Tag Archives: Mao

By George P. Brockway, originally published January 17, 1994

1994-1-17 Making a Mess of Russia

THE NEWS FROM RUSSIA these days reduces one very quickly to hysterical laughter or hysterical tears. We sometimes seem to be well on the way toward Cold War II or World War III; and if we achieve one or the other (or both), we’ll have the economists of the world, with our economists in the vanguard, to thank.

Of course, the economists won’t be entitled to all the glory. They couldn’t do it alone. They’ll need the help or at least the acquiescence of the statesmen and bankers of all countries, particularly the United States. Crucial will be the austere devotion to austerity of the International Monetary Fund. No less important will be the casual mistranslation, miscomprehension, or misrepresentation of the news by the daily press and television. If, as economists never tire of repeating, we consumers are sovereign and get what we demand, it will in the end be our fault, and the world will suffer for our stupidity, our ignorance and our laziness.

The foregoing diatribe could have been prompted by almost any day’s news, but was in fact inspired by the lead story in the New York Times a couple of days after Vladimir V. Zhirinovsky‘s surprising showing in the election. The Times correspondent wrote: “In what may be a sign of a weakening of economic resolve after his electoral rebuff on Sunday, President Boris N. Yeltsin today granted new heavily subsidized loans that could aggravate the budget deficit and inflation …. The loans were for farm machinery enterprises at 25 per cent interest a year, far below the Central Bank’s discount rate of 21O per cent, the Interfax news agency said.”

Let’s start with the end. It may be that the Interfax news agency, or someone representing the agency, actually said something like what the Times attributed to it. It may also be that “discount rate” is an accurate translation from the Russian. But maybe not. With us, the term has a precise meaning and requires a developed banking system, which Russia is having difficulty organizing.

According to the Federal Reserve Board, “Discount rates are the cost to member banks of reserve funds obtained by borrowing from Reserve Banks …. discounts for member banks are usually of short maturity-up to 15 days.” A discount rate of 210 per cent is not so outrageous as the GI loan shark‘s “six for five” (a loan of $5 today to be settled with $6 on payday, next week), but it is bad enough to stop all business except gambling and thievery dead in its tracks.

With us the prime rate is usually about double the discount rate. It is inconceivable that the best-run medium-size businesses (who are given the prime rate) should be expected to survive paying 420 per cent for their money. They would do better to sell their assets for whatever they could get for them and lend the proceeds to the suckers still trying to earn a living by working for it.

It makes me sick to think of it, because it was not very long ago, when Paul A. Volcker was chairman of the Federal Reserve, that many thitherto profitable American companies found themselves saddled with such an array of “finder’s fees,” “lawyer’s fees,” “compensating balances” and so on (not to mention a 21.5 per cent prime) that they were paying what was effectively more than 40 per cent interest for their money.  Those who survived the shock treatment did so by firing people, cutting production and raising prices.  Otherwise they couldn’t have paid their bankers’ bills.

President Coolidge observed that “when many people are out of work, unemployment results.” I myself have observed that when many people raise prices, inflation results. In Volcker’s day we got it both ways: the highest unemployment rate since the Great Depression, and the highest inflation rate since World War I. The Russians are getting it both ways now and, oddly enough, they don’t seem to like it.

But let’s not forget about those lucky (or well-connected) farm machinery manufacturers who got the “subsidized” loans at “only” 25 percent, thus somehow throwing the budget out of whack and lighting a fire under inflation. I’ll agree that a loan at 25 per cent is inflationary (not so inflationary as 210 or 420 per cent, but sufficient unto the day). After all, interest is an expense, just as rent and wages are expenses; all expenses increase the cost of doing business; and all costs have to be covered by prices charged. I do not, however, believe that is what the Times story meant.

No, the Times (like the Wall Street Journal and all lesser media) is possessed of the curious fancy that interest expense has the mysterious property of lowering prices, whereas all other expenses raise prices. How this magic works is never explained. In contrast, the Times never mentions the prime rate without  pedantically telling its financial section readers what it is, and always makes sure business people understand that when the bond market rises, the interest rate falls. (For more on the mysteries of interest, I refer you to “Why a Low Interest Rate Is the Proper Preventive of Inflation in a forthcoming issue of the Journal of Post Keynesian Economics.)

