Garson in capitalism land:

These are not just wage slaves or salary men - they are genuinely proud of their skills and pleased with their accomplishments. They eagerly strive to take advantage of the incredible variety of opportunities that economic freedom (capitalism) makes available at all levels of economic status and for all types of commercial skills.

  In writing this book, she embarks on an odyssey to find out to some extent just what this global capitalism is all about. Her candor is laudable, as are her intentions, and it would thus be wrong to criticize her for a lack of economic sophistication that she does not pretend.
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   An intelligent, capable, determined and experienced author - and an attractive lady - she is able to gain access to a variety of frequently knowledgeable and always interesting people. Her descriptions of their varied arcane skills - and their hopes, fears, ambitions, successes and failures - bring them to life. Indeed, her personality portraits demonstrate (Dare I say it?) a "woman's touch" that is illuminating and all too often missing from the work of far more knowledgeable authors.
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  Along the way she meets skilled economic craftsmen and formidable financial warriors. She meets some ordinary people struggling to build their lives and maintain their economic footing amidst the powerful ebbs and flows of global finance. She finds that these are not just wage slaves or salary men - they are genuinely proud of their skills and pleased with their accomplishments. They eagerly strive to take advantage of the incredible variety of opportunities that economic freedom (capitalism) makes available for those at all levels of economic status and with all types of commercial skills.
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   There is even a larger than life villain in the story - who causes widespread real world distress, but suitably suffers some comeuppance in the end. "Chainsaw Al" Dunlap and the downsizing of Sunbeam occupy the largest individual segment in the book.
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  Garson learns about and offers brief explanations for such things as the Federal Funds market, letters of credit, Eurodollars, money futures contracts - useful education for economic naifs like herself. The resulting book, of course, is not at a level of sophistication that would be of professional interest to most FUTURECASTS readers.
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  However, because of the intelligence and skill of the author, it is well written, and always interesting and entertaining, and does reveal something of broader and more profound interest than what the author intended. A decade after the collapse of much left wing ideology, the author reveals many of the elements of its propaganda mythology that still survive to befuddle credulous minds.

  Keeping track of myths that are treated as authoritative by substantial numbers of people is an important part of FUTURECASTS coverage. Developments in the real world seldom proceed along strictly rational lines.

    The concept of the book is to first follow money deposited in a small local bank - and later to follow money invested in a mutual fund - to see something of what this capital does. Garson takes part of her publication advance - almost $30,000 - and deposits it in a small suburban bank. She then travels to a money center bank in New York City and later to Southeast Asia to see some of the things that the bank's money is involved in. Later, she takes a smaller amount and invests it in a mutual fund, and embarks on a similar journey.
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  Admittedly, this is not "her" money that she is actually following, but fungible sums put in circulation by the bank and mutual fund. However, that in no way undermines the concept of the book.

Human capital:

It is NOT money that makes the world go around any more than hammers build houses.

  One other preliminary observation is called for at this point - not as a criticism but just in the interest of accuracy.
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  The title is an obvious misnomer. This book actually demonstrates that it is NOT money that makes the world go around any more than hammers build houses.

It is clearly the human capital that is the most productive.

  This book is about people who use money to make the commercial world go around. Each - as Adam Smith explained - is an expert at his own job and knowledgeable about some of the related aspects of the world's vast commercial enterprise. Without their arcane skills, the money would be of as limited utility as a hammer in this publisher's hands. It is clearly the human capital that is the most productive. However, Garson's title is obviously more intriguing and saleable.

The money center bank:

During prosperous times, no significant amount of savings - even savings deposited at obscure suburban banks that have no immediate lending need for it - remain unused and out of circulation even for a single day.

  Not for the first or last time on her odyssey, the author begins to identify with the people that she observes wrestling with remarkable skills with the everyday demands of the commercial world. She need not have worried. Her team met its reserve requirements - once again.

