Some cuts and increases under the new U.S. tax code

Preliminary version


Here’s what taxes will look like for America’s highest-paying jobs

Julia La Roche


Yahoo FinanceDecember 21, 2017

Some of America’s best paying jobs can expect to see higher taxes under the new Republican tax plan.

According to analysis from the Tax Policy Center, most income groups should find reduced taxes on average. In 2018, 80% of taxpayers should receive a tax cut, averaging about $2,100, the analysis found. However, the tax cuts as a percentage of after-tax income would benefit the higher-income groups the most. What’s more, about 5% of taxpayers should expect to see their taxes increase by about $2,800 in 2018. That percentage of taxpayers with an increase is expected to rise to 9% in 2025 and 53% in 2027 compared with the current law, the analysis found.

To get a picture of what American taxpayers might see next year, David Luther, the content marketing editor at career insights website Zippia, crunched data for more than 800 professions to come up with some estimates.

Many surgeons, anesthesiologists, and dentists can expect to see a tax increase.  (Photo by John Moore/Getty Images)

For this undertaking, Luther used New Jersey exemptions as a baseline because it’s a population-dense state that has fairly high state taxes. He also made the assumption that the individual is unmarried and childless and a homeowner with a house valued at three-times the median wage for the occupation.

Yahoo Finance highlighted the 20 best-paying jobs in America according to the Bureau of Labor Statistics. Some of them will see their taxes go up under the proposed plan.

1. Anesthesiologists

Annual mean wage: $269,600

Current tax: $52,972.97

New tax: $58,623

Increase: +$5,650.28

Percentage: +10.6% increase

2. Surgeons

Annual mean wage: $252,910

Current tax: $43,973.66

New tax: $46,847

Increase: +$2,873.96

Percentage: 6.5% increase

3. Obstetricians and Gynecologists

Annual mean wage: $234,310

Current tax: $44,288.88

New tax: $47,309.29

Increase: +$3,020.40

Percentage: 6.8% increase

4. Oral and maxillofacial surgeons

Annual mean wage: $232,870

Current tax: $43,973.66

New tax: $46,847.62

Increase: +$2,873.96

Percentage: 6.5% increase

5. Orthodontists

Annual mean wage: $228,780

Current tax: $43,078.34

New tax: $45,549,49

Increase: + $2,471.15

Percentage: +5.7% increase

6. Physicians and surgeons, all other

Annual mean wage: $205,560

Current tax: $37,995.39

New tax: $38,743.24

Increase: +$747.85

Percentage: 1.9% increase

7. Internists, general

Annual mean wage: $201,840

Current tax: $37,181.06

New tax: $37,652.84

Increase: +$471.77

Percentage: 1.3% increase

8. Family and general practitioners

Annual mean wage: $200,810

Current tax: $36,955.59

New tax: $37,350.92

Increase: +$395.33

Percentage: 1% increase

9. Psychiatrists

Annual mean wage: $200,220

Current tax: $36,826.44

New tax: $37,177.99

Increase: +$351.54

Percentage: 0.9% increase

10. Chief executives

Annual mean wage: $194,350

Current tax: $35,541.48

New tax: $35,457.37

Cut: $84.10

Percentage: 0.1% decrease

11. Pediatricians, general

Annual mean wage: $184,240

Current tax: $33,328.36

New tax: $32,493.93

Cut: $834.43

Percentage: 2.5% decrease


Payroll taxes

United States (Wikipedia)

In the United States, payroll taxes are assessed by the federal government, some of the fifty states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have state income tax; New Hampshire and Tennessee only tax income from interest and dividends), the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases and are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.[15] The Federal Insurance Contributions Act tax is a federal payroll tax imposed on both employees and employers to fund Social Security and Medicare[16] —federal programs that provide benefits for retirees, the disabled, and children of deceased workers.

Income tax withholding

Main article: Tax withholding in the United States

Federal, state, and local withholding taxes are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions.[17] Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4.[18]

Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.[19]

Social Security and Medicare taxes

Main article: Federal Insurance Contributions Act tax

Federal social insurance taxes are imposed on employers[20] and employees,[21] ordinarily consisting of a tax of 12.4% of wages up to an annual wage maximum ($118,500 in wages, for a maximum contribution of $14,694 in 2016) for Social Security and a tax of 2.9% (half imposed on employer and half withheld from the employee’s pay) of all wages for Medicare.[22] The Social Security tax is divided into 6.2% that is visible to employees (the “employee contribution”) and 6.2% that is visible only to employers (the “employers contribution”). For the years 2011 and 2012, the employee’s contribution had been temporarily reduced to 4.2%, while the employer’s portion remained at 6.2%,[23] but Congress allowed the rate to return to 6.2% for the individual in 2013.[24] To the extent an employee’s portion of the 6.2% tax exceeded the maximum by reason of multiple employers, the employee is entitled to a refundable tax credit upon filing an income tax return for the year.[25]

Unemployment taxes

Main article: Federal Unemployment Tax Act

Employers are subject to unemployment taxes by the federal[26] and all state governments. The tax is a percentage of taxable wages[27] with a cap. The tax rate and cap vary by jurisdiction and by employer’s industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000.[28] Some states also impose unemployment, disability insurance, or similar taxes on employees.[29]


That’s it!

STOCKHOLM, Oct 9 (Reuters) – U.S. academic Richard Thaler, who helped popularize the idea of “nudging” people towards doing what was best for them, won the 2017 Nobel Economics Prize on Monday for his work on how human nature affects supposedly rational markets.

Influential in the field of behavioral economics, his research showed how traits such as lack of self-control and fear of losing what you already have prompt decisions that may not have the best outcome in the longer term.

“I think the most important impact (of my research) is the recognition that economic agents are human and economic models have to incorporate that,” Thaler, a professor at the University of Chicago Booth School of Business, said in call broadcast at the Nobel news conference.

See the subtitle of this homepage: A gazdaság és annak emberi dimenziói

Some contemporary additions to my 1998 paper on integration

The paper in question:

Seven pages of statistical data linked below were appended to the 14-page paper. Some additional oral remarks to the written text included the following.

Was the surgery of transition a rational choice? In a most important sense there was not any choice. The surgery was indispensable for an adjustment to the conditions of survival in a global economy. But there were also several destructive adjustment processes. The surgery might have been done in a better way. Actually, some healthy tissues were cut off that meant negative discontinuity. Some sick organs were left intact that meant negative continuity. Nevertheless, the improvement is significant. Hungary is among the leaders in speed of economic-social-political transformation. The leaders in change are also leaders in growth.

The changeover occurs high costs. The new members will be unable to abide by the Maastricht criteria for a middle-long period of time.The advanced part of Europe may slow down the process of transformation or may speed it up. Recently the Community is allocating its transfers mainly to its old member states. The Community seems to be unwilling to invest more into its prospective new members because of the vested interests of net receivers in countries having adhered to the Community in previous expansions. But with some more (additional) allocations to new members a support multiplicator would work and induce more national accumulation and international private capital influx. As far as EU assistance is limited, new members should be allowed to reach European conditions in a flexible way which doesn’t mean that the period of necessary changes would be stretched along for an infinite number of years.

Following the oral presentation some 70 messages asked for more copies of the written text.

Links to the Appendix pages from A thru F (appa thru appf):






Capital and Money in Hungary (3)

My 1991 London paper as cited in 2014.11.30. 12:01 Italo Romano

Second Part


2.1. Economic performance and capital

A second brief remark on a question of first principles is surmised to be appropriate at this point. (The first has been made at the beginning of the previous part. Neither one is meant to say that all the rest derives from them.) One reason for considering monetary equilibrium conditions within the network of capital phenomena is the dependence of successful long-term stabilisation efforts on the regulating impact of profit motivation. There is a negative feedback between prices and market competition which is modified but not eliminated by monopolies. Technical progress with its intellectual requirements is an exigency for every actor of business life interested in getting hold of assets with added value returns. The latter is an attribute of an asset in its quality of capital. In a capital economy private market actors are the main risk- bearers and inefficient activities are eliminated on this elementary (micro) level. It is fool-proof in this crucial respect even if the profit maximisation is not an exclusive pattern of behaviour. /cf.1.7./ Efficiency remains a first principle of a capital-money-market system even if its functioning is consciously restricted with regard to labour participation /cf.1.1./ and long- term capital requirements /cf.1.4./The expansion of this system so that it embraces public welfare goods and services remains a contorversial issue. Here marketisation and demarketisation follow each other in a cyclical way.

In a command system the economic organisations are interested in getting hold of assets in the quality of the latter as production factors in general but not in their specific quality of profit- making factors. Without profit motivation and market there is no capital. Asset formation is called ‘capital investments’, assets are treated in many ways as if they were capital, even capital/production ratios are computed. Technical progress requirements and the intellectual tasks related to it are commanded from above, on behalf of an antiintellectual in its nature establishment. /cf.1.8/ Some workings of capital are simulated but nothing can substitute for the profit drive as an incentive of the economic performance. Accordingly, the system is not fool-proof on the level of national economy being the main risk bearer instead of the market actors themselves. For the last two decades the Hungarian economy has not been a traditional command one. Economic reforms amounted to the beginning of systemic change. Economic performance nevertheless remained weak because of the lack of capital stimuli of development and technical progress. It was not fool-proof either. For some 20-30 years there existed, in terms of animal-farm connotations, quite a number of dinosaur-like big enterprises with net incomes syphoned out of the state budget. That was equal to syphoning away net revenues from more efficient producers thus restricting their investments. Output volume and pattern developed independently of comparative advantages. Lack of competitiveness resulted in a downward shift of overall efficiency. Income- producing capacities of the national economy were not enough to sustain growth and welfare.

All this resulted in a creeping, and, after some time, gallopping inflation. Price rises escalated from a 7% average in the mid 80-ies to 16% in 1988, to 17% in 1989 and to 29% in 1990. /20/ The recent rate is estimated at more than 35%. As there exists a trade-off between the balance of payments and inflation the payments situation became better last year. While in 1989 the balance showed a 1,5 billion dollar deficit, in 1990 there was a modest surplus. (Ibidem.) But, as a result of domestic inflation it cannot be a lasting achievement.While the drive to achieve an ever better competitive performance is a longterm condition of a dependable and relatively stable economic environment inflation should not be explained away by the absence of this powerful motivation. Price stability existed in the fifties and sixties. Business is on an upward slope recently but so is inflation. Equilibrium depends also on how macro-policy meets the requirements of capital towards money supply.

2.2. Capital requirements towards money

It is well-known that market forces alone cannot stabilise the economy without proper macro-policy measures. An expectation- climate promoting capital accumulation and investments can be created only by a complex approach of which the relation of money and capital is an essential component. Capital as a determining factor of money-supply requirements is overlooked by one-sided analysis of money. There are autonomous value-preservation consequences of the capital stock. For example, accelerated depreciation-amortisation increasing after-tax profits leads to changes in velocity of circulation. The ceteris paribus rule applies here as well as in the whole of this paper. The relation of the volume side and the price side of productive capital is a determinant of the equilibrium of commodity markets, which is a main component of the overall equilibrium. Dynamic effects emanating from inner characteristics of capital pertain to the purchasing power of money. Efficiency and competitiveness exert a powerful impact on the dual /price and volume/ capital structure asynchronity of which is one of the roots of inflation. Some other parameters of capital structure are quoted below.

