These competing superstitions make the Republicans quite entertaining just now. The events are even more hilarious to anyone who knows the Old Testament since Treasury Secretary Hank Paulson’s apocalyptic vision and warning is as acceptable to the people to whom he preaches as were those of the Biblical prophets to their audiences. His own people, the Republicans, throw back cries of "...we are getting away from the True Marketplace..." and "...the reward and punishment of the Marketplace..."
Real Ekonomics lurks unseen behind this veil of superstitions, likely jumbled up as cobwebs within the conventionally packaged small brains of the crowd. But at least current Fed Chairman Ben Bernanke does not seem to be a believer. Clear-eyed, he seems to see a planned economy of unintended consequences and collateral damage, all but acknowledging that this crying out to The Market for salvation is nonsense. He says markets, not Market. And he talks about market mechanisms. The man seems to be a realist, not a market intoxicated dogmatist. Which is interesting in its own right, as the irony is the impossibility for those "educated" inside the box of conventional Economics to understand the actual workings of what is misleadingly called the economy. It takes a heap of education before one shakes off the brainwashing of compulsory miseducation.
Facing reality means acknowledging that the US is in constant bailout mode. Without government spending of enormous proportions based on freshly printed money, the consumption churn that keeps it all afloat would freeze up. And don't let anyone argue with bogus nonsense about the velocity of money. During the Reagan spending times the velocity of money seemed immeasurable, so much of it was choked off with Volker’s tourniquet. The idea is nonsensical anyway, though Friedman seemed to love it (perhaps due to his worship of Irving Fisher, but for an alternative discussion see Velocity of Circulation by J. S. Cramer in The New Palgrave Money, op cit).
What happens to markets when the government pours stupendous amounts of freshly printed money into the society? Well, that government spending is much like fuel for a motor on a huge ship. What most of the "free market" advocates seem to mean by a free market is that the ship has no controls, except an accelerator and some nearly useless braking system akin to dragging a foot in the water. But fueling this vessel with money influences the markets. People, after all, go where the money is.
The key systems description of the US "economy" is monopsony fueling oligopoly with consumers spending money obtained on credit. (For some discussion of these terms and their implications, see for example Elementary Economics: A Mathematical Approach by Ralph W. Pfouts for a grade school level approach, or A Course in Microeconomic Theory by David M. Kreps for a high school level approach; I don't believe the term "theory" in Kreps' title is meaningful, for what it’s worth.) The credit part of this system is where much of the current "crisis" comes from, due mostly to a fear of the feedback problems inherent in a widespread inability to pay on debt and to the amazingly obscure way the debt has been "structured," that structure thanks perhaps in part to the silly application of extensions of the mathematical Black-Scholes theory. The single buyer in the monopsony is the US government, and most of the sellers are clustered around the teat of DOD contracts, though there are other players. Freshly printed money pours into the system in the name of National Defense, trickling down in a variety of ways to consumers buying from corporations. The $700 billion "bailout" bill recently passed is simply another avenue for funneling money, the reason for which will become clear upon further reading.
This makes an absurdity of the idea of free markets. When the government chooses where to pump the money by buying from select elements of the "economy," markets are created and steered. That the government does not know what the hell the effects of its steering are does not make it a free market economy. It makes it an incoherently planned economy inspired by fear of bogeymen. Smith allowed for defense as part of government's expenditures, but he didn't predicate massive, continuous government spending because he knew it would influence the markets. Smith believed in an invisible hand that steered free markets, not bogus markets invented and funded by government. And though just what a free market might be seems not knowable, it is clear that a market created and funded by government in monopsony is not it. This is not seriously debatable within the context of economics. Any attempt to say otherwise is sign of pure ignorance or blind ignorance. The argument that the National Defense must be funded for the security of the nation is irrelevant, since necessity does not change the fact that there can be no free market under such circumstances, real threat or no real threat. This is not capitalism in the Smithist sense, but economic planning.
My reading of Smith indicates his vision of free market capitalism was what is called perfect competition, and in perfect competition profit is impossible. Hence the shrinking corporate oligopoly does not meet the criteria in any case, given their profits. In particular, the statement that huge profits are a part of capitalism is not within Smith's Revelation.
It is clear to a disinterested analyst that while spending for military preparedness is the politically palatable means of socializing the US, the actual fighting of wars is economically counterproductive. Ironically enough, the US cannot really afford to fight war because DOD is the main conduit for fueling the "economy." When actual war is fought, less money is given to contractors inside the system and more to those with boots and other shit on the ground in foreign locales. Clinton knew this. So did Bush the Elder, who chose to terminate his little foray into the land of the Oil Sheiks. And hence the $700 billion alluded to above that has caused so much hypocritical crying out to The Market for salvation.