  Unfortunately, Garson does not have the economic understanding to realize the full academic significance of what she is watching. Here is the obvious proof of the invalidity of Keynesian and post Keynesian economic theory.
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  During prosperous times, no significant amount of savings - even savings deposited at obscure suburban banks that have no immediate lending need for it - remain unused and out of circulation even for a single day. Savings are immediately put back in circulation by means of the money markets. Even funds in significantly large checking accounts are maneuvered through the accounts of offshore banks and invested at interest.
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  Garson is looking at the refutation of the fondest beliefs of Nobel laureates and august faculty luminaries at Ivy League and many other colleges. An increase in savings can in no way take money out of circulation and be responsible for undermining prosperity during the prosperous segment of the business cycle.

The Eurodollar:

The U.S. economy has decreased its exposure to the harsh competitive world of commodity manufacturing, and freed resources for more profitable - higher value added - commerce that creates higher paying jobs.

  Of course, this frustration of political efforts to cater to vested interests and to enshrine the status quo has played a major role in domestic prosperity. It has also vastly improved the economic prospects of those third world nations that successfully improve their commercial environment enough to attract the capital and business. The U.S. economy has decreased its exposure to the harsh competitive world of commodity manufacturing, and freed resources for more profitable - higher value added - commerce that creates higher paying jobs. All of this must be kept in mind while we sympathize with and provide some assistance for those hurt by change.

  Garson becomes generally aware of such benefits, even though she still uses such pejorative terms as "deindustrialization" - which she does conclude is an overdone concept. She comes to understand that the world must never revert to commercial "provincialism."
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Capitalist ethics:

 Garson was "amazed" at the extent to which capitalist commerce is carried out on a basis of just trust, ethics, phone calls and established relationships. Here is one of several examples in the book:

  "[L]ike the bookkeeping between rival banks that lend each other hundreds of millions overnight with no security, electronic accounting between oil companies replicates systems of trust and cooperation that go back long before computers."

Segments of the commercial universe:

Dickensian labor conditions:

Those kind, well meaning, sanctimonious people who oppose capitalism and globalization are in fact trying to keep third world peoples hopelessly confined to ankle deep leech infested rice paddies.

  "I liked sewing. I was not bothered by the long hours. People who bend to transplant rice stalks with their feet in water and leeches biting them do not think it's so bad to sit in front of a sewing machine."

  The sewing machine operator aspired to obtain a job in a real "Dickensian" factory. When she got it she could say with satisfaction:

  "Now I work in a factory; I have my own room; I do not sleep on the floor in anyone's house."
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  Everyone fretting over third world labor conditions should read these interviews. There is no magic  wand. You must bake the economic pie before you can divide it. Dickensian labor conditions always exist at the beginning of capitalist development - and are welcomed by workers for whom the conditions of alternative agricultural pursuits are invariably much worse.
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  Setbacks for globalization during the Asian Contagion were a personal setback for this sewing machine operator. Those kind, well meaning, sanctimonious people who oppose capitalism and globalization are in fact trying to keep third world peoples hopelessly confined to ankle deep leech infested rice paddies.

  However, mixed in with such illuminating observations, the author periodically invokes a variety of propaganda myths. Here are a few examples:

Speculative Currency Trading:

• A "speculative I win/you lose (or vice versa) gambling game" that plays no role in the production of goods and services, is common left wing nonsense accepted by the author about speculative currency trading.

It is poor governance practices that leave currencies vulnerable. The markets ruthlessly force reluctant politicians to improve governance practices to the benefit of everyone.

By blaming money markets for currency weakness, the author blames the messenger for the message.

Countries that do not take advantage of the benefits of international financial markets never suffer market collapse - because they never get off the ground. Where the markets can't quickly put a halt to political stupidity and corruption, poor governance will continue and worsen, draining the economy until - as in the Soviet Union - the entire economy collapses or - as in India - the entire economy becomes hopelessly moribund and whole generations pass in hopeless poverty.

  Karl Marx tried to distinguish between financial capital (the useless capitalist bad guys) and industrial capital (the productive capitalist good guys), and this has since become a staple of left wing propaganda mythology.

