The Boy Who Could Change the World

by Aaron Swartz

  It’s a vicious cycle: if people buy less, companies make less, which means people get paid less, which means people buy less. And so on, until we’re all out of work. (Thankfully it doesn’t get that bad—but only because some people are refusing to lower their wages. The thing that mainstream economists said was causing unemployment is actually preventing it!)

  But this cycle can be run in reverse. Imagine Donald Trump hires unemployed people to build him a new skyscraper. They’re suddenly getting paid again, which means they can start spending again. And each dollar they spend goes to a different business, which can start hiring people itself. And then those newly hired people start spending the new money they make, and so on. This is the multiplier: each dollar that gets spent provides even more than one dollar’s worth of boost to the economy.

  Now let’s look at things from the employer’s side—say you run a truck factory. How do you decide how many trucks to make? Obviously, you make as many as you think you can profitably sell. But there’s no way to calculate something like that—it’s a question about what customers will do in the future. There’s literally no way to know. And yet, obviously, trucks get made.

  It used to be, Keynes says, that wealthy men just thought investing was the manly thing to do. They weren’t going to sit around and calculate what kind of bonds yielded the greatest expected return. Bonds are for wusses. They were real men. They were going to take their money and build a railroad.

  But they don’t make rich people like that anymore. Nowadays, they put their money in the stock market. Instead of boldly picking one great enterprise to invest in, they shift their money around from week to week (or hire someone else to do it for them). So these days, it’s the stock market that stimulates most new investment.

  But how does the stock market figure out what profits are supposed to be? In truth, it has no more clue than you do. It’s really just based around a convention. We all pretend that whatever the stock price is now is a pretty decent guess and then we only have to worry about the various factors that will cause the stock price to change. We forget about the most basic fact: that nobody has any clue what the stock price should be to begin with.

  So instead of people trying their best to figure out which businesses will make money in the future, and investing in those, we have people trying to figure out which stock prices will change in the future, and trying to get there first. It’s like a giant game of musical chairs—everybody’s rushing not to be the one left standing when the music stops.

  Or, you could say, it’s like those newspaper competitions where you have to pick the six prettiest faces from a hundred photographs. The prize goes to the person who picks the faces that are most picked, so you don’t pick the faces you find prettiest, but instead the faces you think everyone else will find prettiest. But it’s not even that, since everyone else is doing the same thing—you’re actually picking the faces you think everyone else will think everyone else will find prettiest! And no doubt there are some people who take this even further.

  You might think this means that someone who actually did the work and tried to calculate expected profits would clean up, taking money from all the people playing musical chairs. But it’s not so simple. Calculating expected profits is really quite hard. To make money, you’d have to be unusually good at it, and it seems much easier to just guess what everyone else will do.

  And even if you were somehow good at guessing long-term profits, where would you get the money to invest? It’s in the fundamental nature of your strategy that your investments seem crazy to everyone else. If you’re successful, they’ll write it off as a lucky fluke. And when your stocks aren’t doing well (which is most of the time—they’re long-term picks, remember), people will take this as evidence of your failures and pull their money out.

  The scary thing is that the more open our markets get, the faster people can move their money around and the more trading is based on this kind of speculation instead of serious analysis. And that’s scary because—recall—the whole point of the stock market is to decide the crucial question of what we, as a society, should build for the future. As Keynes says, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

  The best solution is probably a small tax on each trade. Not only would this raise a ton of money (modern estimates suggest even a tiny tax could raise $100 billion a year), it would help redirect all the brains on Wall Street from these wasteful games of musical chairs to something actually useful.

  But even if we solve the problem of the stock market, there’s still some irreducible uncertainty. Because whether new investment makes sense always depends on whether the economy will be doing well in the future. And whether the economy is doing well depends on whether there’s new investment. So, at the end of the day, investment doesn’t depend simply on a careful calculation of future expected yield, but on our “animal spirits,” our optimism about the future. It’s this factor that exaggerates booms and deepens slumps and makes it hard to get out of a bad situation.

  Even more perversely, it means economic performance depends in no small part on keeping businessmen happy. If electing Obama gets businessmen depressed, they might pull back their investments and send the economy into a slump. It doesn’t even have to be intentional—they may very well believe that a President Obama is bad for the economy. But when you have a system that only works when businesspeople feel good, their fears become a self-fulfilling prophecy.

  The result, Keynes suggests, is that the government will have to step in to prevent the economy from crashing every time rich people get a bit of indigestion.

  So that’s how we calculate the income side of things, now what about costs? Most costs are pretty clear—you need to buy equipment and hire people. But since you need to make stuff now that you can only sell in the future, one of your big costs is going to be money to use in the meantime. And the cost of money is just the interest rate. (If you get a loan for a million dollars at 5% interest, you’re essentially paying $50,000 for the right to use the money now.)