On the recent stage of development the exposure of market actors to a number of non-market influences distorts security prices. Under such conditions capital ratios provide an independent measure of assessment in supplement to security prices. In particular, capital ratios are widely in use for the analysis of bank activity. For example,the ratio of share capital to the total of assets. Regulating authorities control this ratio in narrow brackets. In the U.S.A., it should be within the brackets of 6%-12%. The larger the bank the smaller the ratio. In London clearing bank groups, between 1976-1983, total capital measured both against deposits and liabilities oscillated around 7%. Free equity capital measured against banking assets oscillated around 2%. /21/ These ratios in normal conditions provide some leverage for regulation in a degree necessary in a market economy. If that degree is not complied with, quantitative and institutional changes are called for.

Financial markets are the precondition of fiscal, monetary and credit incentives applied in conformity with international practice and requirements of business life. For example,necessary regulatory functions,such as open market operations or reserve requirements presuppose financial markets in the absence of which monetary flows can be influenced only through taxation or direct price and wage controls which increase market imperfections and interfere with property interests. Programs for coming decades should include monetary scenarios based on the growing role of long-term treasury bonds and other state-backed securities. These market instruments finance the budget deficit through increasing government debt. Long-term bonds may provide a yield producing, value preserving, profitable reservoir of wealth for private investors. Beside real estate and private securities, state bonds are also elements of wealth as an object of decisions on what is the advantageous allocation of individual financial resources. As elements influenced by open market operations they are instrumental in regulation of money supply.

2.3. Liquidity versus transactional approach

Monetary dynamics are partially under the impact of capital creating functions of the banking system. A well-known distinction between money demand and credit demand is adopted here. Credit demand expresses the needs of economic actors investing/spending more than their resources allow. Money demand is determined by transactional, liquidity and saving requirements. In Hungarian practice the main monetary aggregate is the stock of all liabilities of the banks minus intrasystem claims and foreign exchange.(M3) With set-aside or frozen deposits deducted from M3 one arrives at M2. Deducting from this long-term deposits gives M1. These definitions /in conformity with the definition of Hicks, 4./ rely on the liquidity approach, viz. on how quickly an asset can be brought into circulation. The most liquid asset is cash, not much different are current account balances. Equilibrium interests require that transactional needs are distinguished from the above. These needs derive from the fact that income and expenditure of economic units do not coincide in time. This asynchronity is bridged by transactional reserves which is causal foundation that the latter be selected within the M1 as subject to special regulation. The other part of recent M1, namely other assets up to one-year liquidity may be separated into some special aggregate.

The significance of all this is connected with deficit financing at high speed of inflation. The surplus of printed money which goes together with the increase of state expenditures has no autonomous mechanism of disappearance like the one in the case of credits created by banks. Increasing transactional needs are able to absorb a part of this surplus. Deficit financing beyond this level can be thought of as money- diluting emission. The proposition is that in Hungary inflation comes about mainly in result of this factor. Main economic indicators may be quoted as evidence. /21/ While additional working capital credit in l989-1990 was 148 billion net government credit took 99 billion Forints from the banking system or approximately 40% of credit growth since other items were not significant.

2.4. Redistributive effects

One of the main effects of inflation is the redistribution of real income. The owners of production factors try to compensate inflation by raising factor prices. The latter restricts the real demand for capital goods and though in accordance with the above paragraph aggregate nominal demand will not diminish partial equilibrium may be restored. But there are also actors of final consumption who are not owners of production factors. Among them the inactive population and governmental or any other public agencies insofar as their expenditures on health, education, social welfare and the like are financed by the state budget. Price rises diminish the real value of their respective budgets. That has, in itself, a boosting effect on their deficits and creates pressures on the whole of public finances. There is no negative feedback between deficit financing and inflation. The self-reinforcing effects of inflation increase even more if the government tries to compensate to a considerable degree the diminishing real purchasing power of final users who are not owners of production factors. Indexation which is a controversial practice even in conditions of creeping inflation, at galopping speeds works to the effect of further speeding up inflation itself. Price, wage, welfare, interest rate or tax measures are unable to stabilise the economy if they are taken in isolation. And even if they are taken together,but in a fictitious independence from their underlying conditions: their impact on the money supply and its impact on them, the state of savings and their trend,the speed and structure of growth , expectations,etc. The responsiveness of the economy to the same measures, e.g. 1%-point change in interest rates is quite different in different situations. As regards gallopping inflation, it puts in another perspective even the governing principles commonly agreed at in a normal setup.

As briefly mentioned above /cf.2.1./ marketisation is a controversial issue in the realm of public welfare services. Capitalization is a distinct matter and may be introduced independently of the above controversy. For example it offers some inflation shelters for the inactive population in the form of pension funds. Up to now pensions were paid from the state budget, with all problems resulting from that. There was no pension capital. The financial sources of pensions were accumulated on a yearly basis from old age security payments on behalf of active employees and from taxes. Under a planned new system anyone can make old age security payments into the pension fund he likes. The fund acts as capital, as a long-term investment fund subject to portfolio management. Long- term nature of these funds determines that a fair share of them would go into real estate business. Under specific circumstances of gallopping inflation the chances for preserving the real wealth in this form are better than in other forms. Pension funds may provide a part of purchasing power for privatisation of state enterprises especially in the service sector. They by no means can mitigate inflation in general but may be instrumental in preserving the purchasing power of pensions.

2.5. A diagnostic phase

Some exclusive schools of economic thought have offered one-causal therapies for curing the diseases of recession and inflation. These cannot be successful forever. Their application results in improvements for discrete periods of time. In scientific theory the purity of the main attitude is a precondition of creating a logically consistent system as a single, descriptive or presciptive, positive or explanatory approach to the object of investigation.

Macropolicy creates mixtures by taking and processing a multitude of components in order of attaining some particular objective. But, as in chemistry, it is not enough to have a variety of components. Their relative weight, the sequence of the operations and the temperature in which they take place must be set up in a conceptually proper way. A balanced mixed approach poised to slow inflation in a considerable degree may not be reduced to a composition with 2-3-4 elements. It is a matrix of tools applied to a matrix of circumstances. It needs to make use of a number of various schools of economic thought which all would be wrong if taken alone because each of them one-sidedly operates in a restricted zone of regulatory power of respective fiscal and monetary, expectational and supply side, exchange rate and securities market instruments. In 1980 Professor Samuelson said he could not see any plausible application of his theoretical synthesis which had performed perfectly when he was an invited member of the Council of Economic Advisers. The theory was designed so that it could not be utilised in stagflation.

The above is to draw attention to an example of researchers’ self- reserve. As it has been mentioned their analysis like a software exists independently of its users. In way of self-reflection one may admit that it is independent also of the new suggestions made by the researchers themselves. If they try to apply their knowledge beyond its radius of action this amounts to assigning a job to a software which does not contain a related algorithm. To try to answer questions unanswerable because of lack of necessary information would mean the same. No one from outside the science is authorised to pass critical judgments on the views of the specialists. Self-reserve controls their assessment-making within the limits of their competence. And that is not just a moral question. As a scientist should mind the quality of a microscope which is placed between him or her and the investigated object, similarly an economist is obliged to be conscious of the relevance of available analytical tools.

This paper is not conceived so as to give a whole therapy. To try to do so would amount to the pretension that a proper diagnosis has already been done. Strategic schemas are indeed being built on this assumption which does not hold. The analytical phase attained so far is a pre-therapeutic one, i.e. that of diagnosis no matter how badly the economy would need a real cure. A relevant diagnosis often consists some elements of the treatment. The point of the above is that this should not be exaggerated. If it is then no matter how much one would like to be a doctor he may all right become the sickness itself.

2.6. Some features of a general diagnosis

It hardly needs to be said that circumstances in Central and Eastern Europe differ from whatever situations experienced before in the West. To draw attention to that Economics as a generalised understanding based on past situations is unable to cover this new one is not to underrate the significance of the tools of this science. What may be questioned is their direct applicability to a whole new situational matrix which does not fit into the system of assumptions of traditional economics as they are represented by neoclassical, keynesian-neokeynesian, monetarist, and neo- neoclassical schools.

It has been mentioned that East-European history has produced mutant societies /cf.1.8./ The mutants, inter alia, were antieconomical or noneconomical societies. Under the necessary impact of the past on the present this feature continues to exist well into the post-mutant stage of the nations in question. This scheme gives by no means an exhaustive picture but inasmuch as it is relevant one may ask if Economics can be applied to a non- economical situation. Assumptions on the state of affairs should  be made explicitly anyway. If the violation of behaviourial rules has been built into the cellular information system of the organism then the immediate cure must not concentrate on the application of these same rules because the governing principles of the organism had changed. The importance of the impact of deficit financing on investments, monetary aggregates on trade cycles, or taxes on supply side need no restating. But not any of the well-known cures making use of these cross-relations could have been conceived so as to be able to overcome the non-traditional disease of Central and Eastern Europe. This is demonstrated e.g. by the fact that the situation is neither Keynesian nor monetarist.

2.7. Non-Keynesian situation

Hungary is not in a keynesian recession situation where effective demand ought to be increased so as to reduce incompletely utilised capacities and manpower reserves. Certainly both of the latter exist but the nation is interested in further reducing inefficient capacities and therefore growing unemployment – however hated by everyone – should be tolerated. That even substantial unemployment benefits cost less than maintaining the production culture which existed up to now is not a relief for people who are to lose their jobs. But this cost-benefit explanation is just an emasculated rhetoric in this case. It is absolutely impossible to preserve the old structure. Therefore the recent state of the national economy calls for some more recession, not for the recession itself but in order to get rid of its uneconomic structural elements. The impact of relative wage and productivity level on the growth of unemployment which according to the actual shape of the Phillips- curve trades off with the price index is an essential determinant of macropolicy. In Hungary employment level was maintained in an artificial way and against any indications of the Phillips curve for a whole decade which amounted to compelling the national economy to support a situation which it could not afford. An inflation of significant speed has been going on for several years but unemployment has begun to grow by hundreds of thousands only in this year. Without inflation it could have reached even a third of the labour supply or more. Or else, without unemployment the price index could have approached a hundred per cents or more. Both would cause social unrest, nor the recent situation can last long.

There are two powerful economic exigencies which call for curbing the inflation. The first one is the long-term equilibrium of the balance of payments. In short term the price index trades off with the balance of payments. /cf.2.1./ More specifically, it exerts its impact through the trade balance. Payment problems resulted in accumulation of a heavy debt burden in time when inflation was relatively moderate. Recently the debt service absorbs a significant share of domestic savings. In 1989 and 1990 only the foreign income part of the debt service (interest payments) required more than 1600 millions of US dollars each year.// The savings can be transformed into foreign payments through the expansion of exports in general and net exports in particular. This is likely to boost inflation. The trade-off will work in a reverse way: while corroborating payments and debt situation it will add to the inflationary pressures. In other terms it will stimulate imports and slow down exports and result in worsening the trade balance situation.

