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The End of Economic Man: Principles of Any Future Economics

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I first purchased Brockway's excellent book about ten years ago, just before the dot-com meltdown. What he wrote made eminent sense, and is as relevant now - with 401k plans having melted down to the tune of more than $6 trillion, as it was then.

Some, who view Wall Street and its promised wealth as the keys to a happy retirement, may be shocked especially by Brockway's Chapter 10: 'Speculation: Why A Bull Market is a Disaster'. But he makes the eminent point that at root, investing in any market instrument except maybe money funds, is no different from gambling in Vegas, and a "zero-sum" game.

In the end, all "Bull markets" do is set the ordinary person, who can least afford it, up for the next fleecing. Why are Americans so ready and willing to be fleeced, as those who have been picked clean in the Madoff mess? Mainly because our economy no longer words true productivity, as Browkway notes (Chapter 12) but rather speculation. Indeed, what we now have is a highly leveraged speculative economy.

This has also been documented in a number of books, among which the best is perhaps William Wolman's and Anne Colamosca's `The Judas Economy: The Triumph of Capital and the Betrayal of Work', 1997).

Brockway himself has noted that before about thirty years ago one had a 'productive' economy and a 'speculative' economy (based in Wall Street). There was more or less a balance between them, and the nation as whole benefited as a result.

Real productivity kept growing because real investment was made in hands-on materials, plant, research and labor. Most everyone benefited, including workers - via real (defined benefits) pensions (not '401ks') as well as higher wages, and companies that produced REAL goods.

Sometime after Reagan was canonized, in the 1980s, the speculative economy - which up until then had been kept in the background- began to take control. A number of steps instituted by Reagan led to the Michael Milkens, Ivan Boeskys and that lot. This also probably laid the fertile soil for our own WorldComs, Enrons, and Arthur Andersen type funny accounting.

One step was the Bank Holding (De-regulation) Act of 1984, which sped the way to speculative excesses resulting in travesties such as the S&L scandal in the late '80s.

One would have seriously thought the legislative infrastructure would have learned from that - but oh no, they didn't. In 1995, congress repealed the right of investors, shareholders to sue companies. That essentially removed the last private solution that would've kept the criminal speculators (we see today) at bay.

Too much big money from the corporate campaign contributors iced it.

Just as their money has been desperately trying to cook up a perfidy of a bankruptcy law- and has left a corporate "reform" law that isn't worth much more than the paper it's printed on. (Since it excludes independent audit provisions, and still refuses to count stock options for CEO maggots as expenses).

But I digress.

By 1987 and the October Market crash, the speculative economy had sucked nearly $1 trillion from people who had invested, and could least afford to lose money. However, they were constantly besieged with the 'buy and hold' mantra to ready them for the next plucking.

Meanwhile, a host of factors contributed to the speculative frenzy and fed it such as:- the passage of the 401k as a substitute 'pension' plan which would replace defined benefits (in real money) that had been received until then.

Thus, workers were now expected to place their savings - whatever they could muster - at the mercy of a market that was anything but merciful. Basing future retirements on 'phantom money' and the shenanigans of shysters on Wall Street (see e.g. 'License to Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor', 1999).

Then add to this morass the constant shrinkage of bank (pass book) interest rates, as well as CDs - forcing vulnerable people to chase yield in risky vehicles for which they were never prepared. These items drove millions of average Janes and Joes into the 'market' who otherwise may never have ventured there. Just as, before 1929, millions of ordinary folk were driven into the infamous 'investment trusts' that caused them to lose everything.

These 'investment trusts' were the forerunners of today's mutual funds) and then - as now - touted as "the little guy's way to enter the stock market".

The more recent piling into the market with 401ks, IRAs, etc, resulted in a never-before -seen phenomenon. What mass speculation did was to drive P/E ratios (the price to earnings of stocks, and averaged out, for mutual funds) to incredible overpriced magnitudes. Some stocks and funds were trading at over 30 times earnings just before the '87 crash, and all during the 90s the average was at 45 times earnings. This was nuts, disclosing grossly overvalued stocks- and (as we now know) a speculative bubble..

At the same time, one beheld the essential disappearance of dividends. Their amounts diminishing in inverse proportion to the soaring P/E ratios. Some 1998-99 stats cited dividends of barely one cent on the dollar for each dollar of return. You can't make any money like that - and all you have left is bogus money, or phantom money. Which is nothing to base a future on.

As prices rose ever higher, with ever more people hoping to strike it rich. Many even taking out second mortgages. They actually thought they could grab the proverbial 'free lunch'. (Since their share prices were so much in excess of what their holdings were actually worth).

