Continuously opining, intermittently publishing.

Archive for February, 2009

My last post was syndicated at A commenter left this comment in reply. My response follows.

World War One was caused by the subset of powerful nations (note: nations, not corporations or businesses or individual shop owners) creating what George Washington called “entangling alliances” such that when the Duke of Sarajevo was assassinated and two nations went to war, the rest of Europe had obligated themselves to fight along side their primary, secondary, tertiary allies. That was the cause of WWI; it is well-known and undisputed.

If one is impliedly asserting that WWI was perpetuated by companies who profited by the war machine, then yes, this happened. War is impossible without production, and either nations own the means of production (communism) or purchase from those who do have the means of production (corporatism).

The question is, with respect to the latter, is this a fault of the free market, that war could enable people to profit off of weaponization? I would argue that it is antithetical to the free market, because war is impossible without government initiation, intervention and involvement. That is to say, because the government defines and causes war and has a national monopoly over its cause, continuation and end, any company willing to do business with the government to profit off of the evil that is war is engaging not in a free market but in corporatism (also known as mercantilism). In fact, the war market wouldn’t exist without government action, so to even consider participation in it a pock against the free market is a reduction to absurdity.

Corporatism/mercantilism are the reliance by businesses on the protection of the government against their own competitors given them an unfair advantage. These companies become the bullies in the schoolyard, precisely because they are all members of a gang of bullies, the leader of which is the biggest, baddest bully in the yard, namely the government. If the little guy attempts to do business in a such a way that contravenes the protectionism of the government, they are either taxed to unprofitability, taxed into a lack of competitiveness, or prosecuted for bogus “laws” that “protect the American/Canadian people.”

World War Two was caused by the underhanded greedy tactics of the victor governments in WWI. Because they created such harsh reparations for Germany (the loser), and because Germany’s economy was tied to the rules of European central banks (i.e. the government), they eventually encountered such overwhelming inflation that it was easy for a strongman to rise to power to give the Germans hope in a stronger Germany, because they were weakened and humiliated. Along came the blame of the scapegoat, the Jews, and then the world was embroiled in conflict once again.

The reason that Germany had such high inflation was because the central banks were manipulating the DM to ensure profitablity to their constituent creditors, the governments of Europe. That is, they would lend out money to German banks at high rates of interest, which would force the banks to lend out to the German people at higher rates of interest, so that the other European powers would be repaid their reparations. What the German government should have done was reject the central banking scheme set up for them, but alas, people starved.

If the assertion is that companies profited by WWII, then yes, that is true. The same arguments apply. IBM was especially immoral, as it was selling war materiel to both the American and German governments simultaneously. But, again, this is not an example of the free market, but rather an example of corporatism.

Labor Strikes
What the commenter is subtly doing is creating a strawman “free market” by conflating government-intervention in private affairs and then blaming the rest of the free market (wherever that may be) for the ills of a few bad actors who were reliant upon the Bully for help. When the RCMP gunned down picketers, that was quintessentially the company relying on government intervention rather than solving the striking/picketing themselves. That is not the free market, that is crying home to mama for help. When Henry Ford machine gunned protesters, were they attacking and/or destroying his private property, or were they acting peacefully on his property or were they not even on his property at all? If the former, then the workers were in trespass. If the latter two, then he was a murderer. If the latter and he wasn’t prosecuted, then we have yet another example of government assistance, i.e. corporatism, rather than the free market.

The Current Day
The global financial meltdown is being caused by exactly two things, which have nothing to do with corporate greed. It is caused by government control and manipulation of the monetary supply via central banks and the use of fiat currency and fractional reserve banking.

Fiat currency is an ill which the Framers of the American Constitution strictly prohibited when they required that all money be coined in gold or silver. Why? Because once the government is able to issue paper money, detached from anything of intrinsic value, it can manipulate the total money supply by printing or burning it and by moving the interest rate. Why is this bad? This is bad, because the free market isn’t able to correctly value the goods and services it is selling, and because it always encourages price inflation.

Incidentally, WWI was used as an excuse by Professor Woodrow Wilson to allow the creation of a central bank (for the third time in American history) to control and manipulate the monetary supply of this country, which was the root cause of the Great Depression and a root cause of the economic crisis now. Definitely not a matter of free marketeering gone wrong, either. In fact, the USD has been devalued 96% since 1917.

