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At the heart of Al-Nakeeb’s tour de force is the juxtaposition of irreconcilable developments: democracy and what he refers to as “parasitic capitalism.” If the history of capitalism has shown anything, it is that it cannot be anything but what Al-Nakeeb describes as “parasitic,” given the many “palliatives” that the U.S. has had to implement in its short history. That this is true is borne out in Al-Nakeeb’s exposé of the inherently flawed classical economic models that he notes are nevertheless still exhorted by “notable” economists as if gospel.
Al-Nakeeb identifies himself as an “independent scholar,” a status that less scrupulous critics would attack. However, such a position frees Al-Nakeeb from what would otherwise be the political constraints often concomitant with institutional affiliation.
The bulk of Al-Nakeeb’s work, his “Unified Theory of Macroeconomic Failure,” consists of identifying those “negative externalities” where the social costs far exceed the private cost, as causing economic failure. Such externalities include irrational taxes, amplified economic cyclicality, the re-emergence of monopolies and monopsonies, along with the subversion of democracy by plutocracy and what he characterizes as immorality in public policy.
The ubiquity of citations to Wikipedia articles could have been supplanted by more references to primary sources, or even scholarly articles. That being said, Al-Nakeeb’s own scholarly and professional background clearly inform the detailed treatment he gives to the discussion of the negative externalities. Indeed, Al-Nakeeb goes even further, providing a variety of economic solutions, including equity financing models to replace debt, excise taxes on interest and splitting personal taxation (one on earned income and one on personal capital). He also advocates a redistributive tax on extreme wealth.
Al-Nakeeb notes that deviant political systems require deviant macroeconomics to support them, and laments at how such immorality can define the parasitic capitalism that has corroded the so-called Western democracies like the United States. Al-Nakeeb’s lament reflects the struggle to understand the incongruity of capitalism and democracy. He acknowledges the need for “students of political science” to “shed more light on the role of plutocratic motives in historical political developments.” If the political history of the U.S. has shown us anything, it has witnessed concerted efforts at limiting democracy, rather than maintaining (much less expanding) it. Indeed, the remnants of political liberty that have been achieved have been the direct result of the many struggles against what Jack London referred to as “The Iron Heel.”
The lack of enthusiasm for true democracy can be seen in the beginning. The U.S. Constitution was intrinsically an aristocratic document designed to check the democratic tendencies of the period. During debates on the U.S. Constitution, many raised concerns about what was to become of the interests of the landed wealthy few. James Madison himself foresaw what he feared would be the inevitable result of democracy. “The landed interest, at present, is prevalent; but in process of time… will not the landed interest be overbalanced in future elections…? In England, at this day, if elections were open to all classes of people, the property of landed proprietors would be insecure. An agrarian law would soon take place.” To prevent this “injustice,” Madison firmly believed that the primary responsibility of government was “to protect the minority of the opulent against the majority.”
In other words, wealth (“landed interests”) will be increasingly concentrated into fewer and fewer hands through markets (“various means of trade and manufactures”). The wealthy, therefore, would be outvoted in a democratic system and government would be overrun by the majority of working people. To prevent the working class from attaining political power and expropriating the property and wealth of the rich (“an agrarian law”), we have to “wisely” ensure that government “protect the minority” of the rich against the majority of the poor.
Al-Nakeeb correctly observes that “macroeconomics is very political.” The privileged few seek to protect its power and wealth, making avarice and “political motivation” two sides of the same coin. Far more nefarious than simply engaging in physical force to subdue its population, the privileged and powerful few manipulate the economic and political processes to ensure their continued preeminence.
The financialization of the U.S. economy, shifting it from being based primarily on production and manufacturing to one where financial institutions dominate, freed business owners from needing to concern themselves with the well-being of their workers. The offshoring of production kept laborers inherently insecure. A dramatic shift of the tax burden from corporations to the working class maintained the poor’s subjugation.
What Thorstein Veblen referred to as “manufacturing consumers” has been the focus of the enormously successful public relations industry, successfully equating being a “good consumer” with being a “good citizen.” As Al-Nakeeb notes, the concentration of media into a few large corporations keeps the citizenry properly un(mis-)informed.
Concentrations of wealth allow the powerful interests to engineer elections, becoming more prohibitively expensive every year. With key legal decisions like Buckley v. Valeo in 1976 and Citizens United v. Federal Election Commission, (2010) corporations – long ago given the status of legal persons with the same free speech rights as actual persons – are no longer limited in the amount of money they can spend on elections.
Any attempt at solidarity was kept in check when the U.S. retaliated against organized labor, notably with the passing of the Taft-Hartley Act. The rejection of organized labor continued in the 1980s, during what Al-Nakeeb referred to as the “counter-revolution.” Ridding the public’s idea of solidarity is at the center of the elite’s attacks on key programs like social security and public education.
Al-Nakeeb notes that Western governments find themselves today waiting passively for the next economic crisis to hit, calling the “Great Recession of 2008” “an alarm bell.” He believes that while the next crisis carries the potential for greater hardship should the plutocracy persist in their present policies, there is promise of the next crisis becoming “the great cleanser” should the powerful lose their grip on power. Recent political developments in Europe and the U.S. do not seem to bear out much optimism, however. With leftist groups still struggling to re-establish credibility – attempting as they are to distance themselves from the policies of the failed communist regimes – right-wing groups have been very successful, filling the political vacuums in countries that once boasted strong progressive political traditions, e.g., France, Sweden, and Belgium. Even in the U.S. the electorate is actually contemplating the possibility of Donald Trump being elected president. Regardless of political developments, the powerful few can be counted on to maintain their concentrations of wealth and power.
