Chomsky on the Economy

October 21, 2008

In part two of their interview, Paul Jay asks Prof. Noam Chomsky to weigh-in on the dominant subject of the day, the economic crisis. While Prof. Chomsky agrees that the current crisis is a very serious one that will have broad implications for the broader society, he points out that the foreseeable Medicare-induced economic crisis will "dwarf" the current one in magnitude. Furthermore, Prof. Chomsky develops his contention that democracy is hindered by unrestrained free markets. While on the other hand, state-restricted markets are democratic by design in that they allow people take control--through their government--of financial institutions to force them to include externalities and risks to the broader population in their decision-making. These factors are such that profit-seeking enterprises will not accommodate them when left to their own volition, given that free markets do not put a price on these externalities.

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In part two of their interview, Paul Jay asks Prof. Noam Chomsky to weigh-in on the dominant subject of the day, the economic crisis. While Prof. Chomsky agrees that the current crisis is a very serious one that will have broad implications for the broader society, he points out that the foreseeable Medicare-induced economic crisis will "dwarf" the current one in magnitude. Furthermore, Prof. Chomsky develops his contention that democracy is hindered by unrestrained free markets. While on the other hand, state-restricted markets are democratic by design in that they allow people take control--through their government--of financial institutions to force them to include externalities and risks to the broader population in their decision-making. These factors are such that profit-seeking enterprises will not accommodate them when left to their own volition, given that free markets do not put a price on these externalities.



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Chomsky on the economy

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to the second part of our interview with Professor Noam Chomsky. Professor Chomsky, ordinary people are trying to understand the current crisis, financial crisis, the people who’ve been already suffering from what they call a crisis in the real economy and maybe have not yet quite felt the effects of what the financial crisis is going to mean to day-to-day life. So, quickly, are we moving into something that resembles a serious depression as some people are suggesting? And if we are, do you think we might see some similar radicalization of the working class that we saw during the 1930s? But start from helping us understand what are we moving into here.

NOAM CHOMSKY, PROFESSOR OF LINGUISTICS, MIT: Well, the immediate crisis that’s on the front pages is the financial crisis. The credit system has frozen, so banks don’t lend to each other, they don’t trust each other. The housing market has collapsed. These are things that, of course, influence people’s lives directly. So it’s not happening kind of in the stratosphere. But the visible crisis, the one that’s discussed, has to do with finance. However, there is a growing crisis in the rest of the economy too, and it’s a serious one. That’s why the automakers are disappearing, for example. There’s a major crisis coming along which is going to dwarf this one, and that’s the growth in medical costs. If you look at the trajectory and extrapolate, extend it, the highly inefficient medical system is going to swamp the federal budget. This is usually described as a benefits system—you know, medicine, Medicare, and social security—but that’s just a technique to try to destroy social security. In fact, social security’s in pretty good shape; it’s the health system that’s the problem. But the immediate problem is the financial system. The roots go back to the early 1970s, when finance was liberalized; it was freed from the constraints of the post-war period. Now, the constraints of the post-war period, roughly 1945 to 1970, they were instituted by the United States and Britain for a reason, one, because it was assumed correctly that allowing governments to control capital movements and currencies would provide a basis for rapidly expanding growth and trade and so on, which indeed happened. That’s called the golden age of modern capitalism. Whereas freeing these constraints would retard growth and development, as indeed it has done. But there was a second reason, which isn’t being discussed much: allowing governments to control capital movements provides them with a certain space for introducing what we call welfare state programs. If capital movements are free, attacks on currencies are free, there’s what economists call a "virtual parliament" of investors and lenders who actually vote, every minute in fact. If they don’t like what a government is doing, they attack the currency, there’s capital flow—.

JAY: And how likely is world capital to vote no faith any longer in US Treasury bonds? Is that really—?

CHOMSKY: No. In fact, they’re fleeing to US Treasury bonds.

JAY: Now, but they’re in this push-pull—either they have to defend it or abandon it, and right now they’re defending it. Is there any choice to abandon it? Or they really don’t have one?