  Thus lowering interest rates increases investment—it reduces the cost of getting money, which reduces the cost of making stuff, which means more things can make a profit. And if more things can make a profit, more things get made, which means more people get hired. So what determines the interest rate?

  Well, if the interest rate is the cost of money, the obvious answer is the amount of money in circulation. If there’s a lot of money lying around, you can get some pretty cheap. Which means that, fundamentally, unemployment is caused by a lack of money: more money (assuming people don’t hoard it all) means lower interest rates, lower interest rates (assuming expected profits don’t crash) means higher investment, higher investment (assuming people don’t stop buying) means more employment, and more employment means higher prices, which means we’re going to need more money.

  Money is created by the central bank (the Federal Reserve in the U.S.), which decides what they want the interest rate to be and then prints new money (which they use to buy up government debt) until the interest rate is where they want. To get the economy back on track, all they have to do is keep lowering interest rates until investment picks up again and everyone has a job.

  But there’s one catch: the interest rate can’t go below zero. (Keynes didn’t think this problem was very likely, but in the U.S. we’re facing it right now.) What do you do if the interest rate is zero and people are still out of work?

  Well, you can pray that billionaires will start hiring us all to build them giant mansions, but that’s no way to run a country. The government has to step in. Instead of waiting for billionaires to build pleasure domes, the government can hire people to build things we all need—roads, schools, houses, high-speed Internet connections. Although, honestly, it doesn’t have to be things we all need. They could hire people to do anything. This is why inspecting the stimulus money for waste is so ridicul
ous—waste is perfectly fine, the important thing is to get the money into circulation so that the economy can get back on track.

  Another good solution is redistributing income. Poor people are a lot more likely to spend money than billionaires. If we take some money from the billionaires and give it to the poor, the poor will use it to buy things they need and people will get jobs making those things.

  Remember that money is just a kind of illusion. In reality, there are just people who want things and people who make things. But we’re stuck in a completely ridiculous situation: there are lots of people who desperately want jobs making things—they’re literally not doing anything else—while at the same time there are lots of people who desperately want things made. It seems ridiculous not to do something about this just because some people have all the little green sheets of paper!

  Capitalism seems to go through frustrating cycles of booms and busts. Some people say the solution is just to prevent the booms—raise interest rates so the party doesn’t get out of hand and we won’t all be sorry the next morning. Keynes disagrees: the remedy “is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

  Think back to the dot-com era, when venture capitalists were spending all their money laying fiber-optic cable under the street. The right solution wasn’t for the Fed to raise interest rates until even punch-drunk venture capitalists could realize all this investment in fiber wouldn’t be profitable. The right solution was to take their money away. Give it to the poor, who will spend it on something useful, like food and clothing.

  So those are Keynes’ prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time—from around the 1940s to the 1970s—that’s kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs.

  But, starting in the 1970s, the rich staged a counterattack. They didn’t like watching inequality—and their wealth—melt away. There was a resurgence in classical economics, Keynes was declared to have been debunked, and interest rates were raised drastically, throwing millions out of work. The economy tanked, inequality soared, and things have never been the same since. For a while people talked about levels of inequality that hadn’t been seen since the 1920s. Then they talked about a recession the size of which hadn’t been seen since the 1930s.

  Once again, Keynes provides us with the instructions on how to get out of this mess. The question is whether we’ll follow them.

  Toward a Larger Left

  http://crookedtimber.org/2009/08/04/toward-a-larger-left/

  August 4, 2009

  Age 22

  Stanford, like many universities, maintains full employment for humanities professors by requiring new students to take their seminars. My heart burning with the pain of societal injustice, I chose the one on “Freedom, Equality, Difference.”

  Most of the other students had no particular interest in the topic—they were just meeting the requirement. But a significant minority did: like me, they cared passionately about it. They were the conservatives, armed with endless citations on how affirmative action was undermining American meritocracy. The only other political attitude I noticed was a moderate centrism, the view espoused by the teacher, whose day job was studying just-war theory.

  It quickly became clear that I was the only person even remotely on the left. And it wasn’t simply that the others disagreed with me; they couldn’t even understand me. I remember us discussing a scene in Invisible Man where a factory worker brags he’s so indispensable that when he was out sick the boss drove to his house and begged him to come back, agreeing to put him in charge. When I suggested Ellison might be implying that labor, not management, ought to run workplaces, the other students (and the teacher) didn’t just disagree—they found the idea incomprehensible. How could you run a factory without managers?

  This is the reproduction of American intellectual culture: a large number of vocal and articulate conservatives, a handful of mushy moderately liberal centrists, and an audience that doesn’t much care. (Completing the picture, the teacher later shouted me down for bringing up inconvenient facts during a discussion of Vietnam.)

  It’s a future that worries George Scialabba. He cares passionately about the humane left-wing tradition, but he’s forced to watch it shrivel. As he observes, the conservatives receive prominent places in industry (including industry-funded think tanks), the centrists are quarantined in hyperspecialized programs at universities, and the real leftists can barely get a toehold. (The Soviet Union fell, seems to be the dominant position. Why are you still here?)

