[Peace-discuss] Chomsky on the financial crisis

[C. G. Estabrook]

"...the breakdown of the Bretton Woods system in the early 1970s is probably the 
major international event since 1945, much more significant in its implications 
than the collapse of the Soviet Union...."

	Chomsky: Understanding the Crisis — Markets, the State and Hypocrisy
	Sameer Dossani | February 10, 2009
	Foreign Policy In Focus <www.fpif.org>

Noam Chomsky is a noted linguist, author, and foreign policy expert. Sameer 
Dossani interviewed him about the global economic crisis and its roots.

SAMEER DOSSANI: In any first year economics class, we are taught that markets 
have their ups and downs, so the current recession is perhaps nothing out of the 
ordinary. But this particular downturn is interesting for two reasons: First, 
market deregulation in the 1980s and 1990s made the boom periods artificially 
high, so the bust period will be deeper than it would otherwise. Secondly, 
despite an economy that's boomed since 1980, the majority of working class U.S. 
residents have seen their incomes stagnate — while the rich have done well most 
of the country hasn't moved forward at all. Given the situation, my guess is 
that economic planners are likely to go back to some form of Keynesianism, 
perhaps not unlike the Bretton Woods system that was in place from 1948-1971. 
What are your thoughts?

NOAM CHOMSKY: Well I basically agree with your picture. In my view, the 
breakdown of the Bretton Woods system in the early 1970s is probably the major 
international event since 1945, much more significant in its implications than 
the collapse of the Soviet Union.

 From roughly 1950 until the early 1970s there was a period of unprecedented 
economic growth and egalitarian economic growth. So the lowest quintile did as 
well — in fact they even did a little bit better — than the highest quintile. It 
was also a period of some limited but real form of benefits for the population. 
And in fact social indicators, measurements of the health of society, they very 
closely tracked growth. As growth went up social indicators went up, as you'd 
expect. Many economists called it the golden age of modern capitalism — they 
should call it state capitalism because government spending was a major engine 
of growth and development.

In the mid 1970s that changed. Bretton Woods restrictions on finance were 
dismantled, finance was freed, speculation boomed, huge amounts of capital 
started going into speculation against currencies and other paper manipulations, 
and the entire economy became financialized. The power of the economy shifted to 
the financial institutions, away from manufacturing. And since then, the 
majority of the population has had a very tough time; in fact it may be a unique 
period in American history. There's no other period where real wages — wages 
adjusted for inflation — have more or less stagnated for so long for a majority 
of the population and where living standards have stagnated or declined. If you 
look at social indicators, they track growth pretty closely until 1975, and at 
that point they started to decline, so much so that now we're pretty much back 
to the level of 1960. There was growth, but it was highly inegalitarian — it 
went into a very small number of pockets. There have been brief periods in which 
this shifted, so during the tech bubble, which was a bubble in the late Clinton 
years, wages improved and unemployment went down, but these are slight 
deviations in a steady tendency of stagnation and decline for the majority of 
the population.

Financial crises have increased during this period, as predicted by a number of 
international economists. Once financial markets were freed up, there was 
expected to be an increase in financial crises, and that's happened. This crisis 
happens to be exploding in the rich countries, so people are talking about it, 
but it's been happening regularly around the world — some of them very serious — 
and not only are they increasing in frequency but they're getting deeper. And 
it's been predicted and discussed and there are good reasons for it.

About 10 years ago there was an important book called Global Finance at Risk, by 
two well-known economists John Eatwell and Lance Taylor. In it they refer to the 
well-known fact that there are basic inefficiencies intrinsic to markets. In the 
case of financial markets, they under-price risk. They don't count in systemic 
risk — general social costs. So for example if you sell me a car, you and I may 
make a good bargain, but we don't count in the costs to the society — pollution, 
congestion and so on. In financial markets, this means that risks are 
under-priced, so there are more risks taken than would happen in an efficient 
system. And that of course leads to crashes. If you had adequate regulation, you 
could control and prevent market inefficiencies. If you deregulate, you're going 
to maximize market inefficiency.