The second one is the contrast of gallopping inflation with the long term interests of capital expansion, saving and accumulation. Efforts to involve more foreign capital into privatisation may come down to jejune rhetoric when elementary conditions of financial stability are lacking. Capital does not fear uncertainty or risk. But gallopping inflation generates an environment of unpredictability which is unbearable to business. Couragious risk- takers would go on with investments, but the bulk of medium-sized enterprises would rather stay off. Insofar as the crisis is multi-dimensional a multicausal approach to its treatment is indispensable. However the multitude of influencing factors should not be identified with a multitude of objectives of the operation. Factors are many, but, beyond 30% slowing down the inflation must be the objective in terms of macro- monetary policy. Beyond that speed the price expectations appear to have a propensity to remain positive, the price index can double the next year, treble in the second year and so on. Growth incentives of the inflation are switched off at this speed. Self- accelerating effects are switched on /cf.2.4./

2.8. Non-monetarist situation

It has been demonstrated that this recession is not a classical Keynesian one /cf.2.7./ A complementary suggestion is that excess money supply gives no enough ground to assess the situation as a whole as a classical Friedmanite one either. Here a simple terminological difference between monetarist and monetary applies. The former designates one school of economic thought while the latter the related elements of the market system and the macro-policy regulation.

Monetary policy should rely partially on monetarist measures because of the existence of the mentioned excess supply of money. In the eighties more purchasing power was created then required for circulation. Velocity of money circulation was influenced by money creation for deficit financing as against crediting. With growing trade balance deficits, money creation for the needs of net imports was based on growing foreign debts. In general, there was more
purchasing power than goods and services at actual prices. And there was more import than export.

Monetary regulation should have played an important role in reversing these inflationary pressures. But in the late eighties one-sided monetarist decisions were made on the base of an explicit strategy of monetary restriction. Thus not only the purchasing power but also the goods supply was reduced. Practically the measure amounted to restrictions in short-term crediting which had caused a liquidity crisis that halted immediately much of production and service before an agreement to stop the shock-therapy of money supply reduction was achieved.

The monetary policy was wrong at least in two respects. First, that some enterprises othervise efficient became abruptly insolvent. The second fault concerned inefficient ones which were surmised to ‘deserve’ insolvency. But the treatment of this problem was beyond the field of monetary policy. As a market function it could have been achieved by means of bankruptcy, takeovers, mergers, sanation,etc. Here monetary policy tried to take up tasks which fell outside its province. By weakening supply incentives it aggravated inflation.

Another problem is the restricted relevance of the monetarist approach itself. It can be questioned if there is such thing as a monetarist situation. If, as it is experienced in Hungary, a part of the money-diluting emission follows price increase then the latter did not come about as a consequence of increased money
supply. It could happen as a result of positive inflationary expectations. It might have been the consequence of tax increases, shortages of commodities, exchange rate evolutions, wage rise or a host of other factors.

Inflation itself with all the halfmeasures being taken against it at a high speed may become a factor of further inflation owing to its self-generating effects. /2.4.,2.7./Inflation not only restricts real purchasing power of buyers but also allocates more money with sellers, so that aggregate demand may continuously exceed supply and accelerate inflation itself. Nevertheless, to perceive it like a ‘causa sui’ would be equal to some mythical belief in its superhuman nature.


2.9. An appraisal

For the time being inflation remains the main evil of the internal economy. The record of the recent administration in dealing with this evil is unacceptable. Nor opposition programs contain any serious antiinflationary strategies. This issue has been practically excluded from debates because the opposition cannot promise any viable alternative. So it is not partisan politics that dominate the problem in question. Then what does? Must be the policies of specialised government agencies whose operations are claimed to be dictated by professional views.

National Bank representatives every now and then make statements to the effect that they follow a tight monetary policy. No doubt, they indeed try to do so according to their strategy. But tight money policy concerns mainly the private sector and interest rates on saving accounts and bonds remain well under consumer price index /cf.2.1./ while the latter is considerably higher than that of industrial sales. Industrial price index was 105, 115 and 121 % in l988, 1989 and 1990 respectively. Recently it is likely to speed up.

The rediscount rate of the central bank was respectively 10.5, 14.0 and 20%. /23/ These ones and short term refinancing rates werelinked to the slower growth of industrial prices. But they influenced saving interest rates which actually remained about 10% points below the price index. As a result, net Forint deposits of individuals diminished in real terms. Their nominal sum was 279 Bn HUF in 1988, 297 Bn HUF in 1989 and 360 Bn HUF in 1990. /24/

The fact of negative real interest rates on savings accounts and bonds while inflation is gallopping indicates a fault built in a crucial element of the regulatory system. Regulators and legislators alike are culpable for the situation, naturally,not in legal sense.

Is it not a pretentious claim to say that everybody is wrong but the author of this paper? Though the question is not relevant to the subject of the argument it may not be ignored. Many experts propound antiinflationary strategies. And a number of public executives share the same views. But the decision power rests with bodies the policy of which is unsatisfactory in this field. Other fields have not been analysed in this paper.

In a situation which is neither Keynesian nor Friedmanite monetarism is the underlying theory of Hungarian macroequilibrium policy while its practical behaviour is dominated by two opposite onesidednesses: a monetarist and an inflationary bias. Let us compare that with the British policy of eighties which had begun also from a monetarist strategic stance. The latter was subordinated to the main task of overcoming inflation. When it did not work it was abandoned mercilessly: further antiinflationary policy was conducted by thumb-rule and lost its monetarist character. In contrast to this Hungarian policy lost its antiinflationary character.

The British antiinflationary record while it may also be not quite satisfactory is uncomparably better than the Hungarian one (<5% as against >35% in 1991). When speaking of the price index one does not passes a judgment on the whole economic let alone political strategy. But how dares one compare so remote situations as that of Great Britain and Hungary? May it be noticed that situations are not being compared at all at this point. Inflation is the matter under review. Gallopping inflation should be checked in any situation. If it is not it will worsen any situation in any country.

The necessity to have a mixed approach does not mean that every mix is good. In this case the concrete system of measures is blamed not for its eclecticism but for its lack of impulses to curb positive price expectations. The definition of objectives is too wide in scope. It is claimed that besides stabilization efforts the monetary policy “should assist structural transformation, stimulate exports, the search for foreign markets…” /25/ All this appears to be too much at the recent speed of inflation the curbing of which represents the first condition for achieving any other economic and social goals. Monetary policy may promote a variety of aims not directly but through its recent specific task concerning the purchasing power of money. This task has to be supported by maintaining foreign solvency. The recent indication for any administration willing to invite more capital in, is to drive the excess money out.

Capital and Money in Hungary (2)

Capital and Money in Hungary  (continued)

My 1991 London paper as cited in 2014.11.27. 21:29 Minnesota

1.5. Financial capital in Eastern Europe

Everybody seems to agree on that Eastern Europe badly needs working capital imports but few analysts deal with the development of financial markets as their precondition. Financial markets are the realm of financial capital existing in interaction with working capital. Capital value expressed by stock prices is different from the reproduction and goodwill value of real assets. The ratio of stock exchange value and reproductory value is an important regulator of real investments. /12/ Generous tax exemptions and other measures have created incentives for working capital import into Hungary. Lack of normal telecommunication, bureaucracy and transitional risks create obstacles which can be counterbalanced only by seducing financial conditions.

Though Hungary boasts of the highest among newly emerging democracies speed of direct foreign investments the volume of their inflow is lagging behind the needs. The overruling of some takeovers already done somewhat worsened the whole climate for capital involvement. But securities markets remain all the time bearish owing to the high speed of inflation and not to some penniwise financial import policy measures. Financial markets are to be built up not only out of domestic savings which are poor but also by way of international capital involvement. Working capital imports are by no means the only alternative to growing indebtedness. Import of financial capital should be relied on to a much higher degree. This factor requires development of financial markets, which, for the beginning would not surely be ‘efficient’ ones. But if their regulation complies with business requirements exposure to foreign capital inflows might help them soon to attain a necessary degree of clearing power. So if policy-makers want to have efficient markets, first they should promote the development of any markets. And if they want to have more working capital imports they should create incentives also to non-working i.e. financial capital imports.

The above cannot be attained without letting all the national capital work and bring profits to the investors who should be able to reallocate their funds to business activities with expected higher returns. Financial markets are the most powerful instruments of capital reallocation. And corporate structure of industry and service /cf.1.2./ (cf. marks cross-references to this paper) is the most eminent purpose for their existence.

1.6. Corporations

In accordance with some earlier analyses in a 1981 public discussion this writer brought forward a proposal for transformation of state enterprises into corporations. A book in line with this idea in application to the then existing and now anachronistical situation was published in 1983 and its shorter English version in 1984. /13/ Some professional conclusions have been reproduced in quite a few economic documents of both the recent administration and its opposition. A system of business enterprises based on the functional division between owners and enterpreneurs was the gist of the proposed practice. The bearing of the risk that goes with investments was selected as a base of enterpreneurial gain or loss. Reducing of the state property and confining the state activities to macro-economic policy, a social safety-net, resarch-development and environmental issues were said to be preconditions for this type of business culture. The proposal offered a wide factor liberalisation program on the level of risk takers. If the managers were willing to pay higher wages they would have to withdraw funds from some other allocations, e.g. investments providing there was an adequate monetary policy. As regards capital involvement the managers were to attain the same wide range of autonomy as in production and employment decisions. The establishment of a bond and stock exchange was also propounded in 1981. The above was concluded by an initiative to establish a Bank of emission functioning independently of the government. Proposals on currency convertibility were made earlier.

The above mentioned strategy envisaged reducing the complex form of collective ownership by incorporation to the simple form of individual ownership. Thus state property might have attained a new character: it were to act in relation to other owners as a single individual. /Legal experts created a complementary theory to the effect that if the enterprizes are incorporated the state ceases to be an owner as an actor of public law. It can retain its holdings as a subject of private law./ Securities are the proper titles of ownership for profit oriented private owners. As any other owner the state is interested in dividends, bonds and shares prices, yields, etc. This sector may be significant in Central and Eastern Europe, where, apart from some other reasons, due to constraints to domestic purchasing power and limited foreign interest in real investments the state will remain a largest owner of assets in some industries for a long time to come. The strategy propounded in the early eighties /see above/ included practical suggestions on the issue. The majority of corporations would belong to portfolio firms and investment banks with the controlling package of them remaining in some cases with government institutions within a stepwise system of participation. This pattern cannot give an overall solution to the problem of state enterprises. It can be efficient only in the framework of extensive business relations as their partial but not dominating sector.

The privatisation of a considerable part of the state property remains an exigency. As it appears against the background of specific circumstances it is distinct from its theoretical model. To take it in the only context of abstract theory when arguing for or against a given decision in a given country would not be quite appropriate. An explicitly theoretical line of thought will be referred to under the next subheading.

1.7. Privatisation

Although no limitations to privatisation can be found in neoclassical theory /14/ no exclusive importance to property issues is attributed either. As evidenced by international comparisons the relative efficiency of public as against private ownership depends on a variety of factors, incl. the efficacy of capital market monitoring, the way of the public decision-making and the managerial market. /15/

Profit maximisation is considered as an ultima ratio of decisions concerning privatisation. In contrast to this ultima ratio there is strong evidence for that firms deviate from strict neo-classical behaviour viewn as short-run profit maximisation. That is explained partially by game theory and neo-institutional theory. /16/ In capital theory the wealth-preserving function is no less important so that what used to be considered as a single motivation is broken down /with respect to profit flows and capital stocks/ into profit maximisation and risk diversity maximisation /cf.1.4./ This ramification applies also to the above issue. It is not meant to define the exact boundaries of remaining state property but gives it a capital-orientation. Apart from public goods and providing externalia for the private business the remainder of the state property itself should function in a businesslike way represented not only by profits but also by capital gains.