This chasing of phantom gains by speculation in the stock market - in fact - caused the underfunding, under-investment in the REAL economy. Not the speculative one. Thus, as money was removed from the spending stream and injected into speculation, real corporate infrastructure - including for better (improved) plant, research, labor was removed.

Instead it was put into the hands of Wall Street's denizens who used it to generate their own profits and enrich themselves. (Since each exchange added to their commissions). At the same time, companies - trying to adhere to the Wall Street line and tempo- sought to jack up yields. Not by any REAL increase in production, but by using financing tricks, smoke & mirrors- such as we beheld at Enron. (Which set up over 400 dummy companies offshore so they could transpose debt and hide losses).

In effect, the speculative economy had intruded into and contaminated what ought to have been Main Street business. Now, added to this, the specter of Social Security privatization - pushed avariciously by Wall Street, cynical politicos, media drumbeaters, and all those determined to finally kill FDR's program of social insurance.

That's not all. They know any privatization will convert remaining public funds into total speculation and a total speculative economy. For years- hell, decades- the Street's parasites will feed off commissions. After all, it regards the folk of Main Street as "chickens to be plucked". (`The Street's Dark Side', Wall Street Journal, Dec. 23, 2002, p. C1)

Lest people forget how we arrived at this sorry pass- where privatization could even be remotely considered- recall it was Reagan that voraciously began raiding the Social security trust funds to cover the deficits he was creating by his inflated military spending. (Even so, in its wake, the U.S. mutated from world's foremost creditor to number one deadbeat....er debtor).

Nothing will improve, as Brockway notes, until we regain the equilibrium that once existed between speculation and actual production. Until the REAL productive economy is restored - including re-ascendancy of labor in relation to capital. (See e.g. 'The Judas Economy- The Triumph of Capital and the Betrayal of Work' by Anne Colamosca and William Wolman).

Brockway's genius in addressing all the effects of the above history, is to tackle in turn crucial financial concepts in each chapter and render them understandable to the serious layperson. ALL of his chapters are essential to read, from the Introduction: 'Why We Have Economics?' to Chapter 2: 'The Three Antimonies of Greed', to Ch. 3 'Why Physics is Value-Free and Economics Isn't', to perhaps his two best: Ch. 5: 'Money - The Distinguishing Idea of Economics, and 6: Reformulating the Law of Supply and Demand'.

For those with ambitions to invest and get rich, I heartily recommend reading Brockway's Ch. 9 'CapitalL Saving and Investing' and Ch. 10: Speculation, as well as Ch. 12: Productivity - Why Micro and Macro Don't Always mix.

For those who have lost jobs in the current downturn, please read Chapters 14 ('Inflation: The Myth of the Full -Employment Tradeoff) and 15 ('Inflation II: The Bankers' Classic COLA). You will never look again at bankers or the financial class the same way, after you have been deprived of your means of sustenance.

Brockway also doesn't stint on supportive or ancillary material, furnishing nearly 40 pages of Appendices - which include sections on the money supply and economies of scale.

Right now, with corporate campaign financing of elections still engrained, I see no one in the political arena with the inclination to do what's needed as Brockway advocates. As he takes those in the sights to task (p. 228):

"It is an open question whether our morale is so corrupt, our power of empathy so feeble, and our interest in economics so meager that it would take another depression to make resumed reform possible"

This quote is given in the context of his referencing how the family povertuy rate has steadily increased since 1973.

Groups like the Concord Coalition have been telling the country that Social Security is a Ponzi scheme that will inevitably collapse once the baby boomers retire. The fearmongers have been largely successful. Many workers, especially those under 40, are convinced that Social Security will be bankrupt before they see a dime in benefits. They have, as Brockway bluntly notes in Chapter 10, bought instead into the meme that they have to gamble in the confines of the market's zero-sum game to be able to avoid dog food in their elder years.

The fear mongers and their lackeys have been successful, because the young Turks think they can gain in any privatized system, not lose. What we have to do - and Brockway essentially advocates- is to show them all the pitfalls buried like land mines in these private accounts and how they can lose their net worth-assets big time.

And in truth, the REAL "Ponzi scheme" is not Social Security, but the casino on Maul Street.

The gist of the Wall St. Ponzi scheme is very simple: you snooker millions into believing they can "beat the market averages" by speculation via investments(usually risky equities), and let them in - using today's analog of the infamous "investment trusts" of the 1920s. (Which are "mutual funds" today).

The gullible marks pour in, and their money fuels a speculative bubble by inflating the price to earnings ratio (P/E ratio) beyond all reasonable bounds.

