Month: June 2020

Sorry for the deliberately click-bait-y headline, but I think this message is important to get out there.

In my discussions few months back on What is Neoliberalism, I noted that a core element of neoliberal philosophy is that markets are the only efficient, effective and rational way to distribute goods and services.

Neoliberals profess the idea that only competitive markets can allocate “scarce” resources efficiently, and that it is only such “free” markets that can lift people out of poverty and deliver broad prosperity. They pound it into our heads constantly.

Yet the Covid-19 crisis has illustrated spectacular and pervasive failures of such “free” markets all over the globe, and especially in the U.S. Instead of fairness or efficiency, we see systemic failure in every market we look: the food industry, the medical industry, the retail industry, the employment market. Resources are being destroyed and misallocated on a massive scale

Let’s start with the food industry, because food is the most important thing (nine means from anarchy, and all that). Thousands and thousands of pigs are being slaughtered, their meat left to rot, eaten by no-one, regardless of the forces of supply and demand:

The United States faces a major meat shortage due to virus infections at processing plants. It means millions of pigs could be put down without ever making it to table…

Boerboom, a third-generation hog farmer, is just one of the tens of thousands of US pork producers who are facing a stark reality: although demand for their products is high in the nation’s grocery stores, they may have to euthanise and dispose of millions of pigs due to a breakdown in the American food supply chain.

Meat shortage leaves US farmers with ‘mind-blowing’ choice (BBC)

Potatoes are sitting in Belgian warehouses and left to rot, only two short years after a drought threatened to produce a severe shortage:

Belgium: Lighthearted campaign to ‘eat more fries’ aims to lift heavy load (DW)

Meanwhile, dairy farmers in the U.S. heartland are dumping milk into the ground, to be drunk by no one.

Cows don’t shut off: Why this farmer had to dump 30,000 gallons of milk (USA Today)

In fact, the whole food situation is rather ugly, as this piece from The Guardian summarizes:

This March and April, even as an astounding 30 million Americans plunged into unemployment and food bank needs soared, farmers across the US destroyed heartbreaking amounts of food to stem mounting financial losses.

In scenes reminiscent of the Great Depression, dairy farmers dumped lakes of fresh cow’s milk (3.7m gallons a day in early April, now about 1.5 million per day), hog and chicken farmers aborted piglets and euthanized hens by the thousands, and crop growers plowed acres of vegetables into the ground as the nation’s brittle and anarchic food supply chain began to snap and crumble.

After delays and reports of concealing worker complaints, meatpacking plants that slaughter and process hundreds of thousands of animals a day ground to a halt as coronavirus cases spread like wildfire among workers packed tightly together on dizzyingly fast assembly lines.

Meanwhile, immigrant farmworkers toiled in the eye of the coronavirus storm, working and living in crowded dangerous conditions at poverty wages; at one Washington state orchard, half the workers tested positive for Covid-19. Yet many of these hardest working of Americans were deprived of economic relief, as they are undocumented. Advocates report more farmworkers showing up at food banks – and some unable to access food aid because they can’t afford the gas to get there.

None of this is acceptable or necessary and it’s not just about Covid-19, it’s also illustrative of a deeply deregulated corporate capitalism. America’s food system meltdown amid the pandemic has been long-developing, and a primary cause is decades of corporate centralization and a chaotic array of policies designed to prop up agribusiness profits at any cost.

Farmers are destroying mountains of food. Here’s what to do about it (Guardian)

That doesn’t sound very “efficient” to me, does it? How about you? Free market fundamentalists, care to weigh in?

Meanwhile, hospitals in the United States, which one would think are the most important thing to keep open during a pandemic, are actually closing across the country. These are the very things you want most to be open! Why is this happening? Because health care in the U.S. is a profit-driven enterprise that “competes” in the free market. Because elective procedures—their cash cow—have either been suspended or postponed. U.S. hospitals are closing because they are dependent upon these elective procedures to shore up their profits, and markets rely on profits.

As the deadly virus has spread beyond urban hotspots, many more small hospitals across the country are on the verge of financial ruin as they’ve been forced to cancel elective procedures, one of the few dependable sources of revenue. Williamson Memorial and similar facilities have been struggling since long before the pandemic — at least 170 rural hospitals have shut down since 2005, according to University of North Carolina research on rural hospital closures.