In an attempt to control inflation, central banks (i.e. governments) attempt to tweak the interest rates, usually lowering them, such that more “money” is released into the market, because banks, who receive the currency from bigger banks, in order to remain competitive with each other (banking is the most non-free market industry), loan money out at rates which are lower and lower, making money easier to get for consumers and businesses. When it is easier for them to get money, they devalue what they have.

Or in other words, if I can get $400,000 at a lower interest rate and a monthly repayment of X whereas a year ago I could only take a loan for $300,000 with the same repayment of X, I don’t actually have more purchasing power, because everyone else has the same new purchasing power. When I go to bid on a house, instead of maybe bidding the actual intrinsic value of $300,000, I’ll bid $400,000 to ensure that I get the house, because the other buyers are able to do the same. In effect, I have overvalued the house versus the value with respect to the monetary supply a year ago.

This effect has continued in recent history since 1998 (but really began in 1917) and we have met the end. The entire market has realized that most assets are overvalued and is correcting for it. Such a huge, national / global bubble is impossible without government intervention and manipulation of the monetary supply.

In fact, without central banks, without fiat currencies, there is never such a thing as a national bubble. In a truly free market, bubbles are region or industry-specific, and the market solves their problems quickly and with relatively little pain. I recommend Edward Chancellor’s book, Devil Take the Hindmost: A History of Financial Speculation, because it discusses many historical bubbles (such as the Dutch Tulip Bubble) and how they were caused.

Fractional reserve banking simply exacerbates the problems of fiat currency central banking, because it allows banks to lend out money they don’t actually have. Fractional reserve banking is sanctioned and allowed by the government. That is, if I have $10,000,000 in my vault, I can lend out another $90,000,000 on paper. Simplifying the math, that means that 90% of the wealth in the United States is paper wealth, false wealth and it means the entire system is by definition, insolvent. In a truly free market, banks that lent on a fractional reserve basis might be able to get away with it, but eventually they would get caught by a bank run. Some people would lose their money, which would be tragic, but the market would greatly reward honest banks who lent out only at a 1:1 ratio.

Banks have been failing, because the manipulation of the fiat currency has run its course in terms of its effectiveness. Ben Bernanke, chairman of the Federal Reserve, has all but admitted he does not know what the Fed can do anymore to preserve the economy. This is because the market here in the U.S. has finally come to realize that all assets are overvalued by some large percentage. Because all of our secured transactions are based on collateral which is now devalued, many people (businesses and consumers) are either unable or rationally unwilling to repay their debts at the same rates, because they simply do not have the wealth or revenue to bank it up.

Because banks lend out at a 9:1 ratio, a reduction of loan repayments by even just 11% is catastrophic to their own “solvency” under the FDIC/FED-sanctioned system. That is why banks are failing so rapidly.

The economy is suffering malaise because of large, coordinated government intervention for more than a century, and the market finally realizes there is less value in it than we thought. Of course, the correct “patriotic” solution is not to spend more money to “save” our economy, but let it correct itself. Else, the U.S. and the rest of the world will run headlong into a bleaker future.


Why Socialism Fails

55 Comments » | Posted by oshane

Stillborn from the Beginning
A truly free market works precisely because it relies on the self-serving desires of most people acting as a manifold of countervailing forces against all the other self-serving desires in the system. Everyone acting in his own self-interest with a baseline of standards (no theft, no fraud, etc.) ensures that the average wealth per capita is raised. That is, while self-centeredness is ignoble, it is the reality of the human condition, and any economic system which pretends that this can be changed outwardly in, i.e., by external forces (read: government) pressing an ideal onto human lives, only works to create and increase misery, because it is based on fantasy. Communism and its attenuated form, socialism, are noble ideals but are fatally flawed for three major reasons.

First Reason: Perversion of Incentive
Communism and socialism do not just hope for, but rely on the good of mankind in aggregate to work. In fact, apropos to a previous discussion, all political purveyors of socialism/communism are selling hope and the value received is far less than the value paid out by the buyer. Believing in the current goodness of mankind, or rather in the goodness of every individual such as to expect that he will act in the best interest of others is rank madness. Socialism wrecks the ability for people to appropriately measure value for themselves by robbing them of incentive. When the fruits of labor are taken from a person in order to redistribute them in aggregate to everyone else, including him, he resents the theft of his labor but also comes to reliance upon the redistribution.

