55. If A Market Is Not A Market …

Long ago when the world was young I went to a high school to learn about the won­der­ful power of Mar­kets and The Invis­i­ble Hand. A mar­ket itself didn’t have to be a shabby patch of ground with fruit stalls and bric-a-brac on sale. A mar­ket was a place, even an imag­i­nary place, where con­tracts were exchanged. Con­tracts were a kind of agree­ment where two par­ties agreed to exchange A for B for mutual ben­e­fit.

Many kinds of con­tracts in his­tory have only been pos­si­ble when both par­ties agreed first of all to fol­low some set of rules. For exam­ple a man and woman might choose to live together because they find each other sex­u­ally excit­ing. Pretty soon how­ever, to avoid con­flict, they come to agree­ments about money, house­work, hav­ing chil­dren (or not), and all the rest. In fact we know that most cul­tures have devel­oped strict for­mal rules about such rela­tion­ships, and sealed the deal with some­thing defined as a mar­riage con­tract.

How­ever, the peo­ple who taught me about mar­ket rela­tion­ships were called econ­o­mists. These econ­o­mists usu­ally con­ceded that there needed to be com­mer­cial rules or laws about par­tic­u­lar kinds of mar­ket rela­tion­ships. For exam­ple, the buy­ers and sell­ers of motor vehi­cles within Aus­tralia have to work within cer­tain rules of dis­clo­sure, com­mit­ment and so on. How­ever, the econ­o­mists insisted that over and above the influ­ence of local, par­tic­u­lar reg­u­la­tions, mar­ket rela­tion­ships were gov­erned by a set of nat­u­ral laws, akin to the ‘laws’ of physics, or per­haps biol­ogy. This was ‘The Invis­i­ble Hand’. For exam­ple, if there were many buy­ers and few sell­ers, the exchange rela­tion­ship (hence the price if money was involved) would be tilted in favour of sell­ers.

The sup­ply and demand law exam­ple seemed rea­son­able to an eco­nomic neo­phyte. Quickly my eco­nom­ics teach­ers pro­jected this nice exam­ple to encom­pass and define the uni­verse of daily life in which we strug­gle to make a dol­lar. At this point in the the­sis, even as a 17 year old, my bull­shit detec­tors went on red alert. The Invis­i­ble Hand sounded remark­ably like the Invis­i­ble God, a trick of social con­trol bran­dished by fright­ened author­ity fig­ures, whom I had long since ceased to hold in awe. Ergo, I repeated the pat­ter they wanted to hear for some exam­i­na­tion papers, duly got an ‘A’ pass, and forever decided that eco­nom­ics was mostly hum­bug.

Chuck­ing out mar­ket conun­drums with the eco­nomic bible in fash­ion was the tac­ti­cal mis­take of a teenager. Firstly the prob­lems, if not the solu­tions, were gen­uine. Sec­ondly, it took me too long to learn that the human world was a warped place, run­ning on mocked-up, back-of-an-envelope scrib­bled solu­tions whose truth didn’t mat­ter. If get­ting a nice job and nods of respect were the goal, then you had to suck up to WHO scrib­bled on the backs of envelopes, not WHAT they scrib­bled. Actu­ally, I could never bring myself to swal­low this fact of life, which is why I’m a washed-up fail­ure, and why eco­nom­ics text books con­tinue to sell for impres­sive sums of money.

Well, it is far too late to do me any good, but The Invis­i­ble Hand has been hav­ing a rough time of it lately. This is very inter­est­ing. Since the man­age­ment pro­fes­sional class was invented by James Burn­ham in 1941, this priest­hood has claimed to inter­pret the will of The Invis­i­ble Hand for the unwashed masses. How­ever, like most priest­hoods, they soon began to invent a self-serv­ing scrip­ture. A major tool of the invented eco­nomic scrip­ture, as played by the sect of Invest­ment Man­agers, has been Invented Mag­i­cal Mar­kets, oper­at­ing beneath the veil of Pub­lic Mar­kets and known only to the cho­sen few. Pretty early in the game of mod­ern cap­i­tal­ism, it was seen that insider trad­ing (or what I have called an Invented Mar­ket) was toxic to Pub­lic Mar­kets. Solemn rules were there­fore pro­mul­gated against insider trad­ing. Ha ha. What a for­lorn exer­cise. The enforcers were that very class of the eco­nomic priest­hood most likely to ben­e­fit from vio­la­tion of the rules. The his­tory of eco­nomic booms and busts for two hun­dred years now has been a tale of new ways to pull off insider trad­ing in hid­den Invented Mag­i­cal Mar­kets.

The Great Finan­cial Crash of 2008 which has denuded mil­lions of employ­ment and their life sav­ings in the North­ern Hemi­sphere is now writ­ten into the text books of Eco­nom­ics 101 as pun­ish­ment by The Hid­den Hand for the sins of play­ing with finan­cial deriv­a­tives. Finan­cial deriv­a­tives were for­tune cook­ies stuffed with dope to reduce any sem­blance of crit­i­cal think­ing by investors to mush. They were cre­ated of course by that wiley priest­hood of eco­nomic man­age­ment for their per­sonal profit, as always, through the time­less tricks rou­tine of Invented Mag­i­cal Mar­kets. We all nod wisely. So, that will never hap­pen again, will it?

