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Wednesday, April 28, 2010

The crisis of socialism, part 1.

Socialists have been beside themselves with excitement since the beginning of this economic crisis, believing wrongly, that the economic turmoil brought about by the collapse of the sub-prime mortgage market was proof of an error in capitalism.

Many a socialist will be happy to point out that even the likes of Alan Greenspan agree with them. The problem, of course, is that Alan Greenspan was not a laissez-faire capitalist while he was Federal Reserve Chairman. He was an ardent interventionist in the economy -- despite his supposed love for the free market and former membership in the Ayn Rand Collective.

What is a laissez-faire capitalist, anyways? The term is often misapplied by socialists to neoliberals (most of whom are not laissez-fair capitalists) and by neoliberals themselves.

Most neoliberals overwhelmingly -- while supporting a reduction in the size and scope of government -- continue to believe in the government's role is deciding monetary policy. A policy, that this free marketer, and many other free marketers would style a form of hidden socialism. And not just any form of hidden socialism. But a socialism that does, alas, primarily benefit the elite.

In this sense, true laissez-faire proponents have a point of agreement with many socialists today. That, our economic system is primarily designed for the benefit of the rich. And it is a system that is designed, quite deliberately, to allow the government to manage the economy.

Most socialists and most people in general are unable to understand how government control of interest rates, and more generally, the money supply is a disqualifying trait from the definition of a free market. Money is seen by most people as not really of direct importance to the economy, other than as a medium of exchange. That's the end of the analysis.

Inflation is generally considered by most people to be caused by rich, greedy corporations slowly increasing their prices to exact more profits. Not as a deliberate government policy.

If you believe this, your entire economic analysis of our economy is basically invalid, because you're completely and utterly wrong.

Food prices have fallen substantially over the past one-hundred years. Yet many people will cry foul over that statement, thinking back to a time where they could buy a loaf of bread for a dime. But the error of analysis here, is assuming that the loaf got more expensive. Rather, it was the dime that became less valuable.

We can demonstrate this quite easily by using wage inflation versus food price inflation since 1901. At the beginning of the 20th century, on average, the price of food consumed 66.1% of a family's household income. That's two thirds!

Today, the cost of food consumes, on average, about 14% of a family's household income. That's a massive decline in a the cost of food.

But most people can't get their head around this. They view nominal price rises as a real price rise. They can't contemplate how their money "loses value".

Inflation is entirely caused by government. It is an intentional policy of central banks sometimes referred to as "price stability". Since prices tend to fall, not rise over time, as economies of scale drive prices down (think cell phones, computers, etc.) government's print money at a rate that brings "core inflation" up at a rate of about 2% a year. This is often referred to as the "inflation target" by central bankers.

The extra money they create to accomplish this, is lent out a discount rate. It becomes mortgages for your house, business loans, and one of the largest sources of hidden government spending.

In fact, government is the majority source of funding for home mortgages in both the US and Canada through this process. Not private capital. In fact, access to cheap credit in general is largely function of government throwing all this cheap capital into the market.

In effect, inflation is a way the government steals value right out of your pocket, right out of your savings account, and right out of your investments. Because when they print money (and I use the term "print" loosely, here) the increase supply of money means that money is more plentiful than the goods it buys, and as a result, the prices of goods rise against the value of a unit of currency. It's supply and demand 101.

Venezuela is perhaps a prominent example of the socialist lack-of-understanding for this principle. Hugo Chavez has enacted massive monetary expansionist policies by printing massive amounts more money, devaluing the bolivar and then reacting indignantly at the 26% consumer price inflation rate.

Socialists call these price moves: speculation. I call their logic: lacking.

Here's a simple lesson as to why anyone who thinks this is fooling themselves:

Let's say we have a tiny economy of 10 people. And the economy generates 10 apples per per month. And lets say that an apple costs $1. And everybody too, makes $1 a month. (This is an unlikely example showing a perfect price and demand equilibrium. But it makes the scenario easier to understand.)

Then, the government of Tenpeopleland, decides -- like Mr. Chavez -- to devalue the currency by 1/2. So $1 turns into $2. But the price of Apples stays at $1.

So the first five people, realizing that they can now afford to by not one, but two apples, buy up all 10 apples. The last 5 people are left with no apples.

So when the next month comes around, some of the people say: hey, I'll give you $2 for one apple instead of $1. And the apple farmer, suddenly only making $10 a month, when everyone else is now making $20, due to the devaluation of the currency, obliges eagerly. Suddenly the price of apples becomes $2. Now everyone can once again afford to buy just one apple a month.

Socialists then would turn around and call the farmer a "speculator". And would instead enforce a "one apple per person" policy in order to maintain the $1 price. However, this only works for a short time. Because since the Revolutionary People's Party of Tenpeopleland has devalued the currency by 1/2, the farmer suddenly finds himself unable to import the fertilizer to grow his apple trees since it's not available locally. His $10 a month is now worth half of what it used to internationally, and if he buys the fertilizer, he won't have any money left over to do anything else.

