heaviest burden, while the right fears high taxes will blunt enterprise – but across the spectrum virtually all agree that wealth is created primarily at the top.

So entrenched is this assumption that it’s even embedded in our language. When economists talk about “productivity”, what they really mean is the size of your paycheck. And when we use terms like “welfare state”, “redistribution” and “solidarity”, we’re implicitly subscribing to the view that there are two strata: the makers and the takers, the producers and the couch potatoes, the hardworking citizens – and everybody else.

In reality, it is precisely the other way around. In reality, it is the waste collectors, the nurses, and the cleaners whose shoulders are supporting the apex of the pyramid. They are the true mechanism of social solidarity. Meanwhile, a growing share of those we hail as “successful” and “innovative” are earning their wealth at the expense of others. The people getting the biggest handouts are not down around the bottom, but at the very top. Yet their perilous dependence on others goes unseen. Almost no one talks about it. Even for politicians on the left, it’s a non-issue.

To understand why, we need to recognize that there are two ways of making money. The first is what most of us do: work. That means tapping into our knowledge and know-how (our “human capital” in economic terms) to create something new, whether that’s a takeout app, a wedding cake, a stylish updo, or a perfectly poured pint. To work is to create. Ergo, to work is to create new wealth.

But there is also a second way to make money. That’s the rentier way: by leveraging control over something that already exists, such as land, knowledge, or money, to increase your wealth. You produce nothing, yet profit nonetheless. By definition, the rentier makes his living at others’ expense, using his power to claim economic benefit. more>

Updates from Chicago Booth

How the Fed plans to pay the country’s bills
By John H. Cochrane – Public attention in the United States during the first phase of the COVID-19 crisis has been largely on the disease itself, the massive social and economic shock of the shutdown, and how we can orchestrate a safe reopening. But we also need to pay some attention to the financial side of the current situation, and the Federal Reserve’s immense reaction to it. Whatever one thinks of that reaction, it’s important to understand what the bank did, what beneficial and adverse consequences there are, and how our financial and economic system and policies might be set up better in the future.

We face a severe economic downturn of unknown duration. If it is something other than a V-shaped downturn spanning months rather than years, there will be a wave of bankruptcies, from individuals to corporations, and huge losses all over the financial system. “Well, earn returns in good times and take losses in bad times,” you may say, and I do, more often than the Fed does, but for now this is simply a fact.

Our government’s basic economic plan to confront this situation is simple: the Federal Reserve will print money to pay every bill, and guarantee every debt, for the duration. And, to a somewhat lesser approximation, the plan is also to ensure that no fixed-income investor loses money.

To be clear, my intention here is not to criticize this plan. From a combination of voluntary and imposed social distancing, the economy is collapsing. Twenty million people, more than 1 in 10 US workers, lost their jobs in the first month of the COVID-19 shutdowns. That’s more than the entire 2008–09 recession, all in the course of three weeks. A third of US apartment renters didn’t pay April rent. Run that up through the financial system: most guesses say that companies have one to three months of cash on hand, and then fail.

If you want to know why the Fed hit the panic button, it’s because every alarm went off.

Is the plan really to try to pay every bill?

Yes, pretty much. This is not stimulus. It is “get-through-it-us.” People who lost jobs and businesses that have no income can’t pay their bills. When people run out of cash, they stop paying rent, mortgages, utilities, and consumer debts. In turn, the people who lent them money are in trouble. Businesses with zero income can’t pay debts, employees, rent, mortgages, or utilities either. When they stop paying, they go through bankruptcy, and their creditors get into trouble. If you want to stop a financial crisis, you have to pay all the bills, not just hand out some cash so people can buy food.

And that’s more or less the plan. more>

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Challenges for international institutions during COVID 19

By Erol User – International institutions still represent a compromise between the power capabilities of their participants and the need for relative civilizational interaction between them. Institutions cannot be effective or on their own. It always depends on the ability of states to agree and the presence of objective structural prerequisites.

In the latter half of April, disputes between China and the United States led to the disruption of a tele-meeting by the G20 countries.

Due to the fact that this grouping is considered the most representative and, at the same time, the least binding in terms of decision-making, until recently it was considered the most promising in the context of a crumbling world order and the growth of national egoism.

However, the first round of the most important interstate confrontation of the new era already called into question the very possibility of discussions between the leaders of the 20 most economically and politically important countries of the world. Somewhat earlier, the US government announced that it plans to stop funding the World Health Organisation, where it is the main donor. Washington does not like much at the WHO. But the main thing is that China has so far been able to exert more influence on its work than the United States itself. Donald Trump is trying to correct this imbalance in the ways characteristic of his policymaking. The result is not yet obvious.