Al-Nakeeb’s contribution with this book is invaluable – not only in the wealth of insight it provides, but in the ease with which it is provided – easily consumable by those not versed in economics, finance or political theory.
Interview with Basil Al-Nakeeb
Q. You mentioned in the introduction that the idea for your book had been developing in your mind for three decades, which would place the origins somewhere in the 1980s. What from that time period created the spark for the book?
A. At that time inflation was raging and the Fed was engineering recessions to curb it. This policy prompted me to published an economic article with a Western magazine whose name escapes now. The gist of the article was that the inflation was rooted on the supply side; hence, a tight monetary policy was inappropriate, because it risked increasing both unemployment and inflation, thereby changing the tradeoff depicted in Philips curve of higher unemployment for lower inflation and vice versa. The logic behind my argument was that solving cost-push inflation required increasing supply by encouraging investment, particularly in the oil sector, whereas a tight monetary policy was choking investment and future supply. The book explains why Fed Chair Volker’s policy has been wrongly, though widely, credited with curing inflation. Inflation eventually subsided when increasingly abundant oil supplies began hitting the market, almost a decade after of the first oil crisis in 1974. That observation and other observed policies since reinforced my awareness that mainstream economists’ understanding of macroeconomics was deteriorating. The Great Recession was the final straw that drove me to write this book, a task that I did not relish given the sacrifices I had anticipated but greatly underestimated.
Q. What authors or research helped inform the ideas in your book?
A. I think the greatest influence was a course in public finance, part of my graduate study of Financial Economics at University College of North Wales (Bangor). It exposed me to the problem of externalities and the market failures associated with it. I was also fortunate in that my supervisor, Mr. Taylor as I recall, was brilliant, a great source of encouragement, and at home with original ideas.
Q. Do you believe the next economic crisis is inevitable, and, if so, what shape do you see it taking?
A. No one has yet devised a means of avoiding the excesses that inevitably develop in an economy, causing contractions and sometimes crises. I think the next crisis will likely resemble the last one in 2008 only worse, because there has been no attempt to solve the structural problems. The causes of that crisis was dual: a rise in the oil price, which peaked in 2007 at US$148 and the rise in credit defaults and interest rates. The trigger this time will likely be credit deterioration and defaults, although a sudden surge in the oil price due to rising political tensions in the Middle East is also a possibility.
Q. What do you see as the significance of the repudiation by the U.S. (Nixon) of the Bretton-Woods system?
A. It shows that Western economists were slow to come to grips with reality, despite repeated failures and suspensions of variations on the gold standard during the first half of the 20th century. The gold standard or any loose system based on gold, other than using it as a form of reserve currency, is bound to fail because it constraints expansionary economic policies.
Q. What country(ies) do you believe might be most able to replicate Iceland’s handling of its debt problem, and how?
A. In principle, any country could follow the example of Iceland provided its government is populist, not under the thumb of domestic and foreign banking influence, and does not yield to foreign governments’ attempts to interfere in its domestic economic policy.
Q. In 1971, 90 percent of international financial transactions were related to the real economy (trade or investment) and 10 percent were speculative. By 1990, those numbers had reversed, and by 1995 about 95 percent of the vastly greater sums were speculative. What do you believe caused this?
A. This is a direct consequence of the rising political power of the banks and their drive to increase the pervasiveness of indebtedness and the financializing of economies. This is encouraged by the existing tax systems, which favor debt over equity.
Q. What is the likelihood of seeing the introduction in the U.S. of your solution of equity financing models replacing debt?
A. Plutocracies are notorious for their economic shortsightedness. Hence, they don’t initiate reforms unless compelled by a failing economy or to cool the rage of public dissent. For equity to partially replace debt financing requires removing the tax favoritism of debt such as the personal income tax and corporate income tax interest deductibility, tax exempt municipal bonds, withholding tax, etc. However, a near complete equity replacement of debt requires brining the private cost of debt closer to its much higher social cost by imposing an excise tax on interest.
Q. British-Pakistani writer, Tariq Ali, has said that capitalism will collapse because banks and the political elite have “allowed the poor to rot”. Based on your research, what is your forecast?
A. In essence, the banking model has always been a failure. Indeed, the establishment of the Federal Reserve over a century ago to save the banks is an implicit admission that the banking model is a failure. No other sector has required the creation of a central bank dedicated to saving it from periodic collapse. With the mushrooming of debt and its by-products such as derivatives, the resources to cyclically bailing out the banks have become astronomical and still increasing. This is unsustainable in the long-run. That said, Tariq Ali is correct in that constraining wages of the working class has resulted in chronic underconsumption and, consequently, anemic growth. By slowing growth, the ratio of debt to income has been steadily rising and, therefore, making the rising indebtedness still more unsustainable. We should distinguish, however, that this is not so much a failure of capitalism as an economic system, but a failure of the political system that has unreasonably supported banking and the mushrooming of debt instead letting banks to swim or sink.
Q. Do you have plans for any further writing, whether articles or books, and, if so, what will be your subject(s)?
A. I don’t think I will write another book in the foreseeable future. Articles are an easier task. I expect, if I do write, it will be to elaborate on some of the economic ideas in this book.
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