CHOMSKY: No, because the United States, despite all the crises, is far and away the richest and most powerful country in the world. And if the United States tanks, the world economy will tank. So it’s a safe bet, if you want security, yes, get Treasury bonds. But the system has unacceptable risk built into it. It’s well known among economists that markets are inefficient from the narrowest perspective. So let’s make it simple. Suppose you sell me a car, okay? We may make a good deal for ourselves, but we’re not taking into account the effect on him. It’s what’s called an externality. And there’s an effect. If you sell me a car, it increases gas prices, it increases pollution, it increases congestion. And that extends very broadly; these so-called externalities can be very large. Now, in financial institutions it’s far worse. They are in the business of taking risks. If they’re well managed, say, Goldman Sachs, they calculate the potential cost to themselves if there’s a loss. But the important words are "to themselves." They don’t calculate in what’s called systemic risk, the effect on the whole system if I go bust, you know, and it has a huge effect. The result is that risk-taking is under-priced, meaning there’s a lot more of it than there would be in a reasonable system. And so, therefore, it was predicted right off that when financial liberalization took place, there would be more regular financial crises and deeper ones. And this particular one is accelerated by the fact that there was a subprime housing bubble and many other factors, so it became far more severe than anyone expected. But it’s built into the system. Now, this was kind of combined with a kind of religious market fundamentalism based on doctrines of, you know, self-regulating markets and so on, which are pure fantasy. So the regulatory apparatus was dismantled. Well, that accelerates the pace of potential financial crisis. And along with that came the creation of highly exotic financial instruments. Well, all of this combined, it was pretty clear the early part of this decade that a major crisis was brewing. Alan Greenspan, head of the Federal Reserve, refused to prick the bubble as could have been done in simple ways, on the basis of religious belief in self-regulating markets. And finally it came to this catastrophe where there’s a credit freeze, the system’s freezing up. Something has to be done, and it’s interesting what the choices are. It goes back to our earlier discussion. So this morning on the radio, George Bush announced that the government is intervening in the banks, but we want to make sure that we go back to the profit motive, not policy motives, not political motives. What are political motives? Well, that means participation of the population in making decisions. So we hate democracy; we don’t want the public to be involved in decisions about things; we want to go back to the profit motive, meaning that a private tyranny, which is what a corporation is, should look out for itself, not for the public interest.

JAY: Which is what got us here. It’s interesting. For the first times, one is hearing the discourse open up. And maybe they don’t like the words "socialism" and "capitalism," even as words, are actually entering the public discourse.

CHOMSKY: I don’t think it has anything to do with socialism. That’s a scare word. It has to do with democracy. So what is being called "government intervention" in a democracy would mean intervention of the population. I mean, if you believe the 4 July speeches, you know, of government of, by, and for the people, then the government is not some alien force stealing for you; government intervention means giving the public a role in making decisions about things that matter to them like working conditions and wages and so on and so forth. In a democracy, political motives would mean the interests of the population in determining what’s going to happen next. If you decode the rhetoric, the question is: Do we want private concentrations of power to make decisions for their own benefit? Or do we want the public to be concerned, to make decisions for the public welfare? That’s what’s really behind it.

JAY: For ordinary people, as this crisis deepens, what do you think they can do? What should they do?

CHOMSKY: It’s very striking. When the $700 billion bailout was announced, the public was outraged. There was furious objection, so much so that the House of Representatives had to vote it down. Now, on the surface, that looks like an exercise of democracy, but it isn’t. Even in a dictatorship, if the dictator does something outrageous, the public can riot and he’ll have to back down. Now, in a democracy, functioning democracy, what happens is different: not just shouting "no," which is what happened, but active popular organizations like unions or political clubs or whatever would be coming forth with specific proposals and demanding that their representatives implement them. And there are proposals; there’s quite a lot of proposals on the table. Joseph Stiglitz, who’s [inaudible] from outer space, made a very simple point. He said if we put money into the banks, pour liquidity into the banks, we can pour it in, and they’ll pour it out—mergers and acquisition, anything—for their own benefit, ’cause that’s what they’re in business for, for their benefit, not for our benefit. So he said we have to have veto power. Well, veto power means voting rights, and if it’s a real democracy, voting rights means popular participation and initiative. Well, the initiative should be coming from the population, like with health care, where the population has definite views. But the country is so depoliticized that popular views are considered politically impossible, lacking political support. Well, that’s what’s called a democratic deficit: formal democratic institutions, but not functioning. And we have to overcome that. That underlies lots of issues.

JAY: Thank you very much, Professor Chomsky. And thank you very much for joining us.

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