Let’s put those farm machinery manufacturers in a larger context. We are told that Russian agriculture is in a bad way, and that Russia needs billions of dollars in foreign aid in order to feed its people. It certainly would be better for everyone (except, perhaps, American, Canadian and Australian wheat farmers) if Russia boosted its own wheat production. And it is, I suppose, no secret that the purpose of farm machinery is the more expeditious production of food. So it should be obvious even to an economist that it would be a smart idea, as well as less inflationary, to get cracking on the production of farm machinery.

But economists know, if they know anything, that international trade is good because it is good, as they have recently taught us in regard to NAFTA and GATT. So even if Russian firms make the best farm machinery (for all I know, they do: Poland is said to make the best golf carts), economists would advise Moscow to import farm machinery on a shock program (shock programs are good because they are good), rather than “subsidize” Russian manufacturers with loans at usurious rates. The alleged subsidy is, they say, inflationary. But assuming the inflation were due to the supposed subsidy, it still could not hold a candle to the inflation caused by unnecessary importing.

There are two sorts of inflation. The sort we’re familiar with is what happens to our Consumer Price Index. The other sort is what is happening to the Russian ruble on the international money market. The two are not closely related, for when all is said and done, even in the brave new global village, domestic markets are many times larger than the import-export business. In the early 1980s, for instance, when our CPI kept on setting new double digit records, our dollar was far “stronger” against foreign currencies than it is today.

The Russian CPI, whatever it is, is undoubtedly very bad because of the usurious interest rates. But it is nothing compared with the free fall of the ruble, which is tumbling because Russia has lost its export markets in Eastern Europe and consequently is unable to import in the style it was accustomed to. When it is said Russian inflation is in excess of 20 per cent a month, that does not mean today’s $2 loaf of bread will be $2.40 next month and $5.97 in six months. It merely means that if you want to show your neighbor what a wheeler and dealer you are, you had better buy your Mercedes today, because it will cost you three times as much if you wait six months.

It is this second kind of inflation that exercises the International Monetary Fund, since it is the Fund’s purpose to make all the world’s currencies interchangeable. It is also this kind of inflation that attracts the attention of Western reporters, who exchange Western for Russian currency to pay for their food and shelter and entertainment. More important, it is this kind of inflation that can get out of hand and pass over into hyperinflation, as it did in the Weimar Republic and then several other places.

Hyperinflation comes about when a nation has debts it can’t repay that are denominated in foreign currencies. Our contribution to Russia’s troubles is a clutch of economic advisers, mostly from Harvard, who seem determined that Russia must destroy the industry it has and borrow to import state-of-the-art factories from us. How else will the Russians be able to compete in the global village (where they were, only yesterday, sufficiently competitive to scare us silly)?

Now, THERE IS in the world a good example of what can happen if you tell the IMF to go peddle its papers. All of a sudden China is being hailed as an economic miracle, more miraculous than Taiwan. I am an authentic old China hand, having spent three weeks there in 1976, when Chairman Mao was still alive. Mao tried shock treatment long before Harvard thought of it. He called it “The Great Leap Forward, and had befuddled peasants trying to make steel in their backyards. It proved a disaster. He tried another shocker – “The Great Proletarian Cultural Revolution – and that, too, passed away, but not before thousands of people were killed and thousands more ruined. After Mao’s death and the defeat of the “Gang of Four,” Deng Xiaoping, who had twice been disgraced by Mao, took over.

Deng is an eclectic gradualist. He followed Mao in scorning foreign loans, in not breaking up the less-than-state-of-the-art factories, in plowing with oxen when tractors were not available, in encouraging (or requiring) teams of workers to plan their year’s work. The plans were subject to veto, but they had the virtue of getting some people to think about what they were doing. It was a form of privatization more meaningful than selling shares of stock on a trumped-up exchange.

Recently Deng has accepted substantial investments by “round-eyes” and has relaxed some controls, especially those on retail trade. Now he is regularizing the currency. Yes, I remember Tiananmen Square; and no, I do not favor the extension of China’s most-favored-nation status. I cite China as an example of what can be done if you take a little time and eschew international finance.