This is pretty elementary economics. They happen to discuss it in this book; 
others have discussed it too. And that's what's happening. Risks were 
under-priced, therefore more risks were taken than should have been, and sooner 
or later it was going to crash. Nobody predicted exactly when, and the depth of 
the crash is a little surprising. That's in part because of the creation of 
exotic financial instruments which were deregulated, meaning that nobody really 
knew who owed what to whom. It was all split up in crazy ways. So the depth of 
the crisis is pretty severe — we're not to the bottom yet — and the architects 
of this are the people who are now designing Obama's economic policies.

Dean Baker, one of the few economists who saw what was coming all along, pointed 
out that it's almost like appointing Osama bin Laden to run the so-called war on 
terror. Robert Rubin and Lawrence Summers, Clinton's treasury secretaries, are 
among the main architects of the crisis. Summers intervened strongly to prevent 
any regulation of derivatives and other exotic instruments. Rubin, who preceded 
him, was right in the lead of undermining the Glass-Steagall act, all of which 
is pretty ironic. The Glass-Steagall Act protected commercial banks from risky 
investment firms, insurance firms, and so on, which kind of protected the core 
of the economy. That was broken up in 1999 largely under Rubin's influence. He 
immediately left the treasury department and became a director of Citigroup, 
which benefited from the breakdown of Glass-Steagall by expanding and becoming a 
"financial supermarket" as they called it. Just to increase the irony (or the 
tragedy if you like) Citigroup is now getting huge taxpayer subsidies to try to 
keep it together and just in the last few weeks announced that it's breaking up. 
It's going back to trying to protect its commercial banking from risky side 
investments. Rubin resigned in disgrace — he's largely responsible for this. But 
he's one of Obama's major economic advisors, Summers is another one; Summer's 
protégé Tim Geithner is the Treasury Secretary.

None of this is really unanticipated. There were very good economists like say 
David Felix, an international economist who's been writing about this for years. 
And the reasons are known: markets are inefficient; they under-price social 
costs. And financial institutions underprice systemic risk. So say you're a CEO 
of Goldman Sachs. If you're doing your job correctly, when you make a loan you 
ensure that the risk to you is low. So if it collapses, you'll be able to handle 
it. You do care about the risk to yourself, you price that in. But you don't 
price in systemic risk, the risk that the whole financial system will erode. 
That's not part of your calculation.

Well that's intrinsic to markets — they're inefficient. Robin Hahnel had a 
couple of very good articles about this recently in economics journals. But this 
is first year economics course stuff — markets are inefficient; these are some 
of their inefficiencies; there are many others. They can be controlled by some 
degree of regulation, but that was dismantled under religious fanaticism about 
efficient markets, which lacked empirical support and theoretical basis; it was 
just based on religious fanaticism. So now it's collapsing.

People talk about a return to Keynesianism, but that's because of a systematic 
refusal to pay attention to the way the economy works. There's a lot of wailing 
now about "socializing" the economy by bailing out financial institutions. Yeah, 
in a way we are, but that's icing on the cake. The whole economy's been 
socialized since — well actually forever, but certainly since the Second World 
War. This mythology that the economy is based on entrepreneurial initiative and 
consumer choice, well ok, to an extent it is. For example at the marketing end, 
you can choose one electronic device and not another. But the core of the 
economy relies very heavily on the state sector, and transparently so. So for 
example to take the last economic boom which was based on information technology 
— where did that come from? Computers and the Internet. Computers and the 
Internet were almost entirely within the state system for about 30 years — 
research, development, procurement, other devices — before they were finally 
handed over to private enterprise for profit-making. It wasn't an instantaneous 
switch, but that's roughly the picture. And that's the picture pretty much for 
the core of the economy.

The state sector is innovative and dynamic. It's true across the board from 
electronics to pharmaceuticals to the new biology-based industries. The idea is 
that the public is supposed to pay the costs and take the risks, and ultimately 
if there is any profit, you hand it over to private tyrannies, corporations. If 
you had to encapsulate the economy in one sentence, that would be the main 
theme. When you look at the details of course it's a more complex picture, but 
that's the major theme. So yes, socialization of risk and cost (but not profit) 
is partially new for the financial institutions, but it's just added on to 
what's been happening all along.