  The question is what to do about it. George hails the few exceptions (Noam Chomsky, Alexander Cockburn—names presumably picked to provoke) who have managed to eke out a niche exposing the falsehoods and bucking the consensus, getting pushed to the cultural margins for their trouble. Henry proposes a more technical version, where left-wing critics don’t argue to the public (which in practice seems to mean the 20,000 readers of Z Magazine) but instead to elites, especially disciplinary experts, using a field’s flaws against itself (à la Doug Henwood). And Michael seems to make the usual retort that such extremism never gets an audience, let alone an accomplishment—only incrementalism and realist accommodation to power will make a difference in people’s lives (perhaps Ezra Klein could be the poster boy here).

  This debate is not dispassionate. It’s a muddy mix of trying to work out what to do with our lives and how to justify what we’ve already done. Personally, I adore Chomsky, Henwood, and Klein—I find both their writing and their personalities incredibly inspirational. And while I could quibble with their strategies, it’s difficult for me to imagine, let alone desire, a world in which they did anything particularly different. But my own plans—forged in that Stanford classroom and (to my surprise) unshakable ever since—take a different tack.

  A new media world is emerging. The mainstream media outlets that won’t even bother to print Chomsky’s response when they libel him are fading, while alternative media explodes. Alexander Cockburn publishes not one, but a dozen articles each day at CounterPunch.org. Amy Goodman has a daily television news show carried on over 700 stations. There’s a whole Chomsky industry, which gets at least a shelf even at suburban chain bookstores. Socialist-feminists like Barbara Ehrenreich write New York Times bestsellers. Hell, we even have a socialist U.S. senator now!

  Then there’s the whole new generation of political bloggers. Daily Kos, Atrios, and so on have a combined readership in the millions and are all consistently venomous toward the bulk of the Democratic Party and the media. Their work is broadcast nightly on major networks by Jon Stewart and Rachel Maddow. (The West Wing even made Atrios a character.) Even Scialabba admits (although not in his book) that if he wants to spend time with like-minded friends, he heads to Crooked Timber.

  But while this clearly has a salutary effect on mainstream political culture (witness Stephen Kinzer’s transformation from Noam Chomsky’s bête noire to Amy Goodman’s guest), it hasn’t exactly created an alternative culture of its own. Conservatives, centrists, liberals—they all repeat their fundamental premise: We’ve got a pretty good system going here. Sure, there may be some trouble around the edges (liberals think more, conservatives think less), but, as McCain said, the fundamentals are still strong. The lines are so well publicized that even college freshmen can repeat them down to the sound bite.

  The left has succeeded in making it sound hollow and unconvincing. Your average liberal blogger is happy to admit all the papers are full of lies, all the politicians are bland sellouts, and the government is run by lobbyists and corporate hacks. And (nothing new here) your average citizen is happy to agree (it takes a lot of education to be dumb enough to think otherwise). But where do you go from there? Elect Howard Dean?

  The Popular Front is long dead, the labor unions have all
but fizzled out, the New Left never had much of a plan (“We must name that system,” SDS cried. “We must name it, describe it, analyze it, understand it and change it”; apparently they never got past naming) and barely even exists anymore. The term socialism has become so watered down that it polls roughly equal with capitalism among the under-30 set—apparently it now means anything to the left of austere neoliberalism (except file sharing, of course).

  If there was ever a time for a new program, this would seem to be it. The economic crisis has shattered the Washington Consensus more than a thousand Chomsky op-eds could, while the Internet has made it possible to organize people by the million. But the left can’t seem to move beyond its reactive stance. If you want books that criticize the policies of the Bush administration, you can fill up a whole library. But if you want books on what to do instead, where do you go? The only left-of-center group seriously putting out policy proposals is Third Way. (Sample recommendation: “Moderniz[e] our intelligence force . . . [hold a p]ress conference highlighting the 20th anniversary of the creation of al Qaeda.”)

  There is a coherent, alternative ideology on the left. Scialabba, summarizing Chomsky, even takes a stab at laying it out: “The fundamental purpose of American foreign policy has all along been to maintain a favorable investment climate . . . the American intelligentsia, though less harshly and clumsily regulated than its Soviet counterpart, has been no less effectively subordinated to the goals of the state.” (I would add only that the domestic economy is structured to make the majority of the population expendable servants of the rich.) Scialabba lays it out, but Chomsky (as far as I can find) never does.

  I’ll even go further and take a stab at describing Chomsky’s solution: democracy. Media democracy, to prevent the population from being misled by deluded elites with big megaphones. Economic democracy, to promote a better mix and fairer distribution of societal goods and necessary evils. And political democracy, so that our military isn’t led by murderous thugs into endless immoral engagements.