Recall or read about the time of Bush the Elder, who wanted to cash in the mythical "peace dividend" from the end of the so-called "cold war." He and his Secretary of Defense Richard Cheney cut all the defense projects that had a relationship to fighting the Soviet Union. Tanks, aircraft, lots of programs and a lot of military bases disappeared. The Honorable Jerry Lewis (not the famous professional Bozo of Dean Martin and telethon fame, but a political bozo) talking about the peace dividend made several points in a speech:
"Defense cuts are people cuts ... Defense reductions are job cuts... There are no quick fixes by which defense cuts can be immediately available for redistribution to other Federal programs." *
Now this (unintentional?) comedian is of Republican persuasion, and complained of these cuts by a Republican regime. These cuts continued into the Clinton regime by legal commitment from the Bush regime after the latter ended in good measure because of the recession the cuts helped cause. Also because Bush the Elder felt he ought to expand government spending with taxes, something that is not allowable within the ideology of supply side economics (remember, that relies on printing money) and because he crawled around on his hands and knees at a state dinner and puked on the shoes of the Prime Minister of Japan. Another irony here was Dick Cheney campaigning against Clinton on the basis of defense cuts made due to Bush the Elder and Cheney’s legislative carry-over.
The point is that even Jerry Lewis acknowledged the real reason for spending on National Defense. Not for wars, but for jobs. Money distribution. Keep that "economy" fueled. In essence, the funding of DOD is a type of permanent WPA program for middle class and connected wealthy. Middle class welfare combined with huge handouts for the right people. And the major recipients ought not be military personnel, since they are not the optimal spenders. Optimal distribution is salaries via large corporations with overhead to fund buildings and retirement programs and health care and social security and most especially executive compensation for those who buy more stuff than your average soldier. One major DOD contractor I worked for carried a ratio of one president or vice-president for every fifteen employees, and all those folk were overhead. At one time, the company wanted to become nothing but executives who managed for other DOD contractors, producing no work, only overhead and G&A. As it was, like most defense contractors their major product was reams of poorly-written and well-bound reports and proposals.
So Bush the Younger, guided by what have come to be called Neocons, invested in war, an investment akin to putting a tooth under a pillow for the Tooth Fairy to reward. This has diverted some good measure of the printed money flow, but the Neocons argue it is a form of investment in the future. For the Empire. If the Empire can control the universe and all that, they will have an easier time keeping the nation fueled with that other necessity, energy. Mostly in the form of petroleum, though one must not discount the importance of the strategic position of Iraq in the Middle East which seems to be seen as the new pivot point or center of gravity or whatever is the current meaningless military jargon.
This means there are a lot of ironies in the fire, to make a horrible pun. For example, many of the worshipers of the Market who profess belief in the Smithist vision of a self-regulating economy that optimizes something or other are loath to believe in self-regulating natural selection via genetics. Nature requires some guidance by God, whereas the economy requires none; perhaps they identify the invisible hand of The Market in Smith's Revelation with God. No matter, since that is a small irony.
The bigger and more dangerous irony can best be illustrated by returning to bad television, taking the metaphor from the ridiculous series Star Trek in its later incarnation. The belief in war as an investment was brought to naught by self-delusion. The Neocons somehow saw themselves as Klingon leaders of a nation of Klingons. But clearly the Bush administration inner circle is composed of sniveling, cowardly, devious, lying Ferengis. Karl Rove is so Ferengi in temperament he might have been a model for the series if one believes in the future affecting the past. So is Cheney, passed along by Bush the Elder; so are those in the background, like Richard Perle and Paul Wolfowitz. Just who is the Grand Nagus in this crew is not clear, but my bet it is likely Cheney and not Bush the Younger. Cheney seems to have the bigger ears.
Reality is that the US is a nation of Ferengis, not Klingons. And so a final irony is that the "Cold War" ought to have been approached Ferengi style. The US could have bought the successors of the real Greatest Generation who defeated Hitler, the Soviet Red Army. They would be the real Klingons. And the investment in war could have been cheaply managed without a hiccup in the force-feeding of money into the homeland via "Defense Spending."
Jim Chaffee is an old guy who writes about what he knows: sex, violence, mathematics and dumbasses. His first science fiction pieces were weapon systems proposals to the Air Force. These days he's pondering which country will be best for immigration to escape the coming US military state. His crime novel, São Paulo Blues, which pisses off a lot of people who read it, is available at The Drill Press, where you'll find details regarding this book and others by authors such as Tom Bradley, Robert Levin, John-Ivan Palmer and Mickey Z. It also publishes three online journals in English and one in Portuguese.