Double Standard

DOSSANI: As we consider the picture of the collapse of some of these major 
financial institutions we would do well to remember that some of these same 
market fundamentalist policies have already been exported around the globe. 
Specifically, the International Monetary Fund has forced an export-oriented 
growth model onto many countries, meaning that the current slowdown in U.S. 
consumption is going to have major impacts in other countries. At the same time, 
some regions of the world, particularly the Southern Cone region of South 
America, are working to repudiate the IMF's market fundamentalist policies and 
build up alternatives. Can you talk a little about the international 
implications of the financial crisis? And how is it that some of the 
institutions responsible for this mess, like the IMF, are using this as an 
opportunity to regain credibility on the world stage?

CHOMSKY: It's rather striking to notice that the consensus on how to deal with 
the crisis in the rich countries is almost the opposite of the consensus on how 
the poor countries should deal with similar economic crises. So when so-called 
developing countries have a financial crisis, the IMF rules are: raise interest 
rates, cut down economic growth, tighten the belt, pay off your debts (to us), 
privatize, and so on. That's the opposite of what's prescribed here. What's 
prescribed here is lower interest rates, pour government money into stimulating 
the economy, nationalize (but don't use the word), and so on. So yes, there's 
one set of rules for the weak and a different set of rules for the powerful. 
There's nothing novel about that.

As for the IMF, it is not an independent institution. It's pretty much a branch 
of the U.S. Treasury Department — not officially, but that's pretty much the way 
it functions. The IMF was accurately described by a U.S. Executive Director as 
"the credit community's enforcer." If a loan or an investment from a rich 
country to a poor country goes bad, the IMF makes sure that the lenders will not 
suffer. If you had a capitalist system, which of course the wealthy and their 
protectors don't want, it wouldn't work like that.

For example, suppose I lend you money, and I know that you may not be able to 
pay it back. Therefore I impose very high interest rates, so that at least I'll 
get that in case you crash. Then suppose at some point you can't pay the debt. 
Well in a capitalist system it would be my problem. I made a risky loan, I made 
a lot of money from it by high interest rates and now you can't pay it back? Ok, 
tough for me. That's a capitalist system. But that's not the way our system 
works. If investors make risky loans to say Argentina and get high interest 
rates and then Argentina can't pay it back, well that's when the IMF steps in, 
the credit community's enforcer, and says that the people of Argentina, they 
have to pay it back. Now if you can't pay back a loan to me, I don't say that 
your neighbors have to pay it back. But that's what the IMF says. The IMF says 
the people of the country have to pay back the debt which they had nothing to do 
with, it was usually given to dictators, or rich elites, who sent it off to 
Switzerland or someplace, but you guys, the poor folks living in the country, 
you have to pay it back. And furthermore, if I lend money to you and you can't 
pay it back, in a capitalist system I can't ask my neighbors to pay me, but the 
IMF does, namely the US taxpayer. They help make sure that the lenders and 
investors are protected. So yes it's the credit community's enforcer. It's a 
radical attack on basic capitalist principles, just as the whole functioning of 
the economy based on the state sector is, but that doesn't change the rhetoric. 
It's kind of hidden in the woodwork.

What you said about the Southern Cone is exactly right. For the last several 
years they've been trying to extricate themselves from this whole neoliberal 
disaster. One of the ways was, for example Argentina simply didn't pay back its 
debts, or rather restructured them and bought some of it back. And folks like 
the President of Argentina said that "we're going to rid ourselves of the IMF" 
through these measures. Well, what was happening to the IMF? The IMF was in 
trouble. It was losing capital and losing borrowers, and therefore losing its 
ability to function as the credit community's enforcer. But this crisis is being 
used to restructure it and revitalize it.