  Garson recognizes the vital risk transferring function of the money markets. These markets permit businessmen to reduce their currency risk by transferring it to speculators who are willing to accept it. However, she frets about the vast majority of money market transactions that have no direct purpose except for speculation.

  How the market is supposed to efficiently accomplish its risk absorbing functions without the liquidity of large scale ongoing speculation is not something she explains. How it is also supposed to provide essential guidance for public and private economic policymaking without constant access to the cumulative inputs of the sharpest speculators in the world is a question she doesn't even consider. How else can you determine what currencies are actually worth? Governments are certainly incapable of determining the value - the purchasing power - of their own currencies.

  Garson repeats the nonsense that there may be hundreds of millions of innocent losers outside the markets as a result of speculation that occasionally clobbers weak currencies. She frets that the unregulated capital markets "caused" so much suffering during the Asian Contagion. She believes capital flows should be regulated to "humanize" the economic system. She notes that Malaysia and Chile had capital controls and survived the Asian Contagion in much better shape than some of the other Asian Tigers.
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  However, she ruefully recognizes "the problem of implementing" such regulation. Indeed, as she puts it, "who will bell the cat?"

  The author, of course, does not have the economic sophistication needed to accurately evaluate such arguments. The very modest capital controls of Malaysia and Chile played practically no role in their comparative stability during the Asian Contagion crisis. Both have since eliminated those practically useless capital controls.
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  Chile always enjoyed superior economic governance. Malaysia - beneath the smokescreen of political rhetoric and those ineffectual capital controls - has actually been one of the most effective of the stricken Asian Tigers at enacting reforms such as those advocated by the IMF - although it, too, stopped well short of all that needs to be done.
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  Failures of leadership invariably harm the innocent. It is poor governance practices that leave currencies vulnerable. The markets ruthlessly force reluctant politicians to improve governance practices to the benefit of everyone. This is something else to which Garson appears oblivious. She prefers to blame the messenger for the message. Yet, she is well aware of the extent of poor governance in the stricken Asian Tigers.
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  Of course, countries that do not take advantage of the benefits of international financial markets never suffer market collapse - because they never get off the ground. Where the markets can't quickly put a halt to political stupidity and corruption, poor governance will continue and worsen, draining the economy until - as in the Soviet Union - the entire economy collapses or - as in India - the entire economy becomes hopelessly moribund and whole generations pass in hopeless poverty. 

  Singapore is successful because there is no corruption - a view unhesitatingly affirmed to Garson by all the local populace. If governance practices are good, prosperity follows regardless of any lack of natural resources. Small states like Singapore are inevitably impacted by conditions in nearby export markets. However, if governance practices are good, stability is maintained even as money markets roil neighboring currencies.
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  Garson puts flesh and bones on the raw facts of Singapore's favorable commercial climate. Honesty, infrastructure, social safety net, racial and ethnic nondiscrimination, cooperative unions, and well paid honest civil servants and labor all play a role.

  "Petty corruption slows down the flow of business and adds cost and grief to daily life. Corruption at higher levels causes a great deal of capital -- which also means labor, material, and land -- to be diverted from one use to another. It undermines both national and individual planning. Corruption is one reason that people can work very hard and still be very poor."

  Nevertheless, Garson insists that she still does not understand why money puts people to work in New York and Singapore rather than in the Philippines or Bangladesh, forcing masses of the unemployed to migrate to find jobs. She is looking at pervasive governance failures on one hand - and vast problems of unemployment, poverty, and financial collapse on the other - in the same nations - but can't seem to relate the two observations.

  Hopefully, those much maligned financial markets will eventually force reluctant politicians to implement sufficient levels of good governance so that money will be able to put people to work even in such places as the Philippines and Bangladesh.

Protection of intellectual property:

• Patent laws increase the cost of drugs to the detriment of the poor, according to the author. She deplores U.S. efforts to get other nations to extend patent law protections at levels provided in the U.S.