As an example of what is likely to happen after shock treatment, I would cite almost any country in sub-Saharan Africa or South America. All of them are crushed by debts denominated in foreign currencies.

Most of them, bowing to the advice of their IMF masters, have tried to balance their budgets by destroying their civil service, whose officers then supplement their starvation wages with extortion.

The enthusiasts for shock treatment cite Germany’s successful ending of hyperinflation in 1924. They forget that the inflation ran for more than three years, and that those who really got shocked were the bankers and investors who lent Germany money to “pay” the War debts, which were ultimately forgotten. Yeltsin wouldn’t mind that sort of shock.

The New Leader

Originally published April 5, 1982

THE REAGAN Administration is finally taking a sensible and practical (though partial) step toward solving the inflation-and maybe even the stagflation-problem. Work is under way on revision of the Consumer Price Index. It would be better to abolish the CPI altogether, and the Wholesale Price Index and the GNP Deflator along with it; but I’m pleased as Punch to be able to say that at least one step of Reaganomics is pointed in the right direction.

Democrats, of course, will regard the maneuver bitterly, for it is another example of Republicans changing the rules of the game, and getting away with it. Nixon was a master of the trick. He built his political career around claiming the Democrats had lost China, and then triumphantly discovered that Mao and Brezhnev weren’t the same fellow after all. And in the field of economics he trumpeted the old-time laissez-faire line until August 15, 1971, when he bowed to the public opinion polls and suddenly imposed wage and price controls. (Characteristically, he muddied discussion from that day to this by proclaiming, “We are all Keynesians,” though you will search The General Theory in vain for recommendations for wage and price controls.)

Jimmy Carter has reason to be especially bitter. For it was the CPI-and what he did about it-that did him in (if it hadn’t been for Iran, he wouldn’t even have been renominated). Possessing a touching engineer’s faith in statistics and an upwardly mobile boy’s awe of the wisdom of rich men, Carter thought the CPI was real, and that “business confidence” (actually bankers’  and brokers’ greed-induced blindness) required the appointment of a hard-core monetarist as Federal Reserve Board chairman.

To “control” inflation, the Fed promptly sent the interest rate through the roof. But the interest rate is a large factor in the CPI; consequently that, too, went through the roof, dragging all indexed wage scales and transfer payments along with it in a self-sustaining escalation. That wasn’t all, but it was enough to send Carter back to Plains, where, if he is given to second thoughts as well as second birth, he must marvel at the Reagan magic of controlling the rate of inflation by changing the way the rate is calculated.

As I say, however, revising the CPI isn’t quite enough to satisfy me. I want to abolish it, because the whole business of indexing rests on confusion as to what measuring-any measuring-is.

Measuring is a comparing of something with some standard. For example, by laying a metric ruler across this magazine you determine that the page is about 21.6 cm. wide. But how long is a centimeter? Well, a centimeter is 1/100 of a meter, which is 1/1000 of a kilometer, which is 1/10000 of the surface distance from either pole to the Equator or one-quarter of the vertical circumference of the earth. What is the circumference of the earth? This distance is calculated from various observations, which themselves depend on measuring, not only of angles but of distances, so that the meaning of a centimeter is ultimately a function of whatever units of measurement are used as the basis of the calculation. When the calculation was first made with reasonable accuracy, by Eratosthenes in the third century B.C., the basic unit was the stadium, which may or may not have been equal to 600 of somebody’s feet. More recently, before the introduction of the metric system, the unit was the yard, or the length of some king’s stride.

In short, the precision of the length of a centimeter depends on a foot or a yard, or cubit or rod or league or something, and that something has to be absolute. The relation between measuring stick and thing measured is not reciprocal. You can’t use the metric system to calculate the circumference of the earth, for your argument would be truly circular. You might just as well start right out and say-as we actually do say that the distance between two scratches on a certain platinum bar in the Bureau of Standards is a yard, and no fooling.

Although the measuring unit is absolute, it is not a convention. The scoring systems of sports are conventions. Davis Cup tennis doesn’t use the tiebreaker; my friends and I play the nine point sudden-death tie-breaker; most tournaments use-lingering death. These are all conventions. There is nothing necessary about them, because (painful as it is for me to admit it) there is nothing necessary about tennis. Spatial measuring, however, is necessary. Spatial units define space; without them the physical world is formless, and everything we make is impossible. It does not matter whether we measure in yards or meters or cubits; we must measure, or rely on the measuring of others, if we are to have a physical world.