It's also true that countries are driven to commodity export; that's the mode of 
development that's designed for them. Then they will be in trouble if commodity 
prices fall. It's not 100% the case, but in the Southern Cone, the countries 
that have been doing reasonably well do rely very heavily on commodity export, 
actually raw material export. That's even true of the most successful of them, 
Chile, which is considered the darling. The Chilean economy has been based very 
heavily on copper exports. The biggest copper company in the world is CODELCO, 
the nationalized copper company — nationalized by President Salvador Allende and 
nobody has tried to privatize it fully since because it's such a cash cow. It 
has been undermined, so it controls less of the copper export than it has in the 
past, but it still provides a large part of the tax base of the Chilean economy 
and is also a large income producer. It's an efficiently run nationalized copper 
company. But reliance on copper export means you're vulnerable to a decline in 
the price of commodities. The other Chilean exports like say, fruit and 
vegetables which are adapted to the U.S. market because of the seasonal 
differences — that's also vulnerable. And they haven't really done much in 
developing the economy beyond reliance on raw materials exports — a little, but 
not much. The same can be said for the other currently successful countries. You 
look at growth rates in Peru and Brazil, they're heavily dependent on soy and 
other agricultural exports or minerals; it's not a solid base for an economy.

One major exception to this is South Korea and Taiwan. They were very poor 
countries. South Korea in the late 1950s was probably about the level of Ghana 
today. But they developed by following the Japanese model – violating all the 
rules of the IMF and Western economists and developing pretty much the way the 
Western countries had developed, by substantial direction and involvement of the 
state sector. So South Korea, for example built a major steel industry, one of 
the most efficient in the world, by flatly violating the advice of the IMF and 
the World Bank, who said it was impossible. But they did it through state 
intervention, directing of resources, and also by restricting capital flight. 
Capital flight is a major problem for a developing country, and also for 
democracy. Capital flight could be controlled under Bretton Woods rules, but it 
was opened up in the last 30 years. In South Korea, you could get the death 
penalty for capital flight. So yes, they developed a pretty solid economy, as 
did Taiwan. China is a separate story, but they also radically violated the 
rules, and it's a complex story of how it's ending up. But these are major 
phenomena in the international economy.

Government Investment

DOSSANI: Do you think the current crisis will offer other countries the 
opportunity to follow the example of South Korean and Taiwan?

CHOMSKY: Well, you could say the example of the United States. During its major 
period of growth – late 19th century and early 20th century – the United States 
was probably the most protectionist country in the world. We had very high 
protective barriers, and it drew in investment, but private investment played 
only a supporting role. Take the steel industry. Andrew Carnegie built the first 
billion-dollar corporation by feeding off the state sector — building naval 
vessels and so on — this is Carnegie the great pacifist. The sharpest period of 
economic growth in U.S. history was during the Second World War, which was 
basically a semi-command economy and industrial production more than tripled. 
That model pulled us out of the depression, after which we became far and away 
the major economy in the world. After the Second World War, the substantial 
period of economic growth which I mentioned (1948-1971) was very largely based 
on the dynamic state sector and that remains true.

Let's take my own institution, MIT. I've been here since the 1950s, and you can 
see it first hand. In the 1950s and 1960s, MIT was largely financed by the 
Pentagon. There were labs that did classified war work, but the campus itself 
wasn't doing war work. It was developing the basis of the modern electronic 
economy: computers, the Internet, microelectronics, and so on. It was all 
developed under a Pentagon cover. IBM was here learning how to shift from 
punch-cards to electronic computers. It did get to a point by the 1960s that IBM 
was able to produce its own computers, but they were so expensive that nobody 
could buy them so therefore the government bought them. In fact, procurement is 
a major form of government intervention in the economy to develop the 
fundamental structure that will ultimately lead to profit. There have been good 
technical studies on this. From the 1970s until today, the funding of MIT has 
been shifting away from the Pentagon and toward the National Institute of Health 
and related government institutions. Why? Because the cutting edge of the 
economy is shifting from an electronics base to a biology base. So now the 
public has to pay the costs of the next phase of the economy through other state 
institutions. Now again, this is not the whole story, but it's a substantial part.

