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November 25th 2008

I wrote previously about Anghel Rugina’s critique about the irrational aspects of our economy.[1] He criticized the currency, which had no standard to back it[2]; monetized bank credit, in which banks made loans and charged interest for them (unethically, he maintained) without having the said capital[3]; and the pure speculation of the financial system as opposed to actual investment in production.

Rugina argued that if all capital was invested in production, we would have full employment. Since a portion was used for pure speculation, full employment became impossible. Such irrational speculation also threatened destabilization (or dis-equilibrium) of the economy. In face of the irrational elements distorting an economy, which in and of itself is very complex, a rational monetary policy was impossible. One could not control or measure in any way, for example, the affect an interest rate cut by the Federal Reserve was having on the economy.

According to Rugina, full employment becomes impossible because of speculation. Rick Wolff, an economics professor at the University of Massachusetts at Amherst, approaches our crisis from a very different angle. He argues that the indebtedness of the middle class passed the breaking point, because of wage stagnation and higher expectations. He listed the reasons why real worker wages tended to stagnate after 1974. This stagnation followed wages that rose steadily over the previous 150 years, continually increasing the level of consumption. The middle class interpreted its level of consumption as an increasing level of achievement. Four reasons for wage stagnation were outsourcing of labor, women entering the labor force, low level of wage expectations by immigrants, and highly productive technology that made the replacement of many workers possible. See “Against the Grain,” the National Public Radio program of October 20, 2008.[4]

Along the lines of Rugina, Wolff argued that technology (just think of computers) exploded worker productivity, while employers let wages stagnate, allowing fantastic corporate profit. They placed this profit into the banks, which in turn gave workers easy credit. These borrowed heavily to keep pace with the former steady increase in standard of living and levels of consumption. But now this increase was not due to increased wages in terms of a living wage, but due to taking out loans and making use of credit cards. Somewhat like monetized credit, with banks lending money and charging interest on capital they did not have, corporations gave their profit to financial institutions, which loaned workers money with interest, loaning them money which they had rightfully earned but was withheld from their wages. When credit card loans went to the maximum, the people then took out further loans on the equity of their houses, which seemed unproblematic because of the housing bubble.[5]

Fair wages are thus also crucial to the solution of our financial crisis. According to Wolff regulation and deregulation did not work, thus allow workers representation with voice and vote for the guidance of corporations, in order that they help to find an effective balance and standard of regulation.

Listening to one economist after another, I hear them state that the public sector is the only one functioning in the breakdown of the market system. On the Lehrer Report, NPR, November 24, 2008, one economist argued that tax-payer dollars could buy the whole corporation of Citicorp for the $20 billion of invested capital and the $300 billion insurance for liabilities at risk. Those incredible sums of money should give the tax-payer some say-so, some representation for our public and common interest in this bank, which has become too large to fail. The piece-meal bailouts, (for example, why didn’t they bailout Lehman Brothers?) bring about the moral hazard that other private banks will take advantage of the public sector and its billion dollar bailouts.

Meanwhile the huge discrepancy between the salaries of the financial sector and stagnant wages of regular employees remains. It was reported that Goldman Sachs will have to do without bonuses this year. They will have to make do with their meager $600,000 salaries a year! Working in the financial world is stressful and certainly the CEO’s who make $100 million a year are stressed out, but then what about all the employees whose wages have stagnated while those above have jettisoned into the stratosphere? What about the underemployed, the unemployed, the workers who have been marginalized and left out of the statistics because they have given up seeking employment?

Rugina would agree that free market capitalism spells freedom and a government controlled economy spells a controlled society as well. But why can’t a social economics be devised, where legal institutions and public representation enforces enlightened regulation that safe guards public interests as well as private ones. There should not be a collectivization of costs and a privatization of profits, nor conversely, a collectivization profits and a privatization of costs. Legal institutions and boards safe-guarding public interests should have real representation with voice and vote over the corporations in order to maintain such a balance or equilibrium (to use Rugina’s word). Wolff calls for radically reconstituted boards of directors of corporations in this way. Also see Rugina’s table of mixed economic models from pure private competition to a government controlled economy.[6] I feel that Rugina would argue that we have to be more nuanced in terms of regulation, deregulation, and re-regulation in terms of an institutional and legal framework appropriate to our model of capitalism.

I have not yet integrated into my thoughts above the sociological field theory of Pierre Bourdieu, with its structure, forces, positions, dispositions, and specialized capital. The research of his sociology would investigate many different fields of our economy, providing a more nuanced and closer assessment of economic realities than merely thinking on the level of systems.

One more thought: if proper regulation of business and fair taxation was integral to our branches of government, then such economic boards for safe-guarding the public interest would not be necessary. The government would be doing so. But I sense a conflict of interest when the government should stand for the common interests of the public, but represents financial and corporate interests almost exclusively. A philosophy of government that denigrates its necessary functions of checking injustices, preventing the destruction of the environment, and correcting ethical lapses gets sucked into the very problem it should oppose. To consciously place those with known conflicts of interest at the head of regulating agencies is, of course, to hire the fox to guard the chicken coop. I suppose when government governs well, then self-government develops, so that the government can govern less. Then that government is best which governs least. When the financial institutions and corporations are out of control and even the people themselves, then government must step in again.

Some kind of balance seems to have been lost. Perhaps Rugina’s principle of equilibrium is like that of sustainability. Why did all the investment houses collapse the way they did?

[1] Blogging some Thoughts on Anghel Rugina and our Financial Crisis, October 11, 2008 under the category of economics in

[2]See “On the Indentification of De Facto Currency Pegs,” by Agnès Bénassy Quéré and Benoît Qœuré, February 2003,

[3] That may be another way to refer to leveraging.

[4] The URL for the above archived program is:

[5] I wonder if the corporations put the people into the bubble or the people put the corporations into the bubble or the speculative bug in our system infected both? For the Dot.Com Bubble, I believe the invention of the internet was infected by the Wall Street bubble that then quickly infected Main Street as well. An ever larger percentage of Main Street is in Wall Street.

[6] Anghel N. Rugina: International Journal of Social Economics, Vol 26 No. 10/11, 1999, (pages 1227-1248), page 1244.


Written by peterkrey

November 25, 2008 at 7:37 am

Posted in Economics

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