The dilemma of state versus private would be oversimplified without a historical reflection. According to the analysis of economic backwardness from a historic perspective made by A.Gerschenkron in Western Europe individual private capital, in the East the state and in some other, mainly central regions business banks were the engine of accumulation and industrialisation. Banks represent private but as typical not individual capital. Although not any typology is of exclusive validity this one seems to apply with some necessary modifications. When individual capital is weak and state capital slopes downward, financial mediators /and not only banks/ may acquire a considerable place in ownership and redistributive relations.

That role of state which is predicted to remain more important than in Western countries can also be performed by way of public participation in bank ownership. Mixed ownership is another option in addition to privatisation or nationalisation.

Even in some most developed countries there is a link between crediting and ownership. A good part of firms relies on the same bank in every respect. A work quoted above /16/ has proved on grounds of Swedish evidence that a bank that is a principal creditor of a firm is likely to become its main supporter also in bond issuance and ownership contracts. Antitrust or general antimonopolistic regulation prohibits only the excesses in this relations. Long-term principal bank relations are associated with high rates of technical progress for example in Japan where firms rely to much less extent on equity capital then the American ones. Comparisons between France and Great-Britain /15/ show somewhat similar differences.

In Central and Eastern Europe the speed of privatisation relates also to specific circumstances of countries in question which pertains to the multidisciplinary theory of transformation.

1.8. Process of transformation

In Central and Eastern Europe several types of changes are going on. Systemic changes represent one type. Under the heading of another type is a secular evolutionary process of modernization including moving away from peripherical situations,from authoritarian rule that was in existence well before it flourished in one-party states. Some Weberian secularisation aspects of modernisation were even forcefully promoted. But the Luhmanian requirement regarding the economy as a functionally autonomous social subsystem was not lived up to. This is regarded even a more general failure than the one embodied in distorted ownership relations./17/

The third type of change is connected with achieving high technological standards, developing postindustrial features of a modern society based on information. One has to bear in mind the new quality of capital briefly referred to /cf.1.1./. It has been unrecognisably different from its previous untransformed versions. The modus operandi has preserved its essential nature but in the context of a new social organism. Its important regeneration in a century and especially in the last fifty years gives a powerful impetus to the development of this social pattern also in other parts of the world. As a consequence, the appeal of capital is to be taken in account as the environment of transformation of the Eastern half of Europe.

A fourth type is represented by the swift restructuring of the whole world: the international aspect which, in the highly sensitive European space comprises many new security problems. Even apart from them this continent is going to acquire a new identity. The E.C. membership may double in ten years. With the republics of former Eastern federal states it may treble within some years after the end of the millenium.

The fifth type of change is the worsening standard of life that is not unnaturely a most sensitive and dangerous issue. It began in the early eighties /in Hungary/. It is the background of social and political upheavals in Eastern Europe.

These processes interact. They have prompt, short run and long-range sequential layers which also intermingle. These inter-temporal, inter-spatial, and inter-dimensional cross-relations are not to be forgotten when one thinks of the specifics of each process. Change always supposes also continuity even if they combine differently in dramatic and epic phases. Continuity does not relate to everything: there are vectors that must cease to exist. The ‘command’ systemic vector belongs here in our time.

East-European history has produced a type of mutant societies which, in some crucial aspects, are not related to the same classificational dimension as the ‘feudal’ or ‘capitalist’ ones are. Particularly, in feudal times an antiintelectual establishment was not anachronistic like the one in the XX-th century. The animal-farm tale has been supplemented by new actors. The policies of the rhinoceros-like nomenclatura most perfectly personified by some soviet leaders of the seventies and eighties sometimes looked like a purposeful attempt to prove the historical inadequacy of the whole setup.

Mutation notwithstanding the past is not described exhaustively by it. The life of nations was richer than that. One cannot state that in 40 or 70 years of a nation’s life everything was evil. A mutant developmental path was not unrelated to its previous history even if it may not be explained away by earlier events. Analysis includes efforts to avoid biases of ideological thinking in terms of absolute priorities. The market system is better in comparison with the command one but there is no such thing as a perfect system. Nor the market can function without some public regulation. Pure systems anyway exist only in abstraction. In reality they always combine. Market does not combine with the command system but with regulating impulses coming from outside of it.

Politicians as against researchers incl. political scientists sometimes identify the transition to a new system with any important issues on agenda. Systemic dimension, however crucial, is not the only one. It cannot explain such simple things as different economic performance across European country borders, not to mention the Japan phenomenon. An exclusively systemic approach reflects a European way of thinking. For a major part of the world underdevelopment and starvation remain the first problem. From that some ‘command appeal’ emerges and remains in existence whenever the populace can be convinced that there is more food under dictatorship. If there is neither food nor democracy nothing remains of this belief. Command society eliminated, other dimensions or vectors continue, no matter how one likes them. For example, nationalism. But economists should warn first of all against miserable material conditions. Ethnic violence is linked not only to cultural traditions. Well to do people rarely have propensity to kill each other on grounds of ethnic diversity.

By social transformation we mean an extremal in its complexity historic matrix. From this angle the systemic change proper is but a part of a whole and, consequently, should not substitute for the whole.

1.9. A compensation problem.

The texture of national organism emerging from history determines also the social and economic contents of business culture and its implications on the speed of privatization. /cf.1.6./ Systemic transition, being a part of a whole /cf.1.8/, nevertheless is a complex issue in itself and is a deeper qualitative change than the one under way in Western societies. It is more extensive and intensive than any process of deregulation in market economies. The former include such a wide factor liberalisation as to allow the general transformation of property relations. In the field of capital movements the changes also exceed the problem of deregulation in a market economy, for deregulation is not as same as the development of financial market itself. Complexities of the situation may be demonstrated on the evidence of financial problems of denationalisation.

In Hungarian experience the revenue from privatisation is directed to the paying off state debt which is approximately 21 billion dollars or 1300 billion forints (1990 data). Some schemas of privatization credits were implemented. Refraining from the detailed examination of this process the compensation which is paid to former private owners instead of reprivatisation should be mentioned as a particularly sensitive issue linked to it.

Compensation is being paid in form of securities, it can be used for the purchase of new property. /19/ It limits state revenues from privatisation and somewhat slows down the above mentioned
paying off of the state debt. The opposition holds the view that all this is equal to diluting money because the securities can be sold while the government states that the measure does not touch upon macroeconomic equilibrium.

Both are in the wrong. The measure does not involve additional money supply or slow down economic growth which is slow /negative/ anyway. It is not a direct inflationary move. But it dilutes securities in the sense that for the same assets the state will be paid less money, because a part
of the securities will not be sold but distributed in the form of compensation. By limiting state revenues future equilibrium efforts may be weekened. To minimise this danger the compensation is gradualised in time, it will take about five years or more, owing to which it is not the compensation that will reduce the purchasing power of money but the diminishing of the latter will reduce the real sum of the compensation. The matter will boil down to a symbolic political gesture. But this is beyond the concern of economic researchers.


My 1991 London paper as cited in Italo Romano 2014.11.24. 16:38:54

First Part

Karoly Foldes


The first part of this paper examines capital as an ownership phenomenon of monetary nature. It is written with the purpose of giving an as explicit as possible qualitative account on some theoretical assumptions within the limited boundaries of the matter in question and of space. Practical ownership relations are assessed with regard to this orientation. The review of literature is concentrated here. A section is devoted to the broad complex of social transformation which is connected with the narrow subject by many links. The second part is an updated English summary of some works published by the author for the last twenty years in Hungarian. It deals with several capital related attributes of a monetary system. Conclusions on Hungarian macro-equilibrium trends are concentrated here and not repeated separately.

The choice of topics is motivated by the question whither go newly emerging democracies. Insofar as capital is a part of the answer to this question its modus operandi falls within that choice. What this paper has been trying to do is to assess this mode of working as a diagnostical orientation for transformational processes. That includes a trouble-shooting approach to actual decisions as well as programs of incumbent and would-be decision-makers. They are expected to perceive inquiries into the situation /needless to say, not this only one/ as a kind of software designed for users like them but not dependent on them. Criticism of policy coming from this part is no political judgment and should be distanced from partisan debates.

The paper represents but a modest fraction of Hungarian views on economic matters. Some salient capital phenomena could not be elucidated in it. Particularly, a lot of works on measuring capital and capital-output ratio, the impact of capital on growth and the influence of interest rates on investments have been published. The problems just mentioned have been scrutinized by a number of international academic panels the first of which, after World War II. was held, to our knowledge,in 1958. /1/ (References: See at the end.)

Capital is perceived as a business-like behaviour with respect to property in the context of imperfect markets. This viewpoint would be incompatible with lines of thought theoretically eliminating capital. They are tolerated as well, but here the matter has to be presented on a lower level of abstraction. Definitions will not be discussed.

1.1. Capital and labour

Insofar as social transformation includes the adoption of some first principles it seems to be appropriate to begin this part with a brief remark on a question pertaining to them.

There exists a kind of functional complementarity between capital and labour within the boundaries of their mutual substitution and competitive relations. Capital embodies human intellect while
labour represents human capital to a growing extent. In creative work these two sides may merge into one blend. As a rule, skilled labour is propertied. Millions of small business units are based on a personal union between capital and labour. Together with wage-earners living at middle class level they maintain social stability. This electorate is changing its cyclical allegiance.

XIX-th century capitalism with its crude type of free market gone for good, transformation of Eastern and Central Europe is not aimed at its restoration. There is no substantial confrontation between capital and labour there. In Poland, it was labour that created conditions for the functioning of capital. In Hungary, labour and capital have been fighting together against some ill-conceived measures of the administration, against inflationary pressures.

Another, well-known to specialists link between capital and labour this author has just come across. Self-management is likely to generate some special wage-differentials which may be attributed either to capital market or labour market imperfections existing owing to this system. These two do not exlude each other./2/ And in both cases it is the management of capital by labour that creates this particular pattern of wage determination.

1.2. Capital and time

A transformation process from the domination of preserving social attitudes to the innovating ones is under way. The theory of innovation in its original form /3/ deals with “new combinations” which is also a key problem of present endeavours at structural change with the entrepreneur as the key problem-solving actor of the whole setup. He or she works in an environment of disequilibrium, his or her space of choice is under the influence of this state of affairs. One of the main functions of an
enterpreneur as a market actor is to transform input informations received from this space into output informations, i.e. decisions. The decisions of market actors are interdependent under cooperative or non-cooperative game conditions.

Regarding phenomena in question a fairly considerable part of entrepreneurial activity is engaged in corporations, which are regarded by law as persons distinct from the individuals who in fact compose them. Thus in the English Law of the Persons a corporation is distinct from the directors, and from the shareholders (if any) who are its creditors by contract,and from the beneficiaries (if any) for whom it holds property in trust.

In cases when capital from outside is engaged in a corporation in the form of loans, and also bonds, shares and other securities, prompt money of the investors was exchanged for future money of the company. Future is uncertain. Terminal deals, at least partially, harmonise expectations in connection with this uncertain future. Central authorities are unable to do so. Stock-like dynamics, investor-corporation relations, non-stationary conditions which a futures economy as against an imagined prompt economy is based on evolve out of the profit drive of the capital and its wealth-preserving function. The proper context of the time-problem is the management of the capital of other people by a fairly considerable part of business activity. This peculiar function of entrepreneurship as opposed to ownership is a conspicuous feature of modern capital.

Dynamic economics, particularly in Hicks, gives utmost care to the time elapsed between resource involvement, factor combination and output under non-stationary state, when needs, technology and
resources change. /4/ This concept of time as against others, like that of Bohm-Bawerk is given a well deserved preference in the economic literature.

