CAKE POLICE

From the latest n+1:

"The orthodox story blames declining profitability (and price inflation) during the '70s on the excessive demands of labor - a plausible enough explanation until you consider that the worldwide defeat of labor since the '80s has failed to restore prior levels of growth. The high wages of the early '70s are long gone. What has endured and intensified since then is a systemic bias in favor of short-term financial speculation over longer-term productive investment. The replacement of the gold standard by floating currencies encouraged capital to flit from country to country in search of returns magnified by any temporary overvaluation of this or that national fiat money. At the same time, information technology sped transactions along at a new rate and volume. What in 1983 was a daily mass of $2.3 billion in international financial transactions had become $130 billion by 2001. Only about 2 percent of the same sum would be necessary to maintain international trade and productive investment.

"Meanwhile production is guided by the search for low wages. The export-led growth of first Germany and Japan, then the 'Asian Tigers,' then China with its endless reserve army of labor has flooded the world with cheapening goods; and between 1985 and 1995 the US itself staged a manufacturing revival through the exporter's proven formula of cowed labor and an undervalued currency. But this is supply: what about demand? The fundamental problem with workers (to whom as much money as possible should be denied if commodities are to be affordable) is that they are also consumers (to whom as much money as possible should be supplied if they are to buy commodities). Marxists aren't kidding when they talk about the contradictions of capitalism. In the end, as Marx wrote, 'the ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.' The result of declining or stagnant real wages since the '80s has been global industrial overcapacity: too much plant turning out too much stuff for not enough buyers.

"The structural solution to this dilemma was as ingenious as it was unsustainable. If the global wage-bill couldn't cover all the world's gimcrack goods and coastal vacation properties, then consumers - especially American, but also European - had to be extended a new line of credit. They would borrow money to buy houses, and then borrow more money, to buy other stuff, against the rising value of these houses! Of course many new home-buyers plainly couldn't pay their mortgages; the mortgages were granted on the assumption that someone else ultimately could and would. So present consumer demand was leveraged against a future demand for which there was no plausible source. For mortgage brokers operating under the originate-and-distribute model this didn't matter; they had already pocketed their commissions. And those bundling iffy mortgages into securities comforted themselves with a rhetorical question: What was the likelihood of homeowners defaulting en masse?

"The venality and self-deception of the brokers, rating agencies, and bankers are now notorious. By comparison, David Harvey's most audacious theoretical move, in Limits to Capital, seems sensible enough: How can Marx's labor theory of value (which identifies value as 'socially necessary labor time') be reconciled with land prices, given that land is obviously not the product of human labor? Harvey's answer was that under capitalism land becomes 'a pure financial asset'; land price is a claim on future revenue treated as a present-day asset. 'Mortgages,' Marx said, 'are mere titles on future rent.' And Harvey completes his thought: 'Land price must be realized as future rental appropriation, which rests on future labor' (our italics). The big risk, naturally, is that you will attribute to real estate far more present-day value than can later on be returned to it by labor (in the form of the portion of total income devoted to housing). A bubble occurs not when people pay for real estate with money they don't yet have - as always happens, given the availability of credit - but when they pay with money they will never have, out of wages they will never receive - out of wages no one will ever receive. This past fall the papers were full of 'analysts' wrapping their heads around a new idea: 'Home prices,' said one, 'are going to have to start reflecting people's income.'"