Uh, yes it will. Actu­ally it never stopped hap­pen­ing, even as the mask was ripped from George Bush and his eco­nomic gen­er­als of the uni­verse. The tril­lions of dol­lar cred­its, cre­ated with a stroke of the pen in Wash­ing­ton were a shriek­ing air raid siren to the priest­hood of invest­ment man­agers and their clients, who stam­peded away from the impend­ing infla­tion of dol­lars, into sup­pos­edly safer com­mod­ity invest­ments. Hence com­mod­ity prices became hugely inflated instead, appar­ently trans­fer­ring wealth into the arms of com­mod­ity pro­duc­ers and away from con­sumers (who just hap­pened to include the same mon­keys who were invest­ing). Yet even this was a trick. Hot off the press now we learn about vast hid­den tides of “dark inven­tory” – in effect an ocean of “vir­tual com­modi­ties” mas­querad­ing as real com­modi­ties in hid­den com­modi­ties mar­kets. These vir­tual inven­tions (let’s just call them orga­nized lies) have fatally pol­luted real com­modi­ties mar­kets and now turn­ing toxic (deja vu of deriv­a­tives / junk bonds any­one?) are about to crash ashore like a tsunami with all the car­nage of a sec­ond GFC (http://atimes.com/atimes/Global_Economy/MJ26Dj02.html ). With luck, at least the price of petrol might drop before Aus­tralia goes down the gur­gle hole.

Mean­while, across the Paci­fic lake in the turgid smog of Bei­jing, those other, Com­mu­nist mas­ters of the uni­verse saved China from the GFC by cast­ing bil­lions of yuan into the seething jun­gle of Chi­nese cap­i­tal­ism. Well, didn’t they? Save the Party, that is. Hmm. The actual enter­prises that make things that can be sold for moolah weren’t on the A-list for Bei­jing hand­outs. Those sweat soaked enter­prises are no soul mates of risk-adverse bureau­crats count­ing their pen­sion con­tri­bu­tions in nice offices. Nope, the tor­rent of yuan went down vac­uum chutes to banks (gov­ern­ment owned) who fun­neled it to SOEs (gov­ern­ment owned enter­prises, money los­ing by def­i­n­i­tion), who fun­neled it into build­ing whole cities of new apart­ment tow­ers. Why? Well, it all has to do with the crazy logic of Chi­nese cap­i­tal­ism.

You actu­ally lose about 3% a year offi­cially (more in real­ity) by putting your money into a Chi­nese bank. That is, infla­tion tops out bank inter­est by a wide mar­gin. So the mid­dle classes have squir­reled their sav­ings into apart­ment “invest­ments” – now around 60 mil­lion EMPTY apart­ments that MUST even­tu­ally lose money. Nobody will buy these apart­ments as a liv­ing propo­si­tion because the resale prices are in dream­land, set for “profit”. Mean­while tens of mil­lions of unhappy young cou­ples delay mar­riage, unable to ever afford hous­ing. There are whole cities of empty apart­ments, a time bomb wait­ing to explode.

Ah, but those bil­lions of yuan from Bei­jing were not even exhausted by build­ing ghost cities. The slob man­agers in SOEs there­fore set up unof­fi­cial, legally uncon­trolled “trust funds” to lend cap­i­tal to cash starved real busi­nesses at up to 60% inter­est a year. Even at Eco­nom­ics 101 level, you’d think that this would look like a sure, unsus­tain­able loser. Well, des­per­a­tion, greed, and igno­rance are a daz­zling com­bi­na­tion. The real engi­nes of China’s eco­nomic growth, fac­to­ries by the thou­sand, have sated their vora­cious appetite for cap­i­tal by bor­row­ing at impos­si­ble rates. Mean­while, stuck with their empty, unsaleable apart­ments, still flush with cash, Chi­nese cit­i­zens in their mil­lions have spent the last cou­ple of years also pour­ing their per­sonal sav­ings into these unreg­u­lated “trust funds” which promise of vast returns. Talk about a “dark inven­tory”. This fan­tasy lasted until a cou­ple of weeks ago, when a swathe of fac­tory own­ers in Suzhou sud­denly met the real­ity of impos­si­ble debt repay­ments by jump­ing out of win­dows or flee­ing the coun­try. Now the epony­mous “rich­est city in China”, Ordos, is col­laps­ing in sim­i­lar style. We wait in mor­bid fas­ci­na­tion for the domi­noes to fall.

Ref­er­ences

Chung, Olivia (2011) China’s bor­row-and-die epi­demic spreads north. Asia Times. Online at http://atimes.com/atimes/China_Business/MJ26Cb01.html

Cook, Chris (2011) Dark Inven­to­ries and the Death of Mar­kets. Asia Times. Online at http://atimes.com/atimes/Global_Economy/MJ26Dj02.html

Lam, Willy (2011) Bei­jing caught in debt dilemma. Asia Times. Online at
http://atimes.com/atimes/China_Business/MJ21Cb01.html

McDon­ald, Hamish (2011) Clean, open bank­ing a Chi­nese dream. Bris­bane Times. Online at http://www.brisbanetimes.com.au/opinion/politics/clean-open-banking-a-chinese-dream-20111021-1mc4l.html#ixzz1bTnTcUhm

Sempa, Fran­cis P. (2000, Fall) The First Cold War­rior: James Burn­ham (1905–1987). Amer­i­can Diplo­macy, 5:4. Online at www.unc.edu/depts/diplomat/AD_Issues/amdipl_17/articles/sempa_burnham1.html

Sisci, Francesco (2011) Fal­ter­ing China car­ries global risk. Asia Times. Online at http://atimes.com/atimes/China_Business/MJ18Cb01.html

Smith, Adam & oth­ers (1776) The Invis­i­ble Hand dis­cussed as a con­cept in The Wealth of Nations (and in many works later). Out­line online in Wikipedia at http://en.wikipedia.org/wiki/Invisible_hand

Wikipedia (2011) Late 2000s Finan­cial Cri­sis. Online at http://en.wikipedia.org/wiki/Late-2000s_financial_crisis

Zhang, Monan (2011–10-24) Shadow bank­ing risky. China Daily. Online at http://www2.chinadaily.com.cn/opinion/2011–10/24/content_13959381.htm

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