Monday, October 12, 2015

Why Socialism is Chic, and Capitalism is Not (ICYMI)

Socialism is chic in 2015.   But, just a few short years ago Obama voters would mock and charge racism when anyone likened his ideology to socialism.  Now Bernie Sanders, an openly socialist candidate, is leading in some key polls of those very same voters!

Why is this happening in a country which enjoys the highest standard of living of any large diverse country, and one which uniquely earned it's place due to its historic reliance on free markets and constitutionally limited government?  Part of this is a triumph of deliberate indoctrination which has been going on for at least half a century.  Another part, and the most recent part, is a deliberate deception regarding the financial crisis of 2008.

Pop quiz:   
  1. Who is the father of modern socialism/communism?  
  2. Who is the father of modern capitalism? 
Odds are you will be able to answer the first question correctly, and can name Karl Marx as the father of modern socialism/communism.  You probably can do a decent job of explaining Marxism without even looking it up on Wikipedia.  You may even be familiar with the Marxist slogan, "from each according to his ability, to each according to his need".

Conversely, if you are asked who the father of modern capitalism is, odds are you'd either draw a blank or be mostly wrong.

You may not realize it, but socialists have been influencing you your whole life. Prior to the 1960's there were prohibitions on government workers joining organized labor.  That's because there was an obvious conflict of interest; organized labor and socialism have been synonymous throughout their shared history in the U.S.. But that changed in the 1960's under Democrat John F. Kennedy, and since then, government workers including school teachers have flooded into organized labor.   Most likely every teacher who taught you in a U.S. public school was a member of organized labor.  Of course, not all teachers, nor members of organized labor, are socialists, but the politics of organized labor in the U.S. leans undeniably in that direction.  

"Hold on!", you say, "Just because public schools are unionized and organized labor leans socialist doesn't mean it has had any real impact on our country!"  Actually it has.  After half a century of this, Karl Marx is the most assigned economist at U.S. colleges today.  By far.   

So how did you answer the second question?  In one sense the answer to that one is again... Karl Marx.  Yes, Karl Marx is both the father of modern socialism AND the father of modern capitalism. Karl Marx was the person who defined capitalism for the masses in his scathing critique of 1860s capitalism called "Das Kapital".  He constructed a convenient dichotomy between socialism and capitalism based on his own definitions to support his theories .  Of course Marx's preferred ideology, socialism, was defined in the most glowing light, while his version of capitalism was defined in the most sinister.

Many scholars credit a Scotsman named Adam Smith as the person whose ideas most influenced our economic system.  Adam Smith’s book, “An Inquiry into the Nature and Causes of the Wealth of Nations”, was actually published in 1776.  (That date rings a bell, no?)  But the word capitalism didn't exist in Adam Smith’s day.  He never used it.  We mistakenly call our economic system capitalism because that's what Marx and the critics called it.  The name unfortunately stuck. 

If everyone knows what Marxism is, why doesn't everyone know what Smithism is?  Because it’s not taught.   Except to select economics majors.  "Smithism" never became a word.  Marxism is taught everywhere all the time, and not just to economics majors.  If you want to learn about Adam Smith, you most likely have to do it on your own.  You can go through K-12 and well beyond in schools in the U.S., and never hear the name Adam Smith, never learn about his ideas, and never understand the influence those ideas had on the founding of our country.  If you go to Wikipedia and look up Marxism, you’ll find plenty.  If you go to Wikipedia and look up Smithism, you’ll get crickets. 

How about a more modern term, like Supply Side Economics?  You are probably familiar with that term, but can you accurately define it?  Can you define its opposite, Demand Side Economics?

·         Supply side economics is the theory that people will SUPPLY (create) more value if they are allowed to function in a free market.
·         Demand side economics is the theory that people will DEMAND (consume) more value if wealth is redistributed to them.    

These are opposite approaches for achieving different economic goals.  Supply Side seeks to optimize overall economic vitality (Smithism).  Demand Side at times seeks to stimulate consumption (Keynesianism), or at times to achieve egalitarianism (Marxism).

If you look up supply side economics on Wikipedia, you’ll find a thorough entry along with plenty of criticisms.  If you look up demand side economics, you’ll get zip.  The language in this case does not favor the socialist demand side ideology.   Hence, it is not even defined.

No event has had a more profound impact on this country's recent tilt towards socialism than the financial crisis of 2008.  It is said that history is written by the victors.  That has never been more true than in the wake of the financial crisis.  Democrats controlled the government commission that wrote the post-mortem.  Barack Obama won the presidency.  Democrats had both houses of congress.  And liberals made the movies and wrote the books explaining the crisis to the masses. Unfortunately, everything they told you was a deliberate deception designed to exonerate socialism, and scapegoat capitalism.   