But even as hospitals in cities like New York City and Detroit have been deluged with coronavirus patients, many rural facilities now have the opposite problem: their beds are near-empty, their operating rooms are silent, and they’re bleeding cash.

More than 100 hospitals and hospital systems around the country have already furloughed tens of thousands of employees, according to a tally by industry news outlet Becker’s Hospital Review. They’ve sent home nurses and support staffers who would be deemed essential under state stay-home orders.

Rural hospitals are facing financial ruin and furloughing staff during the coronavirus pandemic (CNN)

And how about allocating labor via impersonal markets? How’s that going? Well, not so well. The workers with the skills most desperately needed on the front lines during the crisis are taking pay cuts and getting laid off left and right. Instead of contributing, they are sitting at home, unable to work even if they wanted to:

At a time when medical professionals are putting their lives at risk, tens of thousands of doctors in the United States are taking large pay cuts. And even as some parts of the US are talking of desperate shortages in nursing staff, elsewhere in the country many nurses are being told to stay at home without pay.

That is because American healthcare companies are looking to cut costs as they struggle to generate revenue during the coronavirus crisis.

“Nurses are being called heroes,” Mariya Buxton says, clearly upset. “But I just really don’t feel like a hero right now because I’m not doing my part.”

Ms Buxton is a paediatric nurse in St Paul, Minnesota, but has been asked to stay at home.

At the unit at which Ms Buxton worked, and at hospitals across most of the country, medical procedures that are not deemed to be urgent have been stopped. That has meant a massive loss of income.

Coronavirus: Why so many US nurses are out of work (BBC)

It’s an ironic twist as the coronavirus pandemic sweeps the nation: The very workers tasked with treating those afflicted with the virus are losing work in droves.

Emergency room visits are down. Non-urgent surgical procedures have largely been put on hold. Health care spending fell 18% in the first three months of the year. And 1.4 million health care workers lost their jobs in April, a sharp increase from the 42,000 reported in March, according to the Labor Department. Nearly 135,000 of the April losses were in hospitals.

As Hospitals Lose Revenue, More Than A Million Health Care Workers Lose Jobs (NPR)

So it doesn’t seem like “free and open” markets are doing so well with either health care or labor.

Meanwhile, U.S. states are competing against each other for desperately needed PPE equipment, bidding up the price and preventing scarce resources from going to where they are most badly needed, which would naturally be where Covid-19 has struck the hardest:

As coronavirus testing expands and more cases of infection are being identified, doctors, nurses and other healthcare workers are scrambling to find enough medical supplies to replenish their dwindling supply.

But state and local governments across the United States are vying to purchase the same equipment, creating a competitive market for those materials that drives up prices for everyone.

“A system that’s based on state and local governments looking out for themselves and competing with other state and local governments across the nation isn’t sustainable,” said John Cohen, an ABC News contributor and former acting Undersecretary of the Department of Homeland Security, “and if left to continue, we’ll certainly exacerbate the public health crisis we’re facing.”

“There’s a very real possibility,” he added, “that those state and local governments that have the most critical need won’t get the equipment they need.”

Competition among state, local governments creates bidding war for medical equipment (ABC News)

Yet neoliberals always tell us how important “competition” is in every arena of life.

Failure, failure, failure! Everywhere we look, we see failure. Pervasive, systematic failure. Resources going unused. Surpluses of food being dumped even while people go hungry and line up at food banks. Workers with necessary skills sitting at home, twiddling their thumbs. Other workers unable to even earn a living to support themselves and their families, no matter how badly they want to work. Masks and protective equipment NOT going to where they are most needed, their costs inflating, befitting no one except profiteers even as people die.

Tell me again about how the market is “efficient” at distributing resources. Tell me again about how central planning inevitably results in wasted resources, surfeits and shortages.

And here is the big, bold, underscored point:

The free-marketeers want to trumpet the market’s successes, but they don’t want to own its failures.