1.3. Capital as a wealth preserver

A general feature of the capital is that its yield over the whole life-cycle surpasses its original costs. /5/ In Tobin, capital as a yield-producing reservoir of wealth and value stands in both substitution and complementary relation with monetary tools, non-monetary wealth and foreign capital. The market of non-capital and non-monetary wealth-holders influences the valuation of productive capital. And though there is no clear-cut line of demarcation between capital stocks and money flows, still there is an undeniable difference between them. Return rates or yield rates mediate between the dynamics of money flows and the dynamics of capital stocks.

The above considerations of economics have recently much more relevance to the development of capital economy then the erstwhile mutual critique of neoclassical and Post-Keynesian authors. And these lines of thought, very much confrontational in times of the Cambridge contraversy (exhaustively examined in a recent history of the question) /6/ have in the meantime adapted to each other to a considerable degree. For example, in the analysis of the demand and supply of wealth preservers the relationship of which depends, inter alia, on preferences concerning the structure of wealth; on the constraints of substitution between different wealth-preservers; and on expectations about the dynamics of interests, dividends and prices.

There remains a divergence of opinion among various schools with respect to these complex (to be briefly mentioned under the next, 1.4. subheading) but the impossibility of satisfying at once all the optimum requirements of social choice /7/ now appears to be generally accepted. Lack of dictatorship would have been one of the requirements of optimal choice. State influence as well as organisational and situational oligopolies and monopsonies create elements of dictatorship even in market economies, not to mention command systems. As to which theories are most likely to give the most comprehensive behavioural orientation game theory and Simon’s bounded rationality theory are to be mentioned. The latter comprises logical and metalogical foundations of second best decisions. Portfolio selection belongs here.

1.4. Portfolio selection

In Markowitz, there are three major ways in which portfolio theory differs from the theory of the firm and the theory of the consumer. First, it is concerned with investors rather than manufacturing firms or consumers. Second, it is concerned with economic agents who act under uncertainty. Third,it is a theory which can be used to direct practice, at least by large /usually institutional/ investors with sufficient computer and database resources.

The first of these needs no further comment. As far as the second is concerned the neoclassical theory assumes that the competitive firm knows the price at which it will sell the goods it produces. That is what should not be assumed in the analysis of investor behaviour. The existence of uncertainty is essential for the latter. One of its main features i.e. diversification is aimed at reducing uncertainty. /8/ The reader recognises here a problem-setting which traces from Frank Knight.

The third difference is connected with the approximate method of portfolio selection “Thus we prefer an approximate method which is computationally feasible to a precise one which cannot be computed. I believe that this is the point at which Kenneth Arrow’s work on the economics of uncertainty diverges from mine.” /9/ Basic dimensions of a portfolio are the expected returns and its variance. Portfolio components with variances complementing each other in time contribute to maximisation of risk diversification. The risk of an asset is seen as its contribution to the risk of the aggregate portfolio.

In Sharpe the ‘beta value’ of a share indicates its marginal contribution to the risk of the entire portfolio. A beta coefficient greater than 1 shows an above-average effect on the risk of the aggregate portfolio. In an efficient capital market,the risk premium and the expected return on an asset will wary according to this coefficient. /10/ This rather simple method of computation shows the percentage of profit rate growth on a given investment as a result of 1% growth of the average rate. It boils down to an elasticity computation. Worth of mentioning is that average rate stands here not for the whole of the exchange but for some index of a group of securities, e.g. Dow-Jones index. The method is widely used by price experts of financial markets.

Experts analysis however is not the only possible way of portfolio selection. In non-scientific professional publications some curious comparisons are made in this respect. A recent article has illustrated four methods of assembling a portfolio, that is to say the experts’, the directors’ choice, the high yield, and the random. The first group of decision makers is selected out of analysts, fund managers and stockbrokers of the City. The second group consists of directors,who bought shares in their own companies in accordance with law. The importance of these two methods goes without saying. The third one is a high yield portfolio. In the short term, the benefit is a high income, in the longer term the investors enjoy capital growth as the yield falls. The fourth method works as dartboard players do. The article quotes a theory that a chimpanzee armed with a set of darts can perform just as well at stock-picking as a sophisticated fund manager, with all his computers and balance sheet analysis.

The existing share price reflects all the currently known information about a company. The price can be affected by “new” information which cannot be known. Accordingly,a random selection of stocks is likely to grow as quickly as a professionally chosen portfolio of shares. /11/ But, to the contrary, enterpreneurial imagination based on professional expertise demonstrated for example by the Soros-story may give better performance on the long run. There is no space here to demonstrate a most exciting aspect of portfolio decisions, namely, diversification into foreign currencies and securities.

Herbert Simon (1916-2001)

Bounded rationality

Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was proposed by Herbert Simon as an alternative basis for the mathematical modeling of decision making, as used in economics and related disciplines; it complements rationality as optimization, which views decision making as a fully rational process of finding an optimal choice given the information available.

Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one. Simon used the analogy of a pair of scissors, where one blade is the “cognitive limitations” of actual humans and the other the “structures of the environment”; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.

Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as “rational” entities (see for example rational choice theory). Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them. (Wikipedia)

The theory in a nutshell:

Pierre Bourdieu (1930 – 2002)

 Pierre Bourdieu konstruktivista strukturalizmusa

“A konstruktivista strukturalizmus megjelölésében a „strukturalizmus” kifejezés a szerzőnél azt jelenti, hogy „a társadalmi világban a nyelven, mítoszon és a többi szimbolikus rendszeren kívül léteznek olyan objektív struktúrák, amelyek az ágensek tudatától és akaratától függetlenek, ám mégis képesek az ágensek gyakorlatait és megnyilvánulásait orientálni és megszabni”. A „konstruktivista” pedig azt hivatott kifejezni, hogy „mind a habitust alkotó észlelési, gondolkodási és cselekvési sémák, mind a mezőknek és társadalmi osztályoknak nevezett társadalmi struktúrák meghatározott társadalmi genezissel rendelkeznek”

Bourdieu relacionista – felfogása szerint nem a lét határozza meg a tudatot, vagy a tudat a létet, hanem kutatásaiban e kettő egymásra hatását vizsgálja, a viszonyrendszerre, relációra helyezve a hangsúlyt. Így jut el a habitus, a szokásrendszer fogalmához:


A habitus definíciója

A habitus latin szó sokrétű jelentéstartalommal bír Bourdieu-nél. Jelent szokást, szokásrendet, az egyéni magatartás mögött meghúzódó attitűdök összességét, ízlést, gondolkodási sémát – általában életmódként szokták fordítani. Értelmezése szerint az egyes ágensek a szocializációjuk alapján alakítanak ki a társadalom kihívásaira reagáló megküzdési stratégiákat – ezek egy részét viszont mintegy készen kapják, szokásként a szüleiktől, ezért ezek számukra objektív adottságként jelentkeznek. Az egyénnel szemben objektív struktúrák először a társadalom szokásrendszerét/ habitusát határozzák meg. E szokásrendszeren keresztül aztán kihatással vannak az egyén által szocializált habitusra, és végső soron meghatározzák az egyének cselekvéseit. Ez a meghatározási folyamat azonban nem mechanisztikus, egy struktúra számtalan egyéni, de ugyanazon habitusban gyökerező választ válthat ki. Ebből viszont az is következik, hogy az egyén nem tud teljesen improvizálni és vadonatúj magatartást létrehozni, mivel nem tudja magát teljesen függetleníteni az elsajátított habitustól. Ezért a habitus, mivel meghatározza az egyén látásmódját, segít újratermelni azokat az objektív struktúrákat is, melyek végső soron létrehozták.

A habitus működése

A szokások egy legitim magatartási repertoárt kínálnak az egyénnek, ezért a lét objektív feltételei nem determinisztikus módon de meghatározzák az egyének cselekedeteit. Hogy az adott egyén a konkrét helyzetben – Bourdieu ezt praxisnak nevezi – hogyan viselkedik, azt a gyakorlati érzéke (sens pratique) fogja eldönteni. Bourdieu egy szemléletes példával világítja meg a habitus működését. Az alsóbb társadalmi rétegbe tartozók központi értéke a férfierő, ami kifejeződik az erős italok fogyasztásában, a nőkkel szembeni megalázó bánásmódban. Ennek az az oka, hogy ez a társadalmi réteg csak fizikai erejét tudja a termelés folyamatába felhasználni, ezért ennek a fizikai erőnek különleges fontossága van a család túlélésében, ami miatt az értékrendszer is ezt emeli piedesztálra. Emiatt viszont az ilyen családban felnövekvő gyermek ilyen modellt látva maga előtt, hajlamos lesz ennek a mintának megfelelően élni, de az nincs determinálva, hogy mind így is fog viselkedni. Viszont aki a családi értékrendet követi, az nem fog tudni továbbtanulni, mivel ez a családban nem volt érték, nem volt jutalmazott magatartás. Így végső soron a családi mintát követő személy maga is fizikai munkás lesz. Ha pedig sok a fizikai munkás, akkor azok a demokratikus viszonyok között nyomást fognak gyakorolni a kormányzatra, hogy fizikai munkát igénylő munkahelyeket hozzon létre, és ne például magas képzettséget igénylőt.

Egyéni és osztályhabitus

Bourdieu vizsgálódásainak középpontjában annak vizsgálata áll, hogy a társadalmi csoport magatartásrendje hogyan hat az egyéni viselkedésre. Másfelől viszont kutatja azt is, hogy milyen mechanizmusoknak határozzák meg maguknak az egyes társadalmi csoportoknak a viselkedését. Alapvető értelmezési egysége ezért a társadalmi osztály. Szembeszállva azonban a marxi felfogással, Bourdieu véleménye szerint a társadalmi osztályok életmódja, habitusa (mit fogyasztanak, milyen újságot olvasnak, milyen pártpolitikai preferenciáik vannak stb. ) alapján különülnek el egymástól. Ahhoz, hogy valaki egy másik osztályba lépjen be, nem elég gazdasági tőkét felhalmoznia, hanem el is kell sajátítania az adott osztályba tartozók habitusát.

“Ha definiálni kívánjuk az osztályhabitus és az egyéni habitus közötti kapcsolatot, azt mondhatjuk, hogy az osztály- (vagy csoport-) habitus interiorizált struktúrák, közös észlelési, fogalomalkotási és cselekvési sémák szubjektív, de nem egyéni rendszerének tekinthető… Valamennyi egyéni diszpozíciós rendszer a többi strukturális variánsának tekinthető, amelyben az adott osztályon és pályaíven belüli pozíció egyedisége fejeződik ki. Az ún. „személyes” stílus, vagyis az a különös ismertetőjegy, amelyet magán hordoz egy adott habitus valamennyi terméke, legyen szó akár egy gyakorlatról vagy egy műalkotásról, sohasem más, mint egyfajta eltérés egy korszak vagy egy osztály eredeti stílusához képest. Az egyéni habitusok közötti különbségek alapelve a társadalmi pályaívek egyediségéből származik, mely pályaívekkel kronologikusan elrendeződő és egymásra visszavezethetetlen meghatározottságok sora korrelál: a habitus… egy olyan kivételes integrációt valósít meg, amelyet egy osztály valamennyi tagjának az első, statisztikailag közös tapasztalatai uralnak .”