It is the same with money; without it we have no economical world. It is common to talk as though we had a  functioning economic system-complete with land, labor, capital, trade, commercial law, liquidity preferences, and the rest of civilization-and then, just to make this system work a bit more smoothly, we added money to it as a sort of lubricant. Yet this is not the case at all. Our civilization cannot exist without money. It did not merely happen to come into existence with money. It does not exist without money, because it depends upon measuring, and economic measuring is done with money.

Nevertheless, people speak of the purchasing power of money and call attention to the declining value of the dollar. These ways of speaking seem to assume that money has value, like any good or service, and that this value can be measured.

Measuring the value of the dollar means comparing it with the “market basket” of the Consumer Price Index or something similar. Despite the fact that the contents of the market basket can be changed by executive or legislative or merely professional fiat, the basket seems real, while money seems only nominal, or, as Marx called it, “a purely ideal or mental” form of value. But if the value of money is in terms of a market basket, the basket becomes the standard of measurement, and money becomes a commodity [Editor’s italics].

Now, there is no objection in principle to making the market basket, or any part of it, our unit of account. As everyone who has had a little Latin or Anglo-Saxon knows, many ancient peoples counted wealth in terms of cattle, as the Masai still do. This may be clumsy and imprecise, it is not impossible. But if we take that approach, we should not kid ourselves-as I fear our econometricians do-into thinking we have established a “constant dollar.” No market basket is the same to different individuals at any given time (my wife and I set up housekeeping a number of years ago; so we are now relatively unconcerned with the price of furniture). Nor is the basket the same in different historical situations.

Of all the things in the basket, the price of bread is sometimes urged as basic, and it was indeed central in the French Revolution. But today food is so much smaller a part of the family budget, and bread so indifferent a part of the diet, that all the bakeries in the land could shut down tomorrow without causing much more inconvenience than the air controllers’ strike. The same holds true for the GNP Deflator: The price of steel is far less important to me, a book publisher, than it is to a builder of office buildings; and it is more important to a builder at present than it was before the elevator and the electric light made skyscrapers possible.

SUCH DIFFERENCES and changes are occurring all the time. Money measures them. Money is not and cannot be “constant,” because the economic world is not and cannot be constant. The natural world is and must be constant; the normal temperature of the human body is 98.6°F. today and will be the same next year or next century. The world of economics is not natural; it is historical. It is not physical; it is ethical. In it things are done; they don’t simply happen.

Indexing-like so many other things economists have done from Adam Smith onward-is an attempt to reduce economics to an automatic happening. It is also in direct conflict with the system it pretends to serve.

Most economists say that the subject matter of economics is the allocation of scarce resources. (Please note that I don’t say that.) And most go on to say that a market economy, through constant shifts in the relative prices of goods and services, is the most efficient way of accomplishing the allocation. (I’ll assent to that). But the sole purpose of the CPI-and of all the other attempts to measure with “constant” – is to nullify market price shifts. If all prices went up (or down) in precise lockstep, there would be no point to trying to freeze them with an index. Inflation is not every price going up simultaneously; it is some going up much faster than others, with the result that last year’s values are not this year’s, to the delight of some people and some countries, and to the dismay, or even the distress, of others.

Am I saying that inflation is not really a problem that we wouldn’t even be aware of it if we didn’t have indices, and that it would go away if we abolished indices? Well, I am saying something pretty close to that. I’m far from saying that there are no distortions in the economy or that we can do nothing about them; but I am saying that these distortions don’t just happen, and that indexing only makes them worse. And I do make the empirical observation that the three modern economies with the worst inflation experience-Weimar Germany, Brazil and Israel-have all been comprehensively indexed.

Attend with humility to the 1923 lament of Hans von Raumer, Minister of Economics in the second Reich: “The root of the evil is the depreciation adjustment [that is, the index]. Inflation goes on unchecked because one must add enormous increments for depreciation onto wages and prices alike, and these in their turn work in such a manner that the depreciation provided for actually occurs through the inflation thus caused.”