The certainty of theft of intellectual property is a harsh deterrent for any drug company contemplating the costs and risks of developing treatments and cures for tropical diseases.

  Those drugs would never have been produced in the first place without patent protected monopoly profits - something Garson undoubtedly knows. However, she never mentions the extent to which the U.S. market subsidizes world health interests by offering protected monopoly profits sufficient to justify the costs and risks of drug development.
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  Also unmentioned is the huge health care price that poor nations pay for failure to extend patent protection for drugs needed to meet their unique health care needs. The certainty of theft of intellectual property is a harsh deterrent for any drug company contemplating the costs and risks of developing treatments and cures for tropical diseases.

High real interest rates:

Inflation could not have been kept down in the face of substantial rates of monetary expansion and huge budgetary deficits without those high real interest rates.

• The obviously false possibility that the high real interest rates of the 1980s and early 1990s were a device to accommodate money center banks hurt by the collapse of real estate and less developed country (LDC) loans is related in a footnote.

  That the banks were indeed helped by those high real interest rates is not in question. However, how inflation could otherwise have been kept down in the face of the substantial rates of monetary expansion and huge budgetary deficits of the 1980s  is not a question Garson is likely to have thought of.

Inflation and unemployment:

• The tradeoff between unemployment and inflation is a myth readily accepted by the author.

  She notes that the Federal Reserve Board is charged with restraining inflation and promoting full employment. However, she repeats the myth that the Fed is really only concerned with controlling inflation regardless of any increase in unemployment that such efforts cause.

After a short initially pleasant period, chronic inflation invariably causes unemployment.

The reduction of inflation was an essential prerequisite to the reduction in unemployment.

  Of course, economic history is not something about which Garson should be expected to be knowledgeable. However, she has also apparently forgotten the lessons of the stagflation of the 1970s - a period that she lived through. The stagflation of the 1970s - and innumerable similar instances in economic history - prove that there is no tradeoff between inflation and unemployment. After a short initially pleasant period, chronic inflation invariably causes unemployment.
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  Indeed, once chronic inflation moves above very low levels, there is no way to achieve full employment until inflation is first brought under control. The comparatively high rates of unemployment in the 15 years after 1980 could not be reduced until those high rates of inflation were reduced. When inflation subsided in the mid 1990s, so did interest rates - and unemployment.
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  Fed Chairmen Volcker and Greenspan understood that the reduction of inflation was an essential prerequisite to the reduction in unemployment.

Dividends:

• Gardner finds that banks are "awash" in funds nobody wants to borrow, and corporations are awash in funds they don't need for operations.

Noxious incentives in the tax statutes have created irresistible pressures to provide returns on investment in the form of capital gains rather than dividends. As a result, the economy has suffered through vast waves of ill considered expansion plans and misguided mergers and acquisitions outside core competencies that have wasted vast amounts of capital.

As and when these bubbles bust, it will undoubtedly be capitalism that will be criticized rather than the government's noxious tax policies.

  "A lack of imagination" is how Garson characterizes the practice of giving money back to shareholders by means of stock buy backs (at capital gains tax rates). Management "couldn't think of any more profitable way to use the money."
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  She apparently shares the left wing view expressed by John Kenneth Galbreath that shareholders play no productive role in capitalist economics and that the payment to them of dividends, stock buy backs or other return on investment is therefore irrational. She even questions why corporate management and boards of directors need ultimately be answerable to shareholders.