Such course of events makes more than relevant the question of the future of international institutions, the most important achievement of international politics in the 20th century.

Mankind went without constant norms and rules for most of its political history. Since the formation of the first states, collectives of individuals have reflected nothing but their own conscience and the strength of other collectives in their actions. In Europe, the role of arbiter was for a short time, less than 1,000 years, played by the Catholic potentate in Rome. The church did not have its own armies, but it did have moral authority. Moreover, the popes’ lack of their own military power, as well as their claim to the universality of spiritual power, did not allow the Holy See to become one of the ordinary states.

Accordingly, the values ​​and rules that Rome tried to impose during the Middle Ages did not directly express anyone’s values ​​or interests. Therefore, they were relatively fair, for the most part. At the beginning of the 16th century, European states became so strong that they became nonplussed with the power of Rome. Over the next 400 years, they lived practically without any institutions embodying the need to follow the rules. As a result of the Thirty Years’ War of 1618 – 1648, at least general rules of conduct appeared, therefore Kissinger in his book World Order defined the Westphalian system as “having not a substantive, but a procedural character.” This was a great achievement for its time, but it was far from an attempt to establish genuine, civilized relations between peoples. more>

When machines think for us: consequences for work and place

The one sure way not to forecast the impact of artificial-intelligence technologies is technological determinism.
By Judith Clifton, Amy Glasmeier and Mia Gray – Will artificial intelligence affect how and where we work? To what extent is AI already fundamentally reshaping our relationship to work? Over the last decade, there has been a boom in academic papers, consultancy reports and news articles about these possible effects of AI—creating both utopian and dystopian visions of the future workplace. Despite this proliferation, AI remains an enigma, a newly emerging technology, and its rate of adoption and implications for the structure of work are still only beginning to be understood.

Many studies have tried to answer the question whether AI and automation will create mass unemployment. Depending on the methodologies, approach and countries covered, the answers are wildly different. The Oxford University scholars Frey and Osborne predict that up to 47 per cent of US jobs will be at ‘high risk’ of computerisation by the early 2030s, while a study for the Organisation for Economic Co-operation and Development by Arntz et al asserts that this is too pessimistic, finding only 9 per cent of jobs across the OECD to be

In a new paper, we argue that the impact of AI on work is not deterministic: it will depend on a range of issues, including place, educational levels, gender and, perhaps most importantly, government policy and firm strategy.

First, we challenge the commonly held assumption that the effects of AI on work will be homogeneous across a country. Indeed, a growing number of studies argue that the consequences for employment will be highly uneven. Place matters because of the importance of regional sectoral patterns: industrial processes and services are concentrated and delivered in particular areas. At present AI appears to coinhabit locations of pre-existing regional industry agglomerations.

Moreover, despite globalisation, national and local industrial cultures and working practices often vary by place. Different cultural work practices mean that, once deployed, the same technology may operate distinctly in diverse environments. more>

Updates from McKinsey

Banking models after COVID-19: Taking model-risk management to the next level
The COVID-19 pandemic has revealed unexpected flaws in the business models that banks rely upon. How can they best address this challenge?
By Marie-Paule Laurent, Olivier Plantefève, Maribel Tejada, and Frédéric van Weyenbergh – The COVID-19 pandemic is taking a terrible toll in human life and in the livelihoods of millions the world over. As people and institutions struggle to contain the spread of the virus, the measures necessarily imposed have caused major economic disruptions.

Every industry has been affected, and banking is no exception. Capital, profit-and-loss, and liquidity positions have been hit very hard. One consequence has been that banks’ models have broken down across their business. The flaws have put the reliability of these models in doubt and suggest that they cannot be trusted to help banks navigate through the crisis.

Few business leaders could have foreseen a global economic shutdown of this magnitude. The models that financial institutions depend on to run their businesses simply did not account for such a crisis. Most models are almost by necessity designed to predict a stable future. In truth, the real failure is not that banks used models which failed in this crisis but rather that they did not have fallback plans to manage when the crisis did come.

There are a number of reasons for the failures. First, model assumptions and boundaries defined at the design stage were developed in a pre-COVID-19 world. Second, most models draw on historical data, without the access to high-frequency data that would enable recalibration. Finally, while access to the needed alternative data is theoretically possible, models would not be able to integrate the new information in an agile manner, because the systems and infrastructure on which they are built lack the necessary flexibility.

Banks are experiencing ever more model failures, and further issues can be expected with time. Financial institutions must now urgently review their model strategies. They need to develop and apply both efficient short-term actions and a long-term plan to improve model resilience. Over two prioritized time horizons, banks can carry out coordinated model adjustments to enable business continuity in the short term while reviewing their model development and redevelopment needs and upgrading their model-risk-management (MRM) frameworks over the longer term. more>

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