The fact is the financial crisis of 2008 was a perfect demonstration of the failures of socialism. Redistribution of wealth, in this case redistribution of mortgage credit, was at the heart of the financial crisis.  At times, the support for this redistribution was bi-partisan, but the ideology behind it was socialist regardless of who was advocating.

It all began with the affordable housing goals promoted by Democrats in the early 1990s, which lowered mortgage requirements.  It accelerated in the mid 1990s under Democrat Bill Clinton with further loosening of mortgage standards, pressure on banks to write loose loans, and mandates for government backed companies FNMA (Fannie Mae) and FHLMC (Freddie Mac) to buy all the new mortgages.  It finally reached it’s apex in 2007 under Republican George W. Bush, while Democrats, including Senator Barack Obama, ran both houses of congress.

All the risk from this socialist redistribution was supposed to be assumed by the federal government in the form of the afore mentioned government backed companies.  Fannie and Freddie were ground zero for the financial crisis.  No government official took more money from these two companies, and at a faster rate, than the junior Senator from Illinois named Barack Obama.  His closest competitors in that money grab included Barney Frank, Chris Dodd, and Hillary Clinton.  If this is news to you,  it's because they wrote the history.

What they told you was that it was a perfect storm involving greedy bankers, deregulation, and the natural flaws of capitalism.  It was a plausible argument designed to deceive.  Bankers today are no greedier than their banking forebears.  So why did they suddenly engage in subprime lending for the first time in history in such large numbers? Because they were coerced to do so by their government.

Deregulation also had nothing to do with it.  Canadian banks are lightly regulated compared to their U.S. counterparts, and none of them failed.  Are U.S. bankers so much greedier than their Canadian counterparts that they drove their banks into insolvency while their less regulated neighbors to the north did not?  No, it was U.S. government regulation in the form of a socialist housing policy that caused the financial crisis.  Unfortunately, when the scheme went bad the damage spread to the private banking and investment sector bringing the entire global financial system to its knees.

The deceptions about this animated the Occupy Wall Street movement, got Barack Obama elected twice, and are responsible for the acceptance of openly socialist candidate Bernie Sanders today.   They are also part of the continuing campaign that has mischaracterized the mortgage market as an example of failed capitalism.

The frightening thing about this is, if history is written by the victors and they engage in deception, aren't we doomed to repeat it?  We are.  Fannie and Freddie own just about every new mortgage written since 2008, and the socialist policies promoting home ownership and borrowing have accelerated under Barack Obama.  We are in the process of building a second real estate bubble. Adding to that scenario is a socialist national debt bubble, student loan bubble, auto loan bubble, and equity bubble.

You might be saying, "OK, big deal, I'm a socialist.  Lots of countries are socialist, and some of them seem to be doing just fine.  What about the Scandinavian countries?  Why can't we have what they have?  Free healthcare, free college, and lots of benefits sounds pretty good to me!".  Scandinavian success came before their experiment with socialism.  They were happy, healthy, productive, and prosperous prior to the 1960s when they made the turn.  Fifty years of high taxes has slowed their growth and momentum and now they are "feeling the Bern".  Sweden and Denmark currently spend more than 100% of their private sector income on government services.  This is obviously unsustainable.  Socialist Europe is failing and is increasingly freeing their economies in response.

Here's the thing:  National socialism has never produced anything long term other than misery, starvation, poverty, and authoritarianism.  That's at the national level.  And long term.  At the local level, socialism can survive a bit longer.  Local socialism does not eliminate the incentive killing aspects of socialism, but it does delay the inevitable monetary collapse.  That's because local governments cannot create money. State and local governments must be more disciplined or risk imminent collapse.  Therefore, they tend to be more fiscally responsible.  National governments can hide their insolvency much longer, plunder future generations, devalue currencies, manipulate interest rates, and cause much bigger problems down the road.

This is an important point that deserves repeating;  socialism cannot work long term at the national level.  The national level is where money is usually created and controlled.  The Euro countries are a recent exception now that money is no longer controlled by the individual countries.  The Euro is controlled by the European Central Bank, which is a consortium of 19 Eurozone countries .  It's almost like they recognized the fatal flaw and are trying to work around it.

But in the U.S. we have no such arrangement.  We borrow and print money at the federal level. Our system was never designed to be a socialist system.  The constitution implied that the states were the proper place for redistributive experimentation.  At the national level, the conflict of interest is just too great for elected officials.  National politicians will eventually destroy the currency, borrow too heavily, undermine the work ethic, and undermine national defense in an attempt to gain and maintain power today.  The founders knew that.  It's happening today. We have doubled our national debt in just the last seven years.  Interest rates have been artificially held near zero for that entire time.  If and when rates normalize to historical levels, the debt service alone will cause the kind of pain socialist nations have felt throughout history. We are not immune.
In summary: You were indoctrinated to be a socialist. You were indoctrinated to call our system capitalism.  You've been deceived about the benefits of socialism.  You've been deceived about the evils of free markets.  And you've been deceived about the perils of national socialism.  If you still think socialism is chic after all that, that is your right.  Just keep it local, and maybe - just maybe, it won't collapse until after your kids inherit the mess.