This demonstrates the basic flaw in the logic of socialists like Chavez, and those who support his policies. They have deluded themselves into believing that money is "arbitrary". Printing more of it does nothing. Prices only rise because of filthy, greedy, capitalists.

Their attempts to solve this capital allocation problem come in the form of central planning, and almost always ultimately fails.

Some contemporary socialists think this problem can be solved through "democratic socialism". Where democratic decisions are made to allocate resources, believing that this will be more efficient than just allowing the farmer to raise his prices to match demand. But the truth is, price signalling in a free market has proven itself the most resilient at controlling demand.

Socialists have no better solution to our economic woes. In fact, it has been policies that are arguably socialist that caused them in the first place; the government subsidization of home loans through the inflationary processes I described above, and in the US, tax credits on home ownership.

Posted by Mike Brock on April 28, 2010 | Permalink


Socialism works fine until it runs out of other people's money. I believe it was Lady Thatcher who said that, worded differently, and it still is true to-day. Governments promoting socialist policies know this, which is why they do everything possible to prevent people with capital from moving abroad with their capital.

Posted by: Alain | 2010-04-28 11:51:05 AM


I don't think they do know that. In fact, many lefties who I argue with say the economic principles, like basic supply and demand curves, and monetary theory is outdated. Instead, choosing to believe things like "deficits don't matter", supply and demand is bullshit and manipulated by speculators, etc.

They essentially reject the entire basis of classical economics and believe in an system of economics that really makes no sense.

You probably have to understand some continentalist dialectic to make sense of it, I don't know. I'm one of those naive, pre-deconstructionists that continues to rely on colonialist, and Occidental manners of rationalization.

Posted by: Mike Brock | 2010-04-28 11:55:08 AM


Excellent post.

I wonder though, is central banking in western countries (especially the U.S.) really a socialist institution? If our central banks, as they are for example in Venezuela or Zimbabwe, were controlled by the government I'd agree with the classification of socialist. As it stands, wouldn't a more appropriate definition of central banking be along the lines of corporatism? The FED, for example, is owned by the banks, but in effect controlled by the government. I mention this simply because I find many libertarians make the mistake of labelling everything they disagree with as "socialism".

Posted by: Charles | 2010-04-28 11:58:51 AM


The Federal Reserve exists as an entity under legislation. Specifically the Federal Reserve Act.

The Federal Reserve's inflationary policy is a form of hidden wealth redistribution that is ostensibly to protect the public welfare through managing the economy.

It promises to print money (redistributing wealth from all holders of US dollars and treasuries) in the event that a bank becomes insolvent.

It guarantees a steady supply of wealth redistribution for cheap consumer credit and loans through the process of inflation.

I'm not using socialism casually here. It is, quite clearly, a form of upside-down socialism. But a form of socialism, nonetheless.

Posted by: Mike Brock | 2010-04-28 12:03:56 PM


I agree that the FED is government controlled (as I think I stated), and does all the things you've outlined and more. But it's owned by the banks. And as you've mentionned, it also bails banks out when things go wrong; which allows them to lever up without having to worry about bank runs (which of course results in significant profits for private shareholders - think Cdn Banks). To me that means corporatism.

Of course all this is besides the point: fractional reserve banking (including central banking) benefits the connected at the expense of the poor, devalues the currency, causes the business cycle, and is most likely the cause of global warming. Well ... ok ... I made one of those up.

Posted by: Charles | 2010-04-28 12:34:14 PM

I have no problem with the corporatist label. You're correct in your usage of it. But I think corporatism is, in a sense, upside-down socialism just as I describe it.

Posted by: Mike Brock | 2010-04-28 12:36:52 PM

Fair enough. I had never heard of "upside-down" socialism ;)

Posted by: Charles | 2010-04-28 2:36:49 PM

Good article Mike. Thanks.

Posted by: Eddie B | 2010-04-28 3:24:18 PM

Mike, I agree and know exactly of which you are speaking. I suspect that these armchair socialists, from my experience anyway, base everything on textbook theories as opposed to actual tried and proved experience.

Another thing I would like to put forward is that free societies can only exist when there is a strong and vibrant middle class. Without this society is reduced to slaves of one sort or another and the rulers or elite. I purposely use the word slaves, since being dependent on government or living from one pay cheque to another is a form of slavery. This all makes it much easier to control people in every sense, and one way of achieving this is the use of economics.

Posted by: Alain | 2010-04-28 3:27:54 PM

"That, our economic system is primarily designed for the benefit of the rich. And it is a system that is designed, quite deliberately, to allow the government to manage the economy".

Other than your use of the word "design". I agree with everything else. Our economic system as we now "enjoy" it was not a creation but an evolution, and one where the most corrupting influence came from corporate and private rent seekers. Their partners were the progressives and whoring politicians but that knowledge is common.

Posted by: John Chittick | 2010-04-28 3:38:22 PM

That socialist straw man sure looks dead, jim.

Posted by: themusicgod1 | 2010-04-28 11:42:09 PM

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