Academic journal article The American Journal of Economics and Sociology

Editor's Introduction

Academic journal article The American Journal of Economics and Sociology

Editor's Introduction

Article excerpt

The current economic crisis appears to be a vortex without any bottom. As of May 2009, the $700 billion bailout of financial institutions (the Troubled Asset Rescue Plan) may have forestalled a total collapse of the U.S. economy. However, nothing has stemmed the flood of foreclosures, the tightening of bank credit, the depression in home construction, the bankruptcies of small business, and the rising rate of unemployment. To avoid the total collapse of the economy, advocates of an unrestrained free market have been forced to accept the partial federal ownership of some major banks, General Motors, and other corporations (but not "nationalization," which would entail government management). Nevertheless, the current crisis has shaken confidence in the ability of capitalism to function as a self-regulating system.

Throughout a long career, Professor Mason Gaffney has identified the endogenous sources of instability in capitalist economies and has shown precisely how capitalism can become a more self-correcting system. The three essays in this volume, based mostly on his earlier writings, examine the theoretical and policy errors that permitted the current crisis to arise. He laments that those same errors have also fostered chronic underemployment of labor, wasteful use of urban and suburban land, military adventurism, and other pathologies. All of those errors stem from undifferentiated capital investment strategies in both the private and public sectors. The persistent problems of modern economies (including the current crisis) are not a function of "capitalism" per se, but rather of flawed models that have distorted markets in systematic ways. In particular, Gaffney points to biases in the relationship between land and capital (the boom-bust cycle of rising and falling land prices, complemented by wasteful capital investment that loses its value in the downturn), between land and labor (the underemployment of labor caused by excessive investment on marginal land), and between labor and capital (the displacement of labor by capital because of overinvestment in capital of long maturity).

Gaffney unites diverse economic traditions (institutionalist, Austrian, Georgist, and others) to produce a novel conceptual understanding of how economies generate their own pathologies, including periodic contraction and loss of liquidity. From that framework, he offers solutions that mainstream macroeconomists ignore because of their focus on monetary variables (including deficit spending). The most distinctive feature of Gaffney's approach is his insistence on taking seriously the real factors of production that lie behind the abstractions of modern economics. By differentiating among various types of capital investment, instead of treating it as a uniform variable, Gaffney shows that policies encouraging excessive investment in land and slow-maturing capital bear prime responsibility for a range of economic ailments. Based on that analysis, it becomes evident why Keynesian, socialist, and Reaganite policies all fail. As long as the current tax system is allowed to bias the location, intensity, and durability of capital investment, the problems attributed to capitalism will recur.

The essays in this volume go behind the headlines and the superficial descriptions of current events. They offer an in-depth look at the causes of recent events through the lens of insights gleaned from patterns that have persisted for hundreds of years. In contrast to economists who treat recessions and depressions as natural calamities that cannot be avoided or as punishment for the sin of overconsumption, Gaffney shows that economic downturns are the result of specific policies and that they can be avoided. He offers an analysis that enables us to understand how the crisis arose and what must be done to prevent a recurrence of this catastrophe.

Before explaining the significance of Gaffney's methods and findings, I will first set the stage with a few words about the present crisis and then discuss some current theories of the crisis and what is wrong with them. …

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