  Before the age of high marginal tax rates, corporations paid dividends with funds not needed for operations, reserves, or rational expansion plans within their lines of business. This permitted the markets to allocate these capital resources. The markets are far more efficient than all but a very small percentage of professional investment advisers. There clearly are few business managers who can beat the markets when their sectors no longer attract investment and they are forced to look elsewhere. The achievements of GE are remarkable because they are so rare.
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  A Harvard Business School professor, Michael Porter, has recently calculated that about three quarters of all efforts by major corporations to expand into unrelated lines of business between 1950 and 1986 were subsequently sold off.
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  Noxious incentives in the tax statutes have created irresistible pressures to provide returns on investment in the form of capital gains rather than dividends. As a result, the economy has suffered through vast waves of ill considered expansion plans and misguided mergers and acquisitions outside core competencies. This has resulted in the waste of vast amounts of capital.
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  The need to provide a return on investment in the form of capital gains has caused dangerous leverage and capital asset bubbles - like some Garson notes - that will ultimately play major roles in the next major recession. Even today, the capital asset bubble plays a major role in the stubborn duration of the current period of economic slowdown. However, as and when these bubbles burst, it will undoubtedly be capitalism that will be criticized rather than the government's noxious tax policies.
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  As for managers and directors who don't want to be ultimately answerable to public shareholders, they can always try to meet their equity financing needs without public capital - by means of partnerships or private corporations.

Overcapacity:

Garson believes in the "mature economy" myth.

• Fears of productive overcapacity - of automation - of capitalist economies reaching a level of "maturity" where they become so productive that profits are squeezed and the economy collapses - has been the basic stuff of left wing propaganda from the times of Karl Marx. It was one of the basic misconceptions of the New Deal - of the automation scare of the 1960s - and of the frustrated expectations of John Kenneth Galbreath. Garson believes in this "mature economy" myth.

It is government that plays the most significant role in creating and maintaining overcapacity.

  She frets over manufacturing "overcapacity" and the displacement of U.S. and European workers by outsourcing to Asia. Displaced U.S. and European workers can no longer buy all that is produced both at home and abroad, and Asian workers are paid too little to "pick up the slack." "That's one origin of today's 'overcapacity,'" she explains.
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  Garson accepts the obvious fallacy that wages declined in real terms in the U.S. between 1973 and 1996.

  Of course, it is government that plays the most significant role in creating and maintaining overcapacity.
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  Indeed, a capitalist system encumbered by high marginal tax rates - high tax rates on profits earned by equity capital - and lower rates on capital gains - coupled with subsidies and protection against "ruinous competition" for weak industries - will inevitably come to resemble the unstable, overcapacity "mature economy" capitalist system expected by the Marxists. By enacting such noxious policies - and many others - the U. S. Congress - every day - does more damage to the economic health of the nation than could be accomplished in a year by a host of saboteurs.
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  The capitalist process of creative destruction - when permitted to operate - prevents the buildup of dangerous levels of  overcapacity. The right to fail is as important to a capitalist system as the right to succeed.
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  Dividends must be encouraged - not discouraged. Fair tax treatment of dividends and lower marginal tax rates would greatly reduce the capital asset bubble.  Not all dividends are saved and invested. The payment of dividends would increase consumption. Thus, if the payment of dividends were encouraged instead of being discouraged, allocation of earned surplus would occur through the markets. This would more efficiently allocate investment earnings between consumption and further investment and would maintain their essential balance.
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  However, governments all over the world  persist in the protection and subsidization of uneconomic facilities. They invariably protect the status quo and inhibit change. High marginal tax rates and the double taxation of dividends induce capital asset bubbles.
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  For such sins as these, we are currently paying a price during this current economic slowdown - and will pay a much heavier price during the next serious recession.

Laissez faire:

• The author invokes "laissez faire" as a straw man to argue against "unregulated capital." 

  Of course, there never has been any overall "laissez faire" economic policy in any of the advanced capitalist nations, as FUTURECASTS has frequently explained at greater length. The real issue is always between good governance that facilitates profit driven, market directed commerce and poor governance that burdens commerce - and just what the essential elements of "good governance" happen to be. These are far more complex questions than propagandistic prattle about "laissez faire."

  At least when she discusses the "moral hazard" problem created by bailing out banks that become overextended in third world capital markets, Garson is putting her finger on a real problem - and one that obviously can't be resolved by simplistic arguments over mythical "laissez faire" policies.