In the years preceding the popping of the 2000 "bubble", millions of novices piled into the market through 401ks, IRAs, etc, resulting in a never-before -seen phenomenon. What this mass speculation did was to drive P/E ratios (the price to earnings of stocks, and averaged out, for mutual funds) to incredibly overpriced magnitudes. Some stocks and funds were trading at over 30 times earnings just before the '87 crash, and all during the 90s the average was at 45 times earnings. This was nuts, disclosing grossly overvalued stocks- and (as we now know) a speculative bubble..

Unknown to the easy "marks", however - Wall street pillaged their accounts with expenses and fees- driving their own profits to obscene heights, while they allowed their richest investors and the wealthiest - to cash out early with the major proportion of profit taking and market timing tricks. During 1998-2000 more than 87% of the profits, share increases were thereby copped by the richest few - leaving the millions of the unwashed to scrabble for what was left.

Thus, the classical Ponzi or Pyramid scheme: millions buy into it using their precious retirement money, contributing to the take of the elite and favored who manage to cash out- using their insider knowledge, or other tricks. They reap the benefits of the inflated P/E ratios, while the poor saps who fueled them are generally the big losers.

In the wake of the 2000 burst bubble, millions lost up to 40% or more of their retirement savings by falling for the bogus appeal to place their trust in "phantom money". Many of these losses will never be made up in the time needed to benefit the victims. (Since a loss of 40% for example, requires an enormous "gain" that is highly unlikely, to reach the break-even point).

The classic warning for this sort of phantom money speculation was given by Anne Colamosca and William Wolman in their The Great 401k Hoax, 2002, who warned that real gains can never, ever exceed a company's actual, real world profits. Or - if bundled together - as in a mutal fund - the averaged profits of the aggregate.

For example, if the latter amounts to 1.3% a year, then real earnings cannot exceed that. Anything beyond, say like 7% a year, is bogus and based on a "bubble". That means that relatively few early profit takers can cream off 95% of the gains, and leave absolute losses to all the 'buy and hold' dupe. (And as anyone who's ever held stocks and mutuals knows, sometimes they never ever go back up - and you end up in an ever deeper pit)

THIS is what the young and optimistic Turks must be informed about - not to mention the dozens of nefarious tricks used by brokers ("churning accounts", etc) before they entrust their money to Maul Street.

For the requisite historical lesson, we can go back to the much ballyhooed "investment trusts" of the 1920s. At the time these were endlessly hyped by Wall Street as the "little man's way to investing" with the big boys. Millions of ordinary workers bought into this, and shelled out their hard earned money for the promised dream. Money that had been saved for their children's education, or for mortgages. Instead they reaped the whirlwind. Why?

Because they were exploited as useful (profitable - stock price inflating) chattel by the moneymen who had insider knowledge. These elite investors cashed out, leaving the little guys with virtually nothing as their "investment trusts" - the forerunners of today's mutual funds, tanked into the toilet bowl.

Think it would be any different this time and the SEC will "protect" investors? Think again! Social Security monies are guaranteed to have the sharks salivating, since there'll essentially be no regulations of how they manage accounts. They will be able to virtually do anything they want with no oversight. (Since the SEC will mainly be looking to protect the wealthiest investors, not little peons)

Brockway makes the central point in his book that a society or nation makes a deliberate and conscious choice as to whether it allots its greatest rewards and resources to the speculator, or the average person. So far, in the case of the U.S., the choice is massively tilted to the former. And tilted to the extent that major policy decisions are made which undermine the ordinary citizen at every turn, while weakening the economy overall.

Thus have we gotten to the stage where our whole financial edifice is now undermined massively via the creation of obscure financial derivatives known as 'credit default swaps' which are holding the flow of credit hostage, and compromising all financial and future policy decisions.

Brockway, for his part, would no doubt agree that the $55 trillion worth of these toxic assets now sitting on banks' books (compared to a financial "black hole" by at least one person quoted in the October FORTUNE) have truly brought us - if unwittingly - the "end of economic Man".

Wow. This book has 1 review only. I took home 5 books from the library on economics and financial history to try to beef up on a subject that I didn't have a decent cultural literacy of and this was the only enjoyable book. This book is a masterpiece. For those of you who may of had the regular macro and micro intro classes, but feel like you don't really understand economics, this book is for you. It's very comprehensive, but completely readable at all times (on occasion a word might need to be looked up), and destroys classical economics as having the fallacy of being determined (so many subjects tend to leave out the problem of freedom...people hate talking about freedom..they don't like to spend time on an abtuse philosophical concept..but it's necessary! He uses common sense to destroy commonly held so-called common-sense beliefs in the economy. This book does everything it set out to do and more. Get it!