Free-market boosters always want to talk about the wonderful benefits of markets. How they allow multiple people to coordinate their activities across wide variations of space and time. How they allow knowledge to be distributed among many different actors. How they favor tacit knowledge that a single entity could not possess. Libraries of encomiums have been written celebrating the virtues of the “free” market. You know their names: The Provisioning of Paris, Economics in One Lesson, Free to Choose, I Pencil, and all of that. Much of what passes for economic “science” is simply cheerleading for markets– the bigger, freer and less-regulated the better.

Okay, fair enough.

But how about market failures? Why don’t they ever talk about that? Because if you read the economics books I cited above, you would come away with the idea that there are no market failures! That, in fact, there is no such thing. That markets, in effect, cannot fail!

If you want to own the successes, you need to own the failures.

Oh, they love, love, love to talk about central planning’s “failures”. They can’t get enough of that. They love to talk about empty shelves in the Soviet Union, long lines at supermarkets, the lack of toilet paper in Venezuela (amusingly, now a problem throughout the capitalist world), and the allegedly long waiting times in “socialized medicine” countries. We are constantly subjected to that drumbeat day after day after day. It’s part of every economics 101 course. Central planning doesn’t work. Central planning is inefficient. Central planning is “tyranny.”

But what about all that stuff I cited above?

Where are all the free-market fundamentalists now?

What is their excuse?

They’ll use special pleading. They’ll argue that it’s exceptional circumstances. That no one could have foreseen a “black swan” event like the global Covid-19 pandemic (despite numerous experts warning about it for years). They’ll tell us that markets work just fine under “normal” circumstances. They’ll say we cannot pass any kind of judgement on the failings of markets during such an unusual event.

Here’s why that argument is bullshit:

Pandemics are a real, and recurring phenomenon in human history. We’ve been incredibly fortunate that we’ve been in rare and atypical hundred-year period from 1918-1919 to today without a global pandemic or novel disease we couldn’t quickly contain and/or eradicate.

But pandemics are always—and always have always been—a societal threat, even if we’ve forgotten that fact. And the experts tell us that there will be a lot more of them in our future, with population overshoot, environmental destruction, encroachment on formerly unoccupied lands and climate change proceeding apace. What that means is this:

If your economic system can’t function properly during a pandemic, then your economic system is shit.

If your economic system only works when conditions are ideal, in fact depends upon conditions being ideal, then, your economic system doesn’t really work at all. If something like a pandemic causes it to seize up and fail, then your economic system is poorly designed and doesn’t work very well. Not only do the free markets graphed on economists’ chalkboards not exist in anywhere the real world, they apparently rely on a blissful Eden-like Arcadia to function as intended—a situation any causal glance at human history tells us is highly unusual. Any disruption and they fall like dominoes. They are about as resilient as tissue paper.

And the stresses are only going to get worse in the years ahead, with climate change making some areas uninhabitably hot, while other places are submerged under rising sea levels. And that’s before we get to the typical natural disasters like volcanic eruptions, tsunamis and earthquakes. And there will be new novel plant diseases as well, unfolding against the increasing resistance of germs to antibiotics.

Will the free market fundamentalists and libertarian market cheerleaders acknowledge this???

Don’t hold your breath.

No, they will continue to lionize “private initiative” at every opportunity, while completely ignoring the stuff I opened this post with. They’ll sweep it under the rug or, more likely, simply handwave it away. They’ll continue to say that we need to scale back government regulation and interference and let the invisible hand sort it all out.

Because discipline of modern economics as practiced today is not a science. It may not even rise to the level of a pseudoscience. It’s PR for laissez-faire capitalism.

Of course, we’ve had market failures before. They occurred all throughout the nineteenth century and during Great Depression, for example. These are well-documented. But many of the things that came out of those bygone market failures to prevent or mitigate them have been systematically and deliberately dismantled over the past generation due to rise of neoliberalism.

And now we’re paying the price.

Karl Polanyi made an important distinction between markets and Market Society. Markets are where people come together to buy, sell, and exchange surplus goods. These have existed throughout history. They are tangential to society; embedded in something larger than it. Such markets can be shut down without causing an existential threat to civilization.

But Market Society is dependent upon impersonal forces of supply and demand and functioning markets for absolutely everything in the society, from jobs to food to health care. Everything is oriented around maximizing private profits, and not human needs. Markets failing to function adequately lead to unemployment, sickness, starvation and death. Shutting them down is an existential threat to civilization.