Bourdieu szerint a habitus főbb tulajdonságai a következők:

1. Hiszterézis: Ez a habitus azon tulajdonságát jelenti, hogy nem reagál azonnal az őt létrehozó struktúrák változásaira. A habitus így akkor is fennmarad, ha kifejezetten inadaptív az aktuális környezet kihívásaival szemben. Erre a jellemvonásra leginkább a Don Quijote-jelenség a legjobb példa.

2. A habitust struktúrák hozzák létre, de mivel meghatározza a társadalmi cselekvők magatartását, és látásmódját, ezért maga is struktúráló elemmé lép elő.

3. Transzponabilitás, azaz átvihetőség. Az egyes mezőkben elsajátított magatartásformák, habitusok átkerülhetnek más területekre is.


Kutatásainak másik fő területe az ún. mezőelmélet megalkotása volt. Véleménye szerint a modern társadalmakban a társadalom világa differenciálódik: a társadalom által mutatott cselekmények – megvalósítandó céljuk szerint – társadalmi alterek, ún. mezők köré rendeződnek (pl. a művészeti, vagy politikai mező). A mező így végső soron bizonyos társadalmi pozíciók közti viszonyok összességét jelenti. Az egyes mezők sajátos logikájuk alapján különböztethetők meg egymástól. Egy mező sajátos logikáját a mezőben folyó játszmák és érvényesíthető aduk határozzák meg. A mezőben cselekvők közötti együttműködés a cselekvőket mozgató erőforrások és aduk függvényében strukturálódik. Az erőforrásokat Bourdieu tőkének nevezi, és megkülönböztet gazdasági, kulturális, társadalmi és szimbolikus tőkéket. A mezők relatív önállóságot élveznek a társadalom egészével szemben. A mezők hierarchizáltak és a bennük tevékenykedő ágenseknek a dominanciáért folytatott versengése dinamizálja őket. Így, a marxista filozófusokhoz hasonlóan Bourdieu is nagy jelentőséget tulajdonít a társadalom életében a küzdelemnek. De ellentétben a marxistákkal, Bourdieu szerint ez a küzdelem mindenekelőtt a mezőkön belül, és a domináns és a dominált pozíciók között zajlik – nem pedig társadalmi osztályok között. Minden mező sajátos szabályokkal rendelkezik ugyan, de vannak általános szabályok is: az újak és a régiek közötti harc, mindenki elfogadja a mezőn belüli játszmákat, és mindenki a saját túlélésére törekszik. A mező végső soron az a játéktér, ahol az egyes cselekvők a saját habitusuk által vezérelve folytatják a játszmáikat.


Bourdieu elemzési egysége a társadalmi osztály -ezt azonban nem marxi értelemben használja. Többször bírálja a marxistákat, hogy – mechanikusan ragaszkodva “a lét határozza meg a tudatot”-elképzelésükhöz – ökonomizmusba esnek: csak a materiális tényezőkre szűkítik le a társadalom által elsajátítható értékeket, és csak a materiális tényezők mozgását vizsgálják. Tőke-elméletével ezzel szemben Bourdieu a társadalom általános közgazdaságtanát akart megalkotni. Véleménye szerint a gyakorlat általános közgazdaságtanának ezért arra kell törekednie, hogy a társadalmi rétegződést meghatározó tőkét és a profitot valamennyi megjelenési formájában megragadja és leírja azokat a törvényszerűségeket, amelyek alapján a tőke különböző fajtái (vagy ami ugyanazt eredményezi: a hatalom különböző fajtái) kölcsönösen egymásba transzformálódnak.


Számára a tőke vagy anyagi formában vagy inkorporált formában felhalmozott munka, emiatt a tőke elsajátításával lehetővé válik a társadalmi energia elsajátítása. Strukturalizmusa ragadható meg abban, hogy azt vallja: a tőkefelhalmozás szabályai miatt a gazdasági élet nem olyan mint a szerencsejáték, ahol bármikor bárkiből milliomos lehet, de azonnal el is veszthet mindent; a tőkefelhalmozás időbe telik, és a tőke felhalmozása és elosztási folyamatai leképezik a társadalmi világ belső struktúráit. A hagyományos tőke-fogalom, a társadalomban lévő csereviszonyokra, az árucsere viszonyaira, a profit- maximalizálásra szűkül le. Az ily módon felfogott tőke mellett azonban a társadalmi csere egyéb, önzetlen formái is léteznek – ezek jórészt azért kerülték el a társadalomtudományi elemzést, mert az uralkodó osztály privilégiumai voltak. Bourdieu megkülönböztet gazdasági, kulturális és társadalmi (kapcsolati) tőkét.

Kulturális tőke


A kulturális tőke háromféle formában létezhet: inkorporált (azaz az egyén által belsővé tett, elsajátított készségek formájában) / tárgyiasult formában (pl. könyvek, lexikonok) / intézményesült formában. Az inkorporált, azaz a belsővé tett kulturális tőke elsajátítási folyamat következtében lesz valaki sajátja és maga is habitussá válhatik. Az elsajátítási folyamat során a képviselet kizárt és az elsajátító a saját erőfeszítéseivel fizet a tőkejavakért. Az intézményesült kulturális tőke elsősorban a titulusokat (iskolavégzett, phd stb.) jelenti melyek kifelé jelzik azt, hogy a titulus jogosultja rendelkezik egyfajta képességgel – függetlenül az aktuális tudattartamától, tudásától. A titulusok emiatt lehetőséget nyújtanak arra, hogy hordozójukat összemérjék más titulusok hordozóival. Egyes szakmák címekhez kötése egyben megmutatja azt az átváltási árfolyamot is, amely a kulturális tőke megszerzése és e tőke munkaerőpiaci értéke között van. Ebben figyelhető meg szerinte a modern társadalom papírimádata: a szakmák betöltéséhez iskolai végzettséget igazoló papírt követel meg a legtöbb munkaadó. A munka tényleges ellátásához azonban sok esetben nincs szükség arra a képzettségre, amelynek a meglétét elvileg a bizonyítvány igazolja. A papír megkövetelése ezért elsősorban azzal magyarázható, hogy ez kvázi biztosítékot ad a munkavállalónak, hogy a munkaadó olyan társadalmi osztályból jön, amelyik képes megfizetni a nevesebb egyetemek diplomáit, illetve amelyik ugyanazokat a kulturális mintázatokat adja át a gyermekének, mint amellyel a munkaadó is rendelkezik. Azaz végső soron az osztályhabitus meglétének igazolására szolgál.

A kulturális tőke vizsgálata során ugyanis Bourdieu kimutatta, hogy a francia iskolarendszer nemhogy megszünteti, hanem éppenhogy újratermeli a társadalmi különbségeket. A francia republikánus hagyományra, azaz a francia forradalom “Szabadság, Egyenlőség, Testvériség!” jelszavaira építő, a diákok másodlagos szocializációjának (a társadalmi normarendszer elsajátítása) színteréül szolgáló iskolarendszer ugyanis egyfelől olyan készségekre, képességekre – röviden: kulturális tőkére – épít, melyet a diákok a családban, azaz elsődleges szocializációjuk során sajátítanak el. Emiatt például az alacsonyabb státusú, kétkezi munkát végző szülők gyermekei számára a szülői példa nyomán elsősorban a család megélhetését biztosító férfierő és a férfias viselkedés lesz a követendő, és kiközösítik a jól tanuló diákokat a kortárscsoportokból. Bourdieu ebben a kontextusban hangsúlyozza, hogy az osztályhabitus legélesebben a nyelvhasználatban ragadható meg: a magasabb habitusúak kidolgozott nyelvi kődban beszélnek, míg az alacsonyabbakba tartozók korlátozottba. Másfelől a diákok az életben nemcsak a kulturális tőkéjük, hanem kapcsolati tőkéjüknek is köszönhetően fognak boldogulni. Ebből következően a jobb környéken lakó, emiatt jobban felszerelt, gazdag szülők gyermekei által látogatott iskolába járó gyerekek sokkal nagyobb előnyökkel lépnek be a munkaerőpiacra, mint például a vidékről érkező, és a nagyobb városokban esetleg semmilyen kapcsolattal nem rendelkező emberek.

Társadalmi tőke

Olyan erőforrásokról van szó, amelyek az egy csoporthoz való tartozáson alapulnak: a csoporthoz tartozás hitelképességet biztosít, illetve a csoport többi tagjának tudása, javai bizonyos mértékben kisugározódnak és egyben hozzáférhetőekké válnak a csoport minden tagja számára, pl. kölcsönös szívességek útján. A csoportidentitás szempontjából ezért kiemelkedő fontossággal bírnak a kapcsolatokat szentesítő ún. intézményesülési rítusok: pl valakit felvesznek egy exkluzív klubba; valaki házasságot köt. A csoportnak ezeket az intézményesülési rítusokat kontroll alatt kell tartania, mivel egy nem megfelelő személynek a csoportba engedése az egész csoport társadalmi tőkéjére kihat. Ez az oka, hogy a tradicionális társadalmakban a házasság – azaz, hogy ki kerül be a családba, nemzettségbe – soha nem az egyén döntése volt, hanem az egész közösségé, hogy elkerüljék a rangon aluli, ezért értékcsökkenéstmaguk utánvonó frigyeket. A tőke ezen formájában lehetséges a képviseleti elv: a főnemes például képviselheti az egész nemességet, vagy az egész országot; egy klánfőnök beszélhet az egész közösség nevében.


Bourdieu hangsúlyozza, hogy az egyes tőkefajták bizonyos feltételek megléte esetén átválthatók egymásba, azaz konverzálhatók. Ennek kapcsán a természetben érvényesülő energiamegmaradás törvénye mintájára úgy gondolja, hogy a társadalmi energia is megmarad: a látszólag felesleges energiakiadások, mint például ingyenes szívességek teljesítése a kapcsolati tőke megtartása érdekében igenis bírnak racionalitással. A kapcsolati tőke ugyanis például egy állás elnyerésénél kemény gazdasági tőkére is váltható.

Szimbolikus erőszak

Mint az látható, Bourdieu a társadalmi egyenlőtlenségek újratermelődésének folyamatában központi jelentőséget tulajdonított a kulturális és szimbolikus tényezőknek, és erősen bírálta a marxistáknak a gazdasági tényezőkre korlátozódó elképzeléseit. Bourdieu aláhúzza, hogy a domináns pozícióban lévők képessége, hogy ráerőltessék a saját kulturális és szimbolikus produktumaikat a társadalom többi részére központi szerepet játszik a hatalmi viszonyok újratermelődésében. Ezt a jelenséget szimbolikus tőkének, de gyakrabban szimbolikus erőszaknak nevezi, és kiemeli, hogy ez magába foglalja annak a képességét, hogy elfedjék a szimbolikus produktumok önkényes jellegét, és így azokat legitimnek mutatják be. A szimbolikus erőszak szélsőséges esetben oda vezethet, hogy nem is lehet társadalmi mobilitásról beszélni, hanem csak a meglévő társadalmi struktúrák reprodukciójáról.

A francia iskolarendszerről írt tanulmányában például azt állítja, hogy a francia iskolarendszerre is jellemző a szimbolikus erőszak. Azzal ugyanis, hogy nem veszi figyelembe az osztályozásnál a habitusbeli különbségeket és ezzel látszólag objektív követelményrendszert teremt végső soron elhiteti az alacsonyabb osztályba tartozókkal, hogy tényleg kevesebbet érnek, mint magasabb státusú és emiatt sikeresebb társaik. Ezáltal a francia iskolarendszer rejtett társadalmi diszkriminációt hajt végre. (Wikipedia)

A complement to ‘Eurodollars, two wars, recycling’

Some additions to the post

“Some kind of proto-fascist state would almost certainly have come into existence on 6 February 1934 had Maurras given the signal for action. But he was then sixty-six, very deaf and by temperament a sedentary word-spinner: he spent the critical day writing an editorial instead.