Jamestown and Plymouth
In Thomas J. DiLorenzo’s book, How Capitalism Saved America, he recounts the story of two early colonies in America, Jamestown and Plymouth. In both, the settlers were required to function in socialism; private property was not allowed and the settlers were required to toil for the “common good.” Within six months of the founding of Jamestown,

all but 38 of the original 104 settlers were dead, most having succumbed to famine. Two years later, the Virginia Company sent 500 more ‘recruits’ to settle in Virginia and within six months, a staggering 440 more were dead by starvation and disease.

He also recounts an example: if 1 out of 20 people refuses to work but can take as needed from the “common wealth,” he will still be able to maintain 95% of his “income” on average while 19 out of 20 people do their jobs. Once too many people realize they can game the system and do less work for more food at the expense of their fellow man, the system fails, and starvation ensues.

Thankfully, in 1611, a governor traveled to America and realized that the incentive structure for the English colonists was the culprit for the previous death and failure. He instituted private property with a small tax on the fruits of their labors. The people could (only) realize the full fruits of their own labor, and the colony began to thrive, because everyone, self-servingly, worked as much as they needed and desired.

Nature’s stochasticity is a far more potent motivator than government’s contrivances.

Socialism cannot possibly work, because it is axiomatically flawed on the notions that people should be selfless and government is the correct actor to ensure selflessness. Thus, in order to effectuate the schemes of the noble cause of “from each according to his ability, to each according to his need,” violent force is justified as a necessity to make men noble. This brings us to the second fatal flaw: socialism relies on force to make it work. By definition, because humans are amoral in aggregate, force is required to effectuate wealth transfer, because rational actors, on the whole, do not voluntarily give away money without value in return.

The Legal Tangent
In fact, our Anglo-Saxon legal system, particularly in the Law of Contracts, at a fundamental level (modulo all the reforms of the modern era), reflects an innate belief that individuals should receive value for value exchanged. The doctrine of consideration, quid pro quo, a bargained-for exchange of something received for something given, mandates that for a contract to be enforceable, it must have the element of consideration. Courts do not like to weigh the relative values of the “something given” for the “something received” because value is entirely relative to the circumstances of individuals in their own situations, and judges do not usually believe their purview is to monitor or value private contracts. An iPhone may be worth $600 to an early adopter, but only $300 to a later adopter or not worth any expense to someone who does not want one. If there is no consideration, the promise is often viewed as a gift, which is always legally revocable unless the promisee reasonably relied on the promise.

Inherent in the doctrine of consideration is that there must be an exchanged that was bargained for. Bargaining, as a legal term of art, does not mean wrangling, dickering or heavy negotiation is required. What it means is that there is an intention of both parties to exchange things of legal value to which both parties assent. By contrast, a contract forced upon one person by another, i.e., using duress, is voidable by the coerced party later.  Why? Because there was no bargaining. There was an exchange, and it might even be of relatively legal value, but the mere act of force makes the contract voidable by the party who was wronged by the lack of free will. It is not usually discussed in this manner, but duress is really the antithesis of consideration.

Second Reason: Socialism is Violence
Force, of course, is a form of duress, and though the United States now has a long history of employing force to get what it wants from its constituents and other peoples (starting, really, with Alexander Hamilton’s policies of excessive and overwhelming national power), the augmentation of the use of force to transfer wealth is still total anathema to our natural law notions in Anglo-Saxon society of what a fair and right contract is. We should all recognize that force to take wealth away from another person, while justified at a governmental level, is still theft on an individual level. So, while socialism might be noble in its thrust to ensure the welfare of other people, it is pragmatically reliant on the evil of violence to make it work.

