William Krehm
COMER’s origins are lost in the distant murk of the latter 1960s. That was when I met John Hotson, economics professor at Waterloo University. About that time I had a lengthy paper published in the then leading French economic publication. Significantly, that publication has since disappeared from the living as the nature and purpose of economic theory were rejigged. Essentially, economics has been reduced to a shill for our banks turned stock market gamblers. Economic Reform, COMER’s publication, began appearing in the fall of 1988, and soon became a regular monthly to meet the challenge of John Crow, governor of the Bank of Canada, who declared ‘zero inflation’ the one goal of central banking. That was the party line of the Bank for International Settlement, a non-elected international body in Switzerland. “Inflation” was defined for the purpose as any persistent increase of the price index. And the BIS argued that the slightest amount of such “inflation,” unless suppressed with higher interest rates, would become hyperinflation as in 1923 Germany and lead the world to ruin. The counted academics who persisted in resisting that nonsense soon found their academic careers at a dead end.
My entry into the lists was determined by a significant observation I had made in handling my personal affairs. Having been blacklisted (as Time correspondent) for my coverage of the initial democratic Central American revolutions1, I had to win economic independence to pursue my interests – essentially to understand why society tended to become malfunctional. In the process of doing so, I became a modest house-builder and developer. Having little capital, my main asset was having identified an upward price ramp unrelated to any excess of demand. This reflected the huge growth of public services to accommodate one of the greatest mass migrations in history after WWII, the introduction of new technologies, and unprecedented urbanization. The deepening layer of taxation in price that resulted I call the social lien. Economists have never made use of this readily available statistic. But my business depended on observing what immense government investments – unrecognized as such – were being made that could only tilt this price ramp further. As a result, more often than not, I was able to foresee rightly rather than wrongly what the economy would be doing.
Lessons in the Rough-and-Tumble Business World
In the rough-and-tumble world of business you would have to be blind to overlook the interdependence of the public and private sectors. Or to believe for a moment the academic fiction that if prices go up in one industry, then a healthy “non-inflationary” economy requires that they go down to the same extent in another so that the general price level might stay flat. Those in the industry required to lower its prices to compensate for the increase in prices for its suppliers, to say nothing of those of its butchers, bakers, and landlords, would go bankrupt, and their bankruptcies would spread with woeful certainty throughout the economy. And if higher interest were chosen – as it was for 30 years – to enforce this “non-inflationary economy,” there would be a surrender of economic power to the most parasitic financial interests.
That led me to seize the concepts of system theory when I was introduced to it by a close friend of my youth, Sam Madras. Madras had been dean of the Science Faculty at Sir George William College in Montreal and subsequently had studied under Jay W. Forrester, one of the great pioneers of systems theory. H wrote an appendix to my work published in 1977 – Babel’s Tower: The Dynamics of Economic Breakdown – on systems theory. That little opus has stood up well over the years. You cannot get very far applying systems theory to economics, if you do not break up the secular rise of price into its two subsystems with completely different causes and trace their respective effects throughout society.
But to systems theory the economics profession for three decades turned a deaf ear. The official model of a “self-balancing, pure and perfect market” was in fact the very antithesis of systems theory. Rather than studying the mutual interrelations of all subsystems of the economy, it declared all the non-market subsystems – such as the public sector, the household economy, the environment, human investment – “externalities” – i.e., pushed them out the back door. Moreover, public investment including investment in human capital such as health, education and, welfare, was disregarded; the money spent on it was written off as a current expense while the debt incurred appeared on the government balance sheet without the capital assets that it had paid for. Obviously this utterly distorted the government balance-sheet and justified the cannibalizing of the non-market subsystems by the financial subsector.
A Balance Sheet with Anonymous Credits
Since I have mentioned balance sheets, the question inevitably presents itself: has all the effort gone into COMER over the quarter of a century of its existence proved justified? To assess that properly we must keep in mind the official restraints that have been tightened on economic thinking. Just about everything society learned in getting out of the Depression and in financing WWII and the postwar reconstruction has been buried. That results in a weirdly inverted metric for measuring the success of any unorthodox view, particularly because it is based on the dearly bought lessons of our history. Economics theory is no innocent sport: it is closely connected with the distribution of the nation’s income and the keys to power. We cannot therefore define success by personal recognition or reward when what dissidents have fought for comes to be finally adopted by officialdom. Increasingly, this is happening in garbled, conspiratorial form because no alternative is left to it.
To expect personal recognition for having advocated such steps for 30 or 40 years would be madness. For those who dare question enthroned dogma, success consists of the ideas fought for having forced their way into the nation’s policy-making. It matters less who take the bows.
The Dominant Revenue that Won’t Step Down
The French economist François Perroux summed this up in his “dominant revenue” concept. Under any economic regime, the revenue of a particular group is regarded in its volume and rate of return, as the measure of the welfare of society as a whole. This is in fact so, as it appears through the eye of those in power. But if power passes to another group, it is no longer so. The dominant revenue has thus passed from the large landowners to the industrialists and then in the latter 1930s to an alliance of the trade unions, open-minded industrialists and the state, with trade unions as a junior partner. The angle of vision of the dominant revenue is in effect a powerful weapon in maintaining the domination of the given ruling group, and when that view is challenged restrictions on challenging concepts are tightened like a hangman’s noose. In a sense then the degree to which they are barred from the media and the universities can serve as a sort of inverse scale for measuring the achievement of the challengers. Eventually, of course, when the discrepancy between the dominant revenue and the reality becomes too great, those militant defences collapse. Obviously such blockage of society’s ability to learn from its current mistakes is a wasteful way of conducting society’s affairs.
In 1996 the United States in near-complete stealth, and in 1999 Canada in semi-stealth, adopted capital budgeting for their physical investments. That was the main factor in producing a budgetary surplus and lowering interest rates. Why the near-secrecy for a laudable if tardy move? Because bringing it into the open would disclose the non-accountancy on which an engineered shift of power from the productive economy to speculative finance was based.
More recently, the US Fed and the Bank for International Settlements have taken position that 2% of inflation is benign rather than harmful and is even needed to keep the wheels of commerce spinning. This is a sensational departure from the “zero inflation” position taken by the Fed for many years that drove interest rates into the 20% range, and ruined millions of people. Instead of reviewing those two decades of programmed disaster, with no explanation of why 2% inflation was a mortal menace calling for preemptive warfare for many years, but is now suddenly considered desirable.
And after turning a deaf ear to the need for systems theory to understand the complex interweavings of the subsystems of a mixed economy, we are now confronted with the beginnings of an interest in systems theory.
This has not as yet worked its way to the official level. But is has become a feature in conferences organized by economists who are restive under enforced dogma. Systems theory, however, is the opposite of money-crunching. Instead of setting “good” figures against “bad” ones, it deals with the entire constellation of interactions of all subsystems. For that you must not only attach a distinctive tag to a newly recognized factor, but explore its interactions with all other subsystems of the economy, and indeed of society. That means a critical reexamination of the price theory which determines the very quantification that number-crunching economists are so wholly engrossed in.
William Krehm
1. Krehm, William (1999). Democracies and Tyrannies of the Caribbean in the 1940s. Toronto: second English edition. Innumerable Spanish editions, pirated and authorized, have appeared since 1949.
— from Economic Reform, December 2003