Precisely the gifts which made him so dangerous in stirring the passions of educated Frenchmen incapacitated him from leading them into battle. There was thus no focus around which a united fascist movement could gather.”

“In this forlorn endeavour, Hammarskjold paid scant regard to the lives, black or white, he was risking. Cold, detached, consumed by an overwhelming ambition masquerading as an ideal, he thought in terms of a political abstraction, not human beings.

Hammarskjold, like many other outsiders, assumed one could discern, and respond to, Western-type political principles and situations in what was, in fact, nothing more than a seething cauldron of tribal and personal politics.”

„Ozaki Yukio, the most durable of Japanese politicians, who took part in the first general election of 1890 and lived to sit in the first post-1945 Diet, wrote in 1918 that in Japan ‘political parties, which should be based and dissolved solely on principles and political views, are really affairs of personal connections and sentiments, the relations between the leader and the members of a party being similar to those which subsisted between a feudal lord and his liegemen.”

„Why had the promise of the nineteenth century been dashed? Why had much of the twentieth century turned into an age of horror or, as some would say, evil? The social sciences, which claimed such questions as their province, could not provide the answer. Nor was this surprising: they were part, and a very important part, of the problem. Economics, sociology, psychology and

other inexact sciences – scarcely sciences at all in the light of modern experience – had constructed the juggernaut of social engineering, which had crushed beneath it so many lives and so much wealth. The tragedy was that the social sciences only began to fall into disfavour in the 1970s, after they had benefited from the great afflatus of higher education. The effect of the social science fallacy would therefore still be felt until the turn of the century.

…But if, as deconstructionists maintained, ‘hierarchical’ systems of judgement, which favoured the

study of Shakespeare’s plays over, say, comic books, were a source of social evil, what was the point of universities, whose traditional purpose was the pursuit of excellence?


..Significantly, just as in Marxist states social engineering went hand in hand with financial corruption of the most blatant kind, the same conjunction appeared in ‘progressive’ American universities. Early in 1991, the House of Representatives’ Energy and Commerce Committee, under the chairmanship of John Dingell, began a vigorous investigation into the use of $9.2 billion a year funded to American universities by the federal government in the form of research contracts. They discovered that at Stanford, which had received $1.8 billion during the previous ten years, about $200 million had been syphoned off into unjustifiable expenditure, designed chiefly to give the academic staff, from the university’s president downwards, a higher standard of living. 149 Such scandals contributed to the process which, by the early 1990s, had begun to undermine the standing of the universities in general, and the social sciences in particular, among the public.”From: Paul Johnson „Modern Times” revised edition HarperCollms Publishers

Eurodollars, two wars, recycling

“The peak post-war year for the American economy, relative to the rest of the world, was 1968, when American industrial production was more than one-third (34 per cent) of the world total. It was also the climax of the American global paramountcy, the year of Lyndon Johnson’s agony, the point at which the combined burden of foreign and domestic spending became too great to bear. Thereafter all was decadence. And with America’s relative economic decline came a progressive softening of the dollar as a reserve currency. This inevitably undermined the Bretton Woods arrangements. From the late 1960s Washington ceased to control the world monetary system.

To some extent it ceased to control its own currency since the 
quantity of unrepatriated dollars — what de Gaulle stigmatized as 
'America's export of her own inflation' - now reached catastrophic 
proportions. The age of the dollar was over. The age of the 
Eurodollar dawned. 

As long ago as 1949 the Communist Chinese, fearing America 
might block any dollars they earned, decided to keep their dollars 
outside the US in a Soviet Paris bank. Its cable address was 
'Eurobank' - hence . the term Eurodollar. America first went into 
deficit in 1958, and thereafter the flow of dollars into Europe 
increased steadily. A British financier, Sir George Bolton, of the Bank 
of London and South America, now grasped the idea that here, for 
the first time, was a currency growing up outside national supervi- 
sion, an expatriate currency capable of providing colossal amounts 
of credit. He made London the centre of the new Eurodollar 
system. 18 The Eurodollar market tripled in 1959 alone; doubled 
again in 1960. Attempts by Kennedy to break it up by controls 
merely boosted its attractiveness. Similar measures by European 
governments were equally counter-productive. It was a good exam- 
ple of the way in which the market defies the suppressive puritanism 
of governments and world agencies. As Walter Wriston of New 
York's Citibank put it, the Eurocurrency market was 'fathered by 
controls'. It was, in fact, a kind of black market world financial 
system. Freed of government interference, it was able to make the 
maximum use of the new electronic communications devices which 
became available in the 1960s and 1970s. To quote Wriston again: 
'Mankind now has a completely integrated international financial 
and information marketplace, capable of moving money and ideas to 
any place on this planet within minutes.' (19) ( source notes are absent.)

But of course the Eurodollar market, the product of American 
inflation, was itself highly inflationary. It reproduced some of the 
worst features of the 1920s New York money market, especially in 
its international loans. It increased the volatile nature of money, 
stacked up credit in multiple tiers of borrowings, thus creating 
'dollars' which did not exist. 20 Eurobonds and Eurocredits were 
invented. All the world's major banks came into the market, and 
formed syndicates to handle loans to governments on a scale never 
before imagined. The first Eurodollar syndicated loan was to the 
Shah's Iran in 1969. It was for $80 million. Italy got a $200 million 
loan later that year. Soon up to two hundred banks joined syndi- 
cates, and the size and number of loans, and the speed at which they 
were packaged, grew dramatically. The billion-dollar loan became 
routine. Commercial banks replaced wealthy Western governments 
and development aid as the chief source of finance for the Third 
World. In 1967, commercial banks accounted for only 12 per cent of 
external public debt in the world. By the end of 1975 they passed the 
50 per cent mark at a trot. 21 

As the banks took over the international monetary system, the 
supervisory role of Washington collapsed. In 1971 the Nixon 
administration lost or abandoned control of what was happening. 22 
Two years later, in March 1973, Nixon cut the link between gold 
and dollars, and thereafter most major currencies floated, either 
singly or in groups. The float revealed the weakness of the dollar, 
which lost 40 per cent of its value against the Deutschmark 
between February and March 1973. It also increased the speed and 
hysteria of monetary movements which, thanks to electronic gadge- 
try, surged backwards and forwards across frontiers in gigantic 
masses (in the late 1970s, money transactions in New York alone 
averaged $23 billion a day 23 ). In short, by autumn 1973, the financial 
underpinning of the world economy was coming apart. To produce 
disaster, all that was required was a sudden shock. What happened 
was by no means a mere shock: it was an earthquake. 

It was no accident that the earthquake emanated from the Middle 
East. The great post-war boom had been propelled by cheap energy. 
Between 1951 and 1972, the price of fuel declined consistently 
compared to the price of manufactured goods. It fell sharply in relative 
terms 1953-69, and in the years 1963-9 it actually fell in absolute 
terms. 24 This fall in price was made possible by the rapid increase of 
exports of cheap Middle East oil. It is significant that the three leading 
sectors in the Western economic boom, motors, chemicals and 
electricity, were all energy-intensive, indeed oil-intensive. 25 By assum- 
ing energy would remain cheap, all the industrial nations were 
short-sighted. But American energy policy was a particularly sad tale 
of improvidence, since government intervention kept domestic prices 
well below world averages. From being a world exporter of energy 
America became a net importer - 7 per cent of the total by 1 960 - with 
her energy consumption increasing fast every year (5 per cent annually 
in the second half of the 1960s). Her imports of petroleum products 
were particularly disturbing: in 1960 she imported 10 per cent; by 
1968 28 per cent; by 1973 36 per cent. 26 America's own oil 
production peaked in 1970 and thereafter declined. 

The rulers of the Middle East oil states noted this growing 
dependence of the West and Japan on their oil exports, and the failure 
to devise supplementary or alternative sources of energy. Some of 
them, and especially the Shah of Iran, were impressed by the 
arguments of the ecologists that the advanced industrial nations, 
especially America, were using up natural resources too fast because 
they were underpriced. In 1972-3 there were already signs that raw 
materials and other commodities, such as farm products, were rising 
in price, and oil began to follow. The Shah sought to persuade his 
fellow-rulers that the oil-exporting countries of the Middle East 
would do better to expand production more slowly and push up 
prices: thus their oil in the ground would increase in value. But to heed 
his advice they required not only a reason but an emotion - hatred of 
Israel, and of Israel's ally America. 

Strictly speaking, there had been no paramount power in the 
Middle East since the Suez fiasco of 1956-7. But though Britain kept a 
much lower profile she was quite active and surprisingly effective in
the area for the next few years. British military interventions in 
Jordan in 1958, in Oman in 1959, in Kuwait in 1961, were 
successful in keeping the area reasonably stable. It was the progress- 
ive British military withdrawal from Aden and from the Gulf in the 
late 1960s which made the real difference. 27 Thereafter the area 
lacked an international policeman. The late Dag Hammarskjold's UN 
force was, in fact, a force working for instability, since under the UN 
doctrine of sovereignty President Nasser could ask for its withdrawal 
as soon as he felt strong enough to overwhelm Israel. That is 
precisely what he did on 16 May 1967. The UN complied three days 
later and the same evening Cairo Radio announced: 'This is our 
chance, Arabs, to deal Israel a mortal blow of annihilation.' Nasser, 
27 May: 'Our basic objective will be the destruction of Israel.' 
President Aref of Iraq, 31 May: 'Our goal is clear: to wipe Israel off 
the map.' Ahmed Shukairy, Chairman of the Palestine Liberation 
Organization, 1 June: 'The Jews of Palestine will have to leave .... 
Any of the old Jewish Palestine population who survive may stay, but 
it is my impression that none of them will survive.' 

In view of the withdrawal of the UN, these threats, and the 
concentration on her borders of armies outnumbering her own by 
three to one, heavily armed with modern Soviet material, Israel 
launched a preventive war on 4 June, beginning with strikes against 
Egyptian air-power. It lasted six days and was wholly successful. The 
Egyptian, Jordanian and Syrian forces were routed, and in Egypt's 
case humiliated. Sinai and the West Bank were occupied. The Syrian 
Golan Heights, which made possible the bombardment of the Israeli 
settlements in Upper Galilee, were stormed. Above all, Old Jeru- 
salem, including the Wailing Wall and the Holy Places, the great 
prize which had eluded Israel in 1948, was now brought into the new 
state. Thus the war corrected a painful anomaly. In its 4,000-year 
history, Jerusalem had been besieged, occupied, destroyed and 
rebuilt repeatedly, under Canaanites, Jebusites, Jews, Babylonians, 
Assyrians, Persians, Romans, Byzantines, Arabs, Crusaders, Mame- 
lukes, Ottomans and British. But it had never been divided, except 
during the years 1948—67. The reunification of the city under the 
Israelis made possible an agreed administration of the Holy Places by 
Muslims, Jews and Christians, within the framework of a national 
capital. 28 

In other respects the Israeli victory brought no permanent gains. 
Nasser survived, thanks to some adroit crowd-manipulation. 29 His 
forces were rearmed by Soviet Russia, at more than twice the 
strength of the 1967 level. The thrust of his propaganda became 
increasingly anti-American, summed up in his endlessly repeated 
slogan 'Israel is America and America is Israel.' It was one of 
Nasser's arguments that to strike at America was to hurt Israel and 
that America's growing dependence on Middle East oil was a means 
to do so. But Egypt was not an oil power. Nasser died on 28 
September 1970 of a heart-attack, a propagandist of genius, a total 
failure as a military and political leader. There was no one to replace 
him as the cynosure of Arab hopes, delusory though they might be. 
But Nasser's destructive role as an advocate and practitioner of 
violence was soon filled by Colonel Mohammed Gadafy of Libya. A 
year before, he and other young officers had overthrown the coun- 
try's pro-Western monarchy rather as Nasser had despatched 
Farouk. In many ways Gadafy modelled himself on Nasser and 
repeated his Pan-Arabist and anti-Israeli rhetoric word-for-word. 
Libya was one of the smallest Arab states with only 2 million 
inhabitants. But it was by far the largest Arab oil producer west of 
Suez, and the importance of its geographical location was stressed in 
the aftermath of the 1967 war, when the canal was closed and 
Middle East oil supplies to the West disrupted. From the earliest days 
of his dictatorship Gadafy stressed the importance of the oil weapon 
in hitting back at 'western imperialism' for its support of Israel. 