Originally published January 1, 1979

(Editor’s note – Occasionally the New Leader would print selections from correspondence in the form of a mini-article.  This is one)

NEW YORK-The United States probably could not and certainly should not do anything to advance or retard the palace revolution that now seems to be proceeding erratically in the Peoples’ Republic of China. We can and should, however, try to understand it, and our understanding will be clearer if we recognize at once that literal translations of Chinese political slogans and epithets are, let us say, inscrutable.

We of course have some experience ourselves with inscrutable politics. A long line of humorists from Artemus Ward through Mr. Dooley and Will Rogers to Russell Baker and Art Buchwald has found that taking political slogans seriously is always good for a laugh. And we are not alone among Western nations in this regard. The wit of W. S. Gilbert had a similar base; nor is political confusion dead in France, where one of the most conservative parties calls itself Radical.

The present Chinese epithet “Gang of Four” strikes us as a bit bizarre, but it is not likely in itself to mislead us. We know that the Chinese are fascinated by numbers; they have Five Kinds of Red and Seven Kinds of Black and much else. In the present case, the four people have been named, and there seems no reason to doubt that they shared similar ideas.

It is when we ask about these ideas that we run into trouble. The Gang was, we are told, counterrevolutionary, which is odd, because this is the very charge the Gang leveled against its successors. The Gang plotted a return to capitalism-again an odd coincidence. And the Gang distorted the Thought of Mao-still another odd coincidence.

Are we faced, then, merely with a clash of personalities? Is all the uproar caused by a personal aversion of Chiang Ch’ing for Teng Hsaio-ping? Or perhaps by his male chauvinism? Or, as in the ostensible occasion for the Great Cultural Revolution, by a dispute over a critique of a play produced two years ago? Such a reading of the situation is by no means impossible, and it does not exclude other complementary readings. There is plenty of precedent for this sort of thing, both in China and elsewhere.

A famous slogan of Teng’s may lead the way to clarification. “It doesn’t matter,” said he in 1967, “whether a cat is black or white so long as it catches mice.” Few Westerners, with the possible exception of doctrinaires like the late Joseph McCarthy, would dream of objecting to this sentiment, which seems the very model of no-nonsense, can-do, winning-is-the-only-thing pragmatism. Yet this apparently innocuous aphorism was an assigned cause of Teng’s fall from Mao’s grace in 1967 and again in 1976.

This happened for a reason surprising and simple: Mao Tse-tung, one of the greatest movers and shakers of history, one of the most successful of doers, one of the most eloquent proponents of dialectical materialism, was not, in the sense generally understood in the West, a materialist at all.

Mao and the Maoists were certainly proud of their material achievements. Wherever visitors went in the early ’70s they were informed that the farm or the factory or the school or the hospital had produced x before Liberation, 2x after Liberation, and 3x after the Great Proletarian Cultural Revolution. At the same time, it was clear that material progress was not an end in itself. The real objective was equality, material equality to be sure, but liberty and fraternity, too. The Cultural Revolution everywhere shamed and degraded those who enjoyed power or status in industry, in education, in medicine, in the Army, in politics, or down on the farm.

That the systematic-unsystematic, rather-destruction of elites disrupted production may have been a surprise to Mao, but it was evidently a price he was willing to pay. “The class struggle,” he reiterated, “is by no means over.” He followed the Marx of The Critique of the Gotha Program in insisting that distribution was not the problem, that once socialist equality was achieved material progress would take care of itself. In any event, there was for everyone to see the degeneration of the Soviets into the totalitarian bureaucracy of Djilas’ New Class. It was this bureaucratic society that the Maoists saw as Right deviationism, as opportunism, as, in the end, capitalist roadism.

A capitalist roader, then, is not necessarily or even probably sympathetic to the ideals or practices of American society. It is unlikely that free speech and the free market hold charms for him. He is, indeed, more likely to understand and seek to emulate the achievements of the Soviets. Mao, on the other hand, was attracted to the United States just because he found Russia repellent.

In short, China’s capitalist road is not an extension of Wall Street. There are no capitalists or protocapitalists in China, in power or out of power, and we will only be misled if we expect ideological slogans to make allies-or enemies- for us. We will find allies, and enemies, too, but we should look for them on the grounds of real rather than imaginary national interest.

January 1, 1979

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