As Dmitry Orlov wrote in his best-known work, the Russians survived the collapse of the Soviet Union precisely because they didn’t rely on the Market.

Naturalizing markets in this way is an abdication of both causal and moral responsibility for famines, a way to avoid reality and the ethical consequences for people in a position to change things. Markets are not given; they are predicated on a host of laws and social conventions that can, if the need arises, be changed. It makes no sense for American farmers to destroy produce they can’t sell while food banks are struggling to keep up with demand. This kind of thinking is a way for powerful people to outsource ethical choices to the market, but the market has no conscience.

Famine Is a Choice (Slate)

Now, to be clear I’m not necessarily making an argument for or against central planning as opposed to markets. That’s a different discussion.

But my core point is simply this: you cannot discuss market successes without discussing market failures. To do so is intellectually dishonest, disingenuous, and not to mention incredibly dangerous and irresponsible. If economics were a real science, instead of just PR for capitalism, it would take a look at the things I described above, and figure out ways they could have been avoided, regardless of any preconceived ideology or assumptions about the “right” way to arrange a society, or assumptions about how things “should” work. It would seek out ways for society to become, in Nassim Taleb’s terminology, “antifragile.”

But don’t hold your breath for that, either.

A lot of people have been utterly mystified by the fact that the stock market seems to be going up and up and up, even as unemployment soars to Great Depression levels, pandemics shut down economies across the globe, American cities are in full revolt, the military is on the streets, clouds of locusts stalk Africa, hurricane season approaches, and the world just generally seems to be melting down around us.

How the f*ck can stocks still be going up???

First the obvious statement: stocks are not the economy. But I’m sure you already knew that. As Paul Krugman put it:

[W]henever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy. That is, the relationship between stock performance — largely driven by the oscillation between greed and fear — and real economic growth has always been somewhere between loose and nonexistent…Did I mention that the stock market is not the economy?

The stock market is simply a casino. Yes, yes, you’ll read in the economic textbooks written by very serious academic scholars using sophisticated academic terms like “capital resource allocation,” and “price discovery,” and all that, as well as about how distinguished gentlemen are doing very, very serious research and making totally rational assumptions about the future needs of society based on prospectuses and sober, realistic assessments of future earnings and capital flows and…blabbity-blabbity-blah.

Don’t believe a word of it—it’s a f*cking casino. That’s the best way to describe what’s going on when you strip away all the economic jargon designed to baffle us into thinking it’s something so sophisticated that us mere mortals with our puny brains cannot possibly understand.

News flash: Casinos aren’t rational!

Now, of course, it’s not just pure dumb luck like spinning a roulette wheel. It’s obvious that some companies have better future prospects than others. You can get information to make informed choices, just as you can count cards to do better at games of blackjack. But the future is inherently unknowable, and stocks are as much bets on the future as they are assessments of the present.

So what’s a stock worth? What someone else is willing to pay for it.

And I hope you’re smart enough not to buy in to economists’ explanation about how this is all totally rational. In fact, as anyone who has had a family member with a chronic gambling addiction in their lives knows all too well, it is precisely when one is gambling and seeking a windfall that one is at their least rational.

Furthermore, stock bubbles have been a persistent phenomenon through the entire history of capitalism, from the Tulip Bubble (where a single tulip bulb equaled a years’ wages), to the Mississippi bubble, to the South Sea Bubble, to railroad mania, the Great Depression, to 2008, and everything in between.

However, I have a theory as to why today’s stock market seems to be so awesomely divorced from the actual world as to seem like it’s on a totally different planet.

In the age of neoliberalism, with wages having been hollowed out for generations, gambling in the stock market is now the only realistic way to make money anymore. Internet gurus like Mr. Money Mustache gain fame and celebrity by telling us we can all get rich by pouring all our money into stonks and retire at 30! (seriously, this is what the guy says). Everywhere on the internet, everyone seems to have morphed overnight into little mini-J.P. Morgans, managing their oh-so complex portfolios, buying and selling their way into the one percent and ready to share their galaxy brain financial knowledge with the rest of us mortals. On Reddit, anyone not gambling in the market is a chump and deserves to starve!