Gadafy proved extremely adroit in bargaining with the oil compa- 
nies and the consumer nations, showing that both could successfully 
be divided and blackmailed separately. When he took power Libyan 
oil was virtually the cheapest in the world. In a series of negotiations, 
in 1970, 1971 and again in 1973, he obtained the biggest oil price 
increases ever granted to an Arab power, with additional upward 
adjustments to account for the fall in the dollar. The importance of 
his success was that it was quickly imitated by the Arab-dominated 
Organization of Petroleum Exporting Countries, opec had been 
formed as a defensive body to protect the oil price when it fell. 
Hitherto it had engaged in no collective action except to agree a 
royalty formula in 1965. In 1971, following Gadafy's move, the 
opec states of the Gulf bargained together as a group against the oil 
companies for the first time. 30 At Teheran on 14 February 1971, they 
secured a 40-cents-on-the-barrel price increase. This was the 
beginning of the energy price revolution. The new agreement was to 
hold for five years, 'a solemn promise', as Henry Kissinger put it, 
'that must hold a world record in the scale and speed of its 
violation'. 31 

The likelihood that the oil weapon would now be used more 
skilfully was much increased in July 1972 when Nasser's successor, 
General Anwar Sadat, threw off the Soviet alliance, expelled his 
Soviet advisers and technicians, and aligned Egypt with Saudi Arabia 
and the other oil states of the Gulf. Sadat was not a verbalizer like 
Nasser. In spirit he was not of the Bandung generation. He was a 
realist. He recognized that the Egypt-Israel antagonism was opposed 
to Egypt's historic tradition and detrimental to her current interests, 
especially economic. He wanted to end it. But to have the power to 
make peace he first needed the prestige of military victory. On 
Saturday 6 October 1973, on the festival of Yom Kippur or Day of 
Atonement, the holiest day in the Jewish calendar, he launched a 
co-ordinated Egyptian— Syrian attack on Israel. The initial success was 
considerable. The Israeli 'Bar-Lev line' in Sinai was pierced. A large 
part of the Israeli air force was destroyed by Soviet ground-to-air 
missiles. Golda Meir, the Israeli Prime Minister, appealed in some 
panic to Washington. Some $2.2 billion of the latest American arms 
was airlifted to Israel. From 8 October the Israelis began counter- 
attacking. Before a cease-fire was signed on 24 October, Israel had 
recovered the lost territory, advanced to within range of Damascus, 
established a bridgehead on the western side of the Suez Canal, and 
surrounded a large part of the Egyptian army. 32 Egypt had demon- 
strated an unexpected military capacity, and that was enough for 
Sadat; Israel had shown she could survive initial disaster. 

The war brought out the ultimate military dependence of Israel on 
American will. It also drew attention to the damage inflicted on 
America's leadership of the West by the pursuit of the Watergate affair 
by the American media and the Congressional Democratic majority. 
When Israel counter-attacked successfully, Sadat appealed for Soviet 
support and Brezhnev sent a message to Nixon on 24 October 
warning that Soviet troops might be sent to fight the Israelis without 
further warning. Though Nixon had earlier ordered full logistical 
backing for the Israelis and now agreed to an alert of US forces 
throughout the world, the first on such a scale since the Cuban missile 
crisis of 1962, he was so cocooned in the Watergate tangle that he felt 
obliged to hand over control of the crisis to Kissinger, now the 
Secretary of State. It was Kissinger, not the President, who presided 
over the White House meeting which responded to the Brezhnev 
message; and he issued the orders for the alert. To the charge by some 
of the Watergate witch-hunters that the crisis had been engineered to 
divert attention from Nixon's difficulties, Kissinger scornfully replied 
(press conference, 25 October): 

We are attempting to conduct the foreign policy of the United States with 
regard for what we owe not just to the electorate but to future generations. 
And it is a symptom of what is happening to our country that it could even be 
suggested that the United States would alert its forces for domestic reasons. 33 

With the American President paralysed by his domestic enemies, 
there was no one to lead the West on behalf of the world's oil 
consumers when the Arab opec states responded to Israel's survival 
by employing the oil weapon with brutal violence. Already, on 16 
October, they politicized oil exports, cut oil production and (with 
non-Arab producers) raised the price 70 per cent. On 23 December 
they again raised the price, this time by 128 per cent. As a result, 
crude oil prices quadrupled in less than a year. The decision, as 
Kissinger put it, 'was one of the pivotal events in the history of this 
century'. 34 It transformed a general but gradual rise in prices into a 
price-revolution of a kind the world had never before experienced 
over so short a period. The worst hit were the poorest countries, 
most of which had acute debt-burdens and imported all their energy. 
In countries with per capita incomes around or below the $100 a 
year mark, where a billion people lived, and whose incomes had been 
rising slowly (about 2 per cent a year) in the 1960s decade, a 
downturn in growth was already occurring before the oil-price 
revolution hit them. For them it was a catastrophe. 35 They found 
themselves worse off at the end of the 1970s than they were when the 
decade opened, the first such reversal in modern times. At such low 
levels, such a direct fall in incomes meant malnutrition and related 
epidemics. The number of Africans and Asians who died in conse- 
quence of Arab oil policy in the decade after 1973 must be calculated 
in tens of millions. 

The world as a whole experienced a decline in wealth since the loss 
of output was worth twice the extra funds transferred to the 
oil-producing countries. For the industrialized countries, the result 
was a form of economic malady which Keynesianism had not 
envisaged: stagflation. From a 5.2 per cent rate of growth with 4.1 
per cent average price increases, the world moved in 1974-5 to nil or 
minus growth with 10-12 per cent average price increases a year. 
This was high inflation, and in many countries it accelerated into 
hyper-inflation. The price revolution, with the oil jump at its heart, 
spanned the years 1972-6. It was by far the most destructive 
economic event since 1945. It acted as a fierce brake on the 
energy-intensive leading sectors responsible for the prolonged expan- 
sion in the American, West European and Japanese economies, 
producing abrupt declines in output and unemployment on a scale 
unknown since the 1930s. 36 By the early 1980s, the number of 
unemployed in America and West Europe alone was 25 million. 

The disaster might have been still more serious but for the 
resiliency of the banking system. In November 1973, in the immedi- 
ate aftermath of the Middle East crisis, a big London fringe bank, the 
London and County, tottered. The Bank of England hastily launched 
a 'lifeboat', getting the major banks to provide $3 billions support 
for twenty-six other fringe banks. A bad moment occurred in the 
following June, when the German Herstatt Bank collapsed, owing 

huge sums to British and American banks, and with disturbing 
echoes of the fall of Credit Anstalt in 1931. But again the support 
system worked. At the end of 1974, the Comptroller of Currency in 
Washington was keeping under special observation some 150 US 
banks, including two of the biggest, which were known to be under 
strain. In London the property boom foundered, dragging down 
some glittering companies. The Financial Times index, 543 in March 
1972, fell to 146 at the beginning of 1975, with shares worth less, in 
real terms, than at the depths of the war in 1940. In America, New 
York city finances, long suspect, finally succumbed when the banks 
refused further loans. The richest city in the world appealed to the 
White House, but Gerald Ford refused to intervene, an event 
celebrated in a famous New York Daily News headline: 'Ford to 
City: Drop Dead'. 37 But by then the worst of the money crisis was 
over and all the banks and institutions that really mattered were still 

Indeed the commercial banks, whose Eurodollar frenzy had contri- 
buted to the instability, now used similar methods to produce some 
kind of order out of the chaos. The problem was as follows. The oil 
price revolution meant that the opec countries took an extra $80 
billion a year out of the world economy. That was 10 per cent of all 
world exports. Saudi Arabia and Kuwait alone, with tiny popula- 
tions, received an extra $37 billion a year, enough over twenty-five 
years to buy all the major companies on all the world's stock 
exchanges. There was real terror that the Arabs would use the new 
'money weapon' as they used the oil weapon. In any case it was 
essential to get the cash back into the world's productive economy 
quickly. Washington, still paralysed by Watergate, could provide no 
leadership. Happily, the extra-governmental Eurodollar system, used 
to responding to pure market needs without bureaucratic help or 
hindrance, was waiting to be used. Eurodollars were renamed 
petrodollars. A new term, 'recycling,' came into use. The petrodoll- 
ars were quickly packaged into huge loans for the hard-hit advanced 
industrial countries and for the still more disturbed developing 
countries, like Indonesia, Zaire, Brazil, Turkey and even new compe- 
titors for the Arab oil producers, like Mexico. 

The Arabs had no wish to help the Third World, except through 
government loans with strings attached. But once they put their 
money into the world banking system, they lost sight of it. And they 
had nowhere else to put it. Like Croesus, they were baffled. They did 
not like what was happening. But not as yet having a banking system 
of their own, for Koranic reasons, there was nothing they could do. 
As a Congressional witness put it: 'All they have is an iou in a bank 
account which can be frozen at any time in the United States or in 

Germany or wherever it is.' 38 If a nation has more money than it can 
spend, it has to share the use, willingly or unwillingly. America did so 
willingly, in the years after 1945, in the form of Marshall Aid, Point 
Four Aid, and in the military containment of Soviet expansion. The 
Arabs had no such altruism, but they could not stop the banks 
lending their money. Walter Wriston of Citibank put the situation 

If Exxon pays Saudi Arabia $50 million, all that happens is that we debit 
Exxon and credit Saudi Arabia. The balance-sheet of Citibank remains the 
same. And if they say they don't like American banks, they'll put it in Credit 
Suisse, all we do is charge Saudi Arabia and credit Credit Suisse: our 
balance sheet remains the same. So when people run around waiting for the 
sky to fall there isn't any way that money can leave the system. It's a closed 
circuit. 39 

It would, of course, have been a different matter if the Arabs had 
possessed a sophisticated banking network, as they belatedly real- 
ized. By the time they had begun to build up their own international 
banks, in the early 1980s, the industrial nations had tapped alterna- 
tive sources of energy, including non-Arab oil, world oil supplies 
were in surplus, and the problem of petrodollars was unlikely to 
recur, at any rate in such an intense form. The point of maximum 
Arab power had passed. That point came in the years 1974—7, when 
the Arabs had half the world's liquidity." From: Paul Johnson „Modern Times” 
REVISED EDITION HarperCollmsPublishers