There will be a shift towards more regulation because of the current 
catastrophe, and how long they can maintain the paying off banks and financial 
institutions is not very clear. There will be more infrastructure spending, 
surely, because no matter where you are in the economic spectrum you realize 
that it's absolutely necessary. There will have to be some adjustment in the 
trade deficit, which is dramatic, meaning less consumption here, more export, 
and less borrowing.

And there's going to have to be some way to deal with the elephant in the 
closet, one of the major threats to the American economy, the increase in 
healthcare costs. That's often masked as "entitlements" so that they can wrap in 
Social Security, as part of an effort to undermine Social Security. But in fact 
Social Security is pretty sound; probably as sound as its ever been, and what 
problems there are could probably be addressed with small fixes. But Medicare is 
huge, and its costs are going way up, and that's primarily because of the 
privatized healthcare system which is highly inefficient. It's very costly and 
it has very poor outcomes. The U.S. has twice the per capita costs of other 
industrialized countries and it has some of the worst outcomes. The major 
difference between the U.S. system and others is that this one is so heavily 
privatized, leading to huge administrative costs, bureaucratization, 
surveillance costs and so on. Now that's going to have to be dealt with somehow 
because it's a growing burden on the economy and its huge; it'll dwarf the 
federal budget if current tendencies persist.

South America

DOSSANI: Will the current crisis open up space for other countries to follow 
more meaningful development goals?

CHOMSKY: Well, it's been happening. One of the most exciting areas of the world 
is South America. For the last 10 years there have been quite interesting and 
significant moves towards independence, for the first time since the Spanish and 
Portuguese conquests. That includes steps towards unification, which is 
crucially important, and also beginning to address their huge internal problems. 
There's a new Bank of the South, based in Caracas, which hasn't really taken off 
yet, but it has prospects and is supported by other countries as well. MERCOSUR 
is a trading zone of the Southern cone. Just recently, six or eight months ago, 
a new integrated organization has developed, UNASUR, the Union of South American 
Republics, and it's already been effective. So effective that it's not reported 
in the United States, presumably because it's too dangerous.

So when the U.S. and the traditional ruling elites in Bolivia started moving 
towards a kind of secessionist movement to try to undermine the democratic 
revolution that's taken place there, and when it turned violent, as it did, 
there was a meeting of UNASUR last September in Santiago, where it issued a 
strong statement defending the elected president, Evo Morales, and condemning 
the violence and the efforts to undermine the democratic system. Morales 
responded thanking them for their support and also saying that this is the first 
time in 500 years that South America's beginning to take its fate into its own 
hands. That's significant; so significant that I don't even think it was 
reported here. Just how far these developments can go, both dealing with the 
internal problems and also the problems of unification and integration, we don't 
know, but the developments are taking place. There are also South-South 
relations developing, for example between Brazil and South Africa. This again 
breaks the imperial monopoly, the monopoly of U.S. and Western domination.

China's a new element on the scene. Trade and investment are increasing, and 
this gives more options and possibilities to South America. The current 
financial crisis might offer opportunities for increasing this, but also it 
might go the other way. The financial crisis is of course harming — it must harm 
— the poor in the weaker countries and it may reduce their options. These are 
really matters which will depend on whether popular movements can take control 
of their own fate, to borrow Morales' phrase. If they can, yes there are 
opportunities.

Sameer Dossani, a Foreign Policy In Focus contributor, is the director of 50 
Years is Enough and blogs at shirinandsameer.blogspot.com.

Published by Foreign Policy In Focus (FPIF), a project of the Institute for 
Policy Studies (IPS, online at www.ips-dc.org). Copyright © 2009, Institute for 
Policy Studies.

Recommended citation:
Sameer Dossani, "Chomsky: Understanding the Crisis—Markets, the State and 
Hypocrisy," (Washington, DC: Foreign Policy In Focus, February 10, 2009).

Web location:
http://fpif.org/fpiftxt/5860

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