Neo-Marxist Approach, Part 1

It's time to put the politics back into political economics.

The Financial Times is taking a first tiny step by introducing ideas of behavioral economics into the discourse. But that is a timid, trivial and bourgeois approach to a bigger problem.

Let's begin by accepting that the current analytical framework is roughly as bankrupt as the financial services sector that crucified the general economy on its own contradictions. So, folks are casting about for something a bit more, er, operative.

There are some serious problems with attempting a neo-Marxist construct to explain the current mess. And that's leaving aside the delicate American queasiness at being labelled a socialist, a commie, a pinko, or anything of that sort. Forget, for the moment, that queasiness, or at least enjoy the outre opportunity to leave respectability behind.

First serious problem is that state directed economic production schemes utterly failed in the 20th century. Call it communism. Call it socialism. Call it state planning. Call it Marxist-Leninist. As a way of organizing complex economic activity, the approach which had its genesis in the writings of Karl Marx and Frederich Engels in the mid-19th century failed the test of history. Their thoughts, as developed and implemented by their followers and adherents, were relatively inferior to alternative approaches to organizing collective economic activities. This approach failed in multiple cultures and different societies. So, let's not even suggest that Marxist-Leninist state planning provides a viable approach to organizing and regulating the economy of a developed or developing country. But that doesn't mean it doesn't offer a tool with which to critique the current situation.

Second serious problem is that no one, and I mean no one, has been pursuing seriously an attempt to apply this analytical framework to the current economic situation for at least a generation. Following the collapse of the Soviet Empire in Eastern Europe, I believe all the departments of Marxist-Leninist studies were shut down. In the West, the few adherents of the approach focused themselves of issues of social justice, income distribution, and the like--not so much attempting to understand the prevailing economic system as critique certain of its outcomes. And most of those guys are either dead or pensioned off. There is no expertise, and there are no experts.

Third serious problem is that there is no coherent and agreed theoretical framework that can be applied to the current crisis. There are (or were) as many flavors of Marxism as there have been flavors of ice cream in the last century or so. And they've all melted into a big puddle. On the other hand, this may be an advantage, since it would allow picking and chosing, adapting and applying what's useful, while leaving the rest of it in the intellectual recycling bin.

With those caveats, we proceed.

Stale News Remains Important

Some things to remember if you want to anticipate the future:

1. In the United States, the financial services sector is and will remain until recapitalized, insolvent. This is a solvency problem, not just a liquidity problem. 6 of 19 per the leaked stress test results, need additional capital. And that's the official story. We need to learn how to get along without those guys.

2. U.S. house prices are and will continue to decline, making it impossible to value a huge chunk of assets critical to financial services sector liquidity. The sociological consequences of unemployed company store peons trapped in real estate they don't own are interesting. And, commercial real estate is in the early stages of joining the residential stuff in a revaluation. While the trajectory is the same, the commercial stuff will be, ah, lumpy, and less suceptible to smoothing.

3. The regulatory apparatus has been captured by the financial services sector. Whatever squabbling is under way within the political classes (viz., the competitive outing of Raul Emmanuel and Larry Summers this month, and the Thain/Lewis catfight, with Paulson calling the count), has yet to metastize into a purge of the financial elite. While bullets in the head aren't called for in America, a rather less drastic purge in, ahem, called for. This is, incidentally, a global issue.

4. The epicenter of this particular crisis was in at the heart of the developed world, and that is where the pain is most likely to be felt most intently. Countries like China, India and Brazil have an opportunity to, if not displace their betters, at least join them at the high table. If that happens, look for some changes in the menu.

And that is the way it looks from here, today.