[p2p-research] a must read from john robb on the financial meltdown

[Michel Bauwens]

from
http://globalguerrillas.typepad.com/globalguerrillas/2008/09/decentralized-i.html

The 20th Century's central struggle was between the ideological systems that
advocated governmental control of the economy and those that relied on
market control. The market-based systems won. Why? In short, market-based
systems made better investments, over the long term, than government managed
systems. The lesson: systems with large numbers of decision makers, each
with capital to invest, make better decisions.

As is often the case, the emerging victory of the market-based system
created yet another problem/struggle. Specifically: is it better to trust
that individuals empowered with growing salaries/wages will make the best
investments for future economic success -- or -- is it better to grow
corporate profits (at the expense of wages/salaries) and let capital markets
invest the excess?

Between WW2 and 1974, while still engaged in a bitter struggle with
Communism, the US hedged its bets on that question. Both individuals and the
capital markets received an equal share of the benefits of productivity
growth. Incomes rose mightily and we became broadly wealthy, mirrored by
generous growth in the capital markets, relative to the start of the
century. As a result of this shared decision-making system, smart
investments in infrastructure, industry, education, and much more made
America the economic powerhouse of the world. In short, we prospered.

However, the shared decision making system ended. From 1974 onwards, the
rewards of productivity growth (economic expansion) went exclusively to the
capital markets and not into income growth for individuals. This was likely
done, although the mechanism is unclear, under the assumption that the
discipline of capital markets produced better investment decisions than
individuals. Regardless of the motive or the specific mechanism, where the
flow of capital from American economic activity went, couldn't be clearer:

   - Median per capita incomes in the US are the same as they were in 1974
   -- there hasn't been any income growth at all.
   - In contrast, we have seen torrential capital accumulation /
   concentration and the capital markets have enjoyed a nearly 30 year run of
   unbridled expansion.

So, what was the result of this concentration/narrowing of decision making
power in the hands of the capital markets? How did they invest thirty-four
years of American productivity growth for the future?

As of this year, the final results of this American experiment in financial
decision making are in. The allocation of this capacity exclusively to
capital markets, rather than sharing that decision making with hundreds of
millions of Americans, has produced a horrible result. Instead of investing
the accumulated wealth of America in productive assets that yielded long
term benefits, the money was invested in derivatives (illusory financial
products) that yielded nothing of tangible value. In short, the narrow group
of actors that operate within the capital markets made the decision to forgo
the long and difficult process of growing investments in the tangible world
in favor of the outsized returns available through investments in virtual
products. That investment is now evaporating.


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