Contrast the doctrine of consideration, required in Anglo-Saxon legal systems, with contract laws in civil countries, which do not necessarily recognize the need for consideration. It is not surprising, therefore, that in cultures without a long history honoring the notion of bargain to ensure the satisfaction of parties exchanging value, communism and socialism took root faster, even with our early forays into forced socialism. See Jamestown, supra. Because these political theories are fundamentally based on oppressive force–in contrast to force being used in the name of liberty here, even though liberty does not require it–the doctrine of consideration as an innate part of our culture has been a silent bulwark to such force. Unfortunately, the Pacific and Atlantic oceans seem to not be wide enough . . .

Ironically, the Jamestown/Plymouth colonies are poignant examples from our own history of why a modern socialist government relies on force to effect an economy. The perversion of incentives leading to low production are evident to even the most mindless pro-government drone, which is why modern governments employ force to ensure the “health” of the socialist state.

Of course, labor at gunpoint does not comprise a worthwhile society; it is a Prison.

Vitiating the Counterexample
Naive proponents of socialism correctly point out that the apostolic community of believers in Yeshua (“Jesus”) was the first successful manifestation of communism. I suppose the inherent argument is that if it was good enough for Jesus . . .

The surprisingly overlooked flaw in this counterexample is that the association of believers was entirely voluntary, because at no time did Yeshua command his followers to preach the good news to convert by force. I believe it is a hallmark of Good for people to voluntarily associate and combine their assets and incomes in a manner to synergetically benefit one another. But it is the voluntariness (the “cheerfulness” in scriptural semantics) that makes it noble and good, not the sharing by itself.

Let each one give as he purposes in his heart, not of grief [grudgingly] or of necessity [compulsion], for Elohim loves a joyous [cheerful] giver.

2d Corinthians 9:7 (The Scriptures, Inst. for Scripture Research 1998)

Third Reason: The Corollary of Correct Valuation
Correct valuation of labor in the form of goods and services can only be appropriately calculated by the parties to their own contract. This is definitely a corollary to the observation that incentives remain healthy when individuals have control over their own labor. Only you know what you really need. Only I know what I really need. If we are friends, we may be able to effectively negotiate on behalf of one another and trade for value in a way that satisfies the other person. Of course, we run the risk of not doing so. Why? It is as simple as the fact that we cannot read one another’s minds and perfectly understand one another’s goals.

Multiply that by the billions of transactions that occur daily. Is it even fathomable that a central planner (especially a bureaucratic committee prone to inaction and inefficiency, detached from the reality of life and the harshness of nature) can correctly value the effectuate transactions between hundreds of millions of people? No, such a proposition is patently absurd.

The market is not a controllable system: it is simply the sum-greater-that-its-parts of all value exchanges between the actors in a population. It is more organic than technical, and it is only predictable on an individual level where we can spend time imperfectly analyzing how actors might negotiate and trade value. If you know all about me, you, again, can probably predict how I would want to transact business and for how much money. Of course, that requires time, patience and astute observation to get it right.

Thought Experiment
Let’s assume a central planning committee has the resources to observe each person constantly and to get to a point where it can accurately predict the appropriate value exchange for each person. Let’s assume this observational analysis only takes one minute one time for each person in the country. Let’s also assume each person enters into five transactions daily. For 327,000,000 people, it would require 3,111 man-years to accomplish the analysis to ensure the central planner could have the information necessary to direct the economy. The assumptions for the experiment are prima facie conservative in favor of the theory socialism, of course, and the result is, nonetheless, literally incredible.

One alternative is that the central planning committee simply fails to do what it believes its job is. It is doomed to failure, because “getting it right,” i.e., ensuring maximum wealth in a centrally controlled manner for each person, is impossible. Because no one appropriately small subset of people can correctly evaluate economic incentives for hundreds of millions of people, the wealth transfer is guaranteed to be lopsided and ineffectual. The plight of the Soviet, Chinese, Cuban and several southeast Asian peoples from the twentieth century are evidence of this.

Socialism promotes misery, starvation, violence and murder. The worst that can be said for capitalism is that it allows for poverty due to nature and poverty due to laziness, both of which decrease over time in a free market. All examples of non-voluntary socialism in their stated quest to eliminate poverty only increase it.

The true alternative is that we can simply allow for each person to transact for himself freely. Liberty is the hallmark of a workable economic system. As flawed as capitalism is for relying on man’s self-centered nature, it is paradoxically this reason that makes capitalism pragmatically perfect.