Did you ever wonder why most economists could not predict the financial crisis of 2008? It’s because they use models focusing on public markets, rather than strategic private financial decisions, either to drive prices up or drive prices down.
James Nolt, a professor of international relations at New York University, explains the often hidden private element as well as different financial interests that drive business and financial markets, and often decide war or peace. It is the theory of corporatism that Nolt convincingly explains. This theory, often suspected by many regular folk, holds that businesses run the world.
“Political struggle, public and private, determines much of what happens in the government and the economy,” writes Nolt. “Exercise of power, to be effective, often must be covert.”
The exercising of power is furthermore strategic, much as Niccolò Machiavelli, Carl von Clausewitz, and Sun Tzu talk about political struggle and war. James Nolt explains the interplay between economics and politics in the international political economy through their vantage point.
So, unfortunately, if we grant so much power to private parties and also give them the attributes Machiavelli espouses in his works, it means the world will not become a better place if we reduce the power of governments in order to increase individual freedom.
Far from being a statist, Nolt concedes: “There are plenty of examples around the world today and throughout history that clearly show that the antithesis of lawful government is not individual freedom, but rather rule by warlords and gangsters.”
The Story of Credit
“Private power comes in many forms, but most decisive throughout the centuries is the power to advance or withdraw credit,” writes Nolt.
Nolt understands that with few exceptions it has always been banks who issue and control credit, or the money we use, whether it was in electronic or paper form.
We will never know whether the powerful 19th century banker Amschel Mayer Rothschild really said the following words attributed to him, but they certainly ring true in Nolt’s book: “Permit me to issue and control the money of a nation, and I care not who makes its laws.”
Because of the dual nature of credit (somebody always owes, somebody always owns) there are naturally two opposing parties in most business and financial transactions. It could be the debtor who wants inflation to go rampant to erode his debt or the speculator, who would like nothing more than prices to fall so he can move in at much lower prices.
It could be the average Joe who bought stocks to save for retirement and hopes they will rise in price pitted against the speculator who borrowed stocks on the margin to sell them short and benefits from a price decline.
For everybody who read the works of Steve Keen and Piero Sraffa, Nolt’s debunking of neoclassical economics is nothing new (and he does cite both on occasion), however, he adds a completely new dimension by arguing that most of economic and financial theories serve the explicit purpose to condition the masses to react in certain ways to certain impulses. Strategic players can then exploit that herd behavior.
“It is better for the moguls of finance if most ordinary traders are blinkered. Staff traders have a lot in common with eighteenth-century Prussian grenadiers. What they need to be useful is not truth, but training,” writes Nolt and cites the debunked Black and Scholes formula for option pricing as an example.
The real decisions are made behind closed doors and information is accumulated by private players at the cost of the public, like at Initial Public Offerings, the collection of limit orders by brokers, and all private loans.
“The myth of the market includes the naïve perspective that everything interesting about the economy occurs in public view,” Nolt writes.
It is in this domain the bulls (people promoting credit extension) and the bears (people promoting credit rationing) carry out their fights.
There are “culminating points during which the economy might tip one way or the other, depending on the relative power of the bears and bulls,” just like in September of 1929 and 2008.
Banks have special power in this case, as they can either increase or decrease credit (or money) at these crucial times. “They can engineer a crash,” but can also start a boom.
In the last chapter, Nolt describes the struggle of the bulls and the bears going on right now in our time, the struggle between inflationary forces and deflationary ones.
In a nutshell, banks and governments are too heavily indebted to let interest rates rise significantly, a process which normally happens with increased real economic activity. This hampers growth and innovation in other sectors, which do not have access to the capital they need. Instead, banks use the low interest credit to speculate in the global derivatives casino.
Efforts by banks and governments to inflate away the debt are countered by free trade and technological innovation which is positively deflationary.
As for central banks: “[They] are in fact committed to serving the trading interests of the great private banks, which have become the ‘projectors and stock-jobbers’ that Adam Smith decried.”
What is going to happen in the future? Nolt says it’s hard to predict, the essence of any good strategy.
“This is not a period of great moderation, but an era of unregulated extremes. Attention to private power and strategy is necessary to have any hope of predicting its course.”
For anyone involved in business, finance, and politics, it would be a good strategy to read Nolt’s book.
“International Political Economy: The Business of War and Peace” (Routledge 2015)