  1. What you call "demand side economics" is called "Keynsianism" by everyone else. What you call "Smithism" is what is called "microeconomics" by everyone else, and everyone learns about it. Hardly anyone learns about Marx. What you call "supply side economics" is also called "Chicago school economics", and it is simply incorrect. Any major recession or depression makes it obvious.

    The issue with microeconomics pointed out by Marx is that the wages of workers are only in classical equilibrium under conditions of full employment, when there is a significant cost to replacing lost labor. In this case, workers can demand higher wages simply by leaving, and wages go up to the maximum possible without making the company insolvent. The competition for workers under full employment is analogous to the competition for any other service in a market, and under perfect competitive equilibrium conditions you don't get an extra surplus profit, beyond what is required to replenish the capital stocks of the corporation, pay out dividends, and expand business when it requires expansion. There isn't anything left to line the pockets of individuals. This is true in classical equilibrium, and this constitutes the Pareto efficient optimal state, at which point the market is theoretically identical to a hypothetical infinitely wise socialist planning agency. This is the standard model of Capitalist theory since the early 1800s. This model predicts roughly equal compensation for all workers (despite what you see in reality).

    What Marx pointed out is that in REAL markets (as opposed to hypothetical equilibria with full employment) the existence of chronic unemployment wrecks equilibrium, by producing a race to the bottom in wages. This happens when large factories are set up, with tens of thousands of largely interchangeable commodity employees, and a tiny number of owners, who personally control the capital. Only the employees compete with the unemployed, the owners don't compete with anybody (they own the big company). So there is an instability: a slight unemployment problem leads the wages of those who compete with the unemployed to collapse to subsistence levels, leaving a large amount of profit in the hands of those who employ them. That's NOT Pareto optimal, but it IS what is observed in real markets--- aside from highly competitive small businesses, which generally reward the owners in a way commensurate with the amount of labor they put in, large businesses leave enormous amounts of profit to be shared among a capitalist class, a capitalist class which is renumerated without having to put in any useful labor at all, only maintaining their class status by relatively unproductive investment choices.

    This is not corrected by the market when all the companies are large. This situation is stable. The employees wages are driven down, the low wages lead to declining demand, as workers can't afford the products, all the demand comes from extremely wealthy owners of capital. This leads to lower production, and further layoffs of workers due to insufficient demand, producing more unemployment and lower wages, and so on, and so on. This is Marx's classical prediction of the collapse of Capitalism, and it is exactly what is observed in the early 1930s and in the post 2008 economy.

  2. The Keynsians accept that wages are too low to keep demand up, but they make up nonsense reasons that don't sound like Marx's. Marx is right here, not the Keynsians. But since Keynsians accept the main idea--- too low demand--- they propose a workaround which involves government taxation and spending, and production of money by central banks. This allows demand to be partially restored. But unless Keynsian policies make the unemployment go to 0%, or close to it, it never produces a real economic equilibrium, with the fair wages and low profits.

    Supply side economics simply rejects Marx entirely (and therefore Keynes too). Supply siders believe that the wage differentials in the economy are not due to failure to find an equilibrium, but due to some ridiculous idea that certain labor is simply not valuable. In a situation of full employment, finding someone to flip burgers requires you to pay quite a bit, because they would usually rather be doing something else, all labor, even unskilled labor, ends up driven by competition to roughly the GDP divided by the population, give or take a factor of 5.

    It is theoretically possible to achieve without great amounts of state meddling and top-down interference, because it is the situation of optimal use of resources (in this case labor), and it in theory emerges naturally from a market. But in reality, it doesn't. The fixes proposed by Bernie Sanders, higher tax rates on high incomes, subsidies for worker owned business, and so on, these get you closer to Pareto optimal equilibrium. I would prefer more radical left policies, but you take what you can get.

    1. You are very well versed in Marxism and have even managed to define Capitalism, Adam Smith, and Supply Side Economics from the Marxist perspective. You have proven my point perfectly!

    2. So you like countries like Sweden or Denmark in which the public spending is high (~ 55% GDP versus 40% in the US), so the social rights (health care, pensions, etc) are excellent and public employment is almost twice than in the US (~ 27% against 15%), so the total employment rate is 6 percentage points larger than in the US is, so that salaries are much higher and everyone has access to decent housing, education (including day care from age 0 to college), health care, decent pensions, etc.

      Indeed, the rich do pay taxes in those countries .

    3. Not sure what this comment has to do with the post, but I can address your misleading statistics. It is incorrect to use GDP when comparing public spending rates because public spending ends up in the numerator and the denominator. (GDP includes government spending). A better measure is private sector GDP