Our only way to retire, we re told, is buying stocks. Even pension funds are invested in stocks. They even tried to put all our Social Security money into the stock market, for crying out loud (which totally wouldn’t have unrealistically inflated stock values at all, oh no!)

Where else is the money gonna go???

Basically neoliberalism has built everything around the edifice of the stock market. Everything is wrapped up in it. Absolutely everything is invested in these imaginary numbers, untethered from reality. It might as well be a f*cking video game score. To that end, we can all just extend and pretend forever. Why the hell not?

Stocks, stocks, stocks, stocks. Is it any wonder the market always goes up?

To be alive in America is to be assaulted by endless high-decibel blather about the critical importance of the stock market. There are entire TV channels devoted to it, new highs are always celebrated on network news, it’s on the front page of newspapers, it’s on an app that comes preinstalled on your iPhone, and the president is constantly yelling at you about it.

Yet the stock market has little direct relevance for regular people. By some estimates, the richest 10 percent of U.S. households account for over 80 percent of American stock ownership. The richest 1 percent by themselves own half of that, or 40 percent of stock. Half of Americans own no stock at all.

Once you understand this, the media’s stock market mania is maddeningly hilarious. It’s as though half of the national news was yammering about the weather in Greenwich, Connecticut. (“Our top story on ABC World News Tonight: This afternoon Greenwich was unseasonably warm.”) And no one notices how bizarre this is.

By contrast, think about economic facts with concrete relevance to the lives of normal people: the unemployment rate, whether the middle class is getting raises, if the minimum wage is going up, strikes, health care, workplace safety. There’s no cable TV ticker about that.

Coronavirus Matters, the Stock Market Doesn’t, and Thinking It Does May Literally Kill Us (The Intercept)

Paul Krugman also points to the lack of alternatives for actual productive investment:

Investors are buying stocks in part because they have nowhere else to go. In fact, there’s a sense in which stocks are strong precisely because the economy as a whole is so weak. What, after all, is the main alternative to investing in stocks? Buying bonds. Yet these days bonds offer incredibly low returns. The interest rate on 10-year U.S. government bonds is only 0.6 percent, down from more than 3 percent in late 2018. If you want bonds that are protected against future inflation, their yield is minus half a percent. So buying stock in companies that are still profitable despite the Covid-19 recession looks pretty attractive.

And why are interest rates so low? Because the bond market expects the economy to be depressed for years to come, and believes that the Federal Reserve will continue pursuing easy-money policies for the foreseeable future. As I said, there’s a sense in which stocks are strong precisely because the real economy is weak.

Crashing Economy, Rising Stocks: What’s Going On? (New York Times via Reddit)

And, of course, the Federal reserve is pumping staggering amounts money into the stock market, buying up assets all over the place. By some measures, several trillion have been spent buying up assets such as stocks, bonds and other securities. Strangely, neither Joe Biden nor Donald Trump ever once asked howyagunnapayforit—they only do that for policies that benefit anyone outside the investor class.

Now, to the point: Nearly all financial trading nowadays is done by bots. That is, computers trading with each other to get the best deal. The technical tern for this is fintech (financial tech).

I tried to find out how long the average stock is held today. I couldn’t find it. I’ve heard everything from four months to 22 seconds. The only point of agreement is that they are being held for shorter and shorter time periods over the years, and trading volume has increased by a big amount (just how big is also hard to discern). But just how short is a mystery. Michael Hudson apparently buys the 22 seconds figure:

Michael Hudson, a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund recently said: “Take any stock in the United States. The average time in which you hold a stock is – it’s gone up from 20 seconds to 22 seconds in the last year. “Most trades are computerised. Most trades are short-term. The average foreign currency investment lasts – it’s up now to 30 seconds, up from 28 seconds last month. The financial sector is short term, yet they talk as if they’re long term.”

Computerised high-frequency trading, which makes up about 70pc of all trades, is the subject of the book, The Fear Index, published late last year.

https://www.telegraph.co.uk/finance/personalfinance/investing/9021946/How-long-does-the-average-share-holding-last-Just-22-seconds.html

However, this Business Insider article disputes some of those figures, citing the original source, but it doesn’t give any alternative figures. I would imagine BI doesn’t want people to start questioning the stock market, and Hudson is very plugged in to the finance and economic worlds, so I think his figures can be trusted. Most financial reporting that us “ordinary people” can find via Google is designed to prop up the legitimacy of the casino by pulling the wool over our eyes.

This is just anecdote, but I was talking with a friend who works in IT. He was talking about someone he knew who worked in tech in the financial sector. He told me that this person moved one of the computers from one office to another office closer to the fiber optic line to shave off 15 femtoseconds from trading speed. Yes, femotoseconds, that’s what he said. To save you the search, a femtosecond is one quadrillionth of a second (10^-15)

Now, bots are obviously unaware that the world is melting down around them. How could they? They have only one goal: buy and sell stocks to maximize value—almost like the mythical Paperclip Maximizer of AI paranoia.

What’s the cardinal rule of stock buying? Buy low and sell high.

We humans tend to do the opposite thanks to cognitive biases such as loss aversion and the Bandwagon Effect. We see stocks going up and we want to buy. We see stocks going down and we get spooked, so we sell. That is, we do the opposite of what we should rationally be doing—we tend to buy high and sell low.

So that’s why the financial industry turned to computers.

Computers do not have the irrational biases that fallible humans do. That’s why they are considered better. And that’s why trading is increasingly done by these computers, often fortified with some sort of AI to game the system using algorithms developed by “quants”. I’ve repeatedly heard that the trading pits where you see all those angry, overweight white dudes in ties screaming at each other like a troop of rabid baboons until they’re beet-red in the face, is kept open only as a sort of performance theater for the masses—there’s no actual trading going on there anymore. It’s all run by computers.

It’s hard to get good data on this; there seems to be a lot of secrecy surrounding it. Presumably they need to prop up the legitimacy of the “democratic” stock market for us average rubes.

But if you’re a bot and you’re designed to buy low, what happens when stocks start dropping in price? When the price is dropping, that means stocks are cheaper. When this happens to fairly good (esp. blue-chip) stocks, that means that they are undervalued. So what do you do? You buy!

Of course, you don’t know the real world of actual people and things “out there” is melting down, because you’re just a brain in a box.

So the computer brain in the box just sees “undervalued stocks” and thinks “buy”. And then other bots see this and they buy too. They follow their instructions. And then they sell the stocks to each other. Wash, rinse repeat. Almost like a simulation.

And, voilà, the stock market goes up. Trading goes on as normal. Paradoxically, the lower the prices go, the more undervalued the stocks appear to the bots, and so the more they buy expecting to get a bargain. So buying activity actually increases! And then the bots buy and sell the stocks to each other, until they go back up to more-or-less where they were before, which they read as the “correct” price, because they are just brains in boxes, with no knowledge that meatspace is quickly sliding into the depths of hell.

A video game score is the appropriate analogy here. What “real world” thing is your video game score tied to? Does it care whether you’re sick or unemployed? No, it only cares whether you’re playing, and the number is just a made up number based on the whim of a bunch of computer programmers somewhere.

So, the reason stocks are still so high, in my theory, aside from just the Fed money bazooka, is because trading is done by machines with simple mandates based on number crunching, blissfully unaware of the real world going on outside the box, which is riddled with pandemic disease, increasing violence, insurrection, social breakdown, economic depression, and environmental collapse.

I imagine a time in the far future where, after the oceans have risen and coastal cities drowned, when the Amazon rain forest has been slashed and burned and billions flee parts of the globe too hot for human metabolism, after 70 percent of terrestrial animals have gone extinct and we’re scraping the ocean floor for methane hydrates to run our remaining power stations, the computers will still be happily swapping stocks between each other, trading away in the darkness, unmonitored, sending the Dow to 100,000,000, or whatever imaginary nonsense number it will be in the future.

That’s my theory, anyway. However, I have no specialist knowledge in either trading or fintech, so I might be way off on this. If by some unlikely circumstance, someone with actual inside knowledge of either computerized trading or the stock market happens to read this, please let me know if this theory holds any water or is total bullsh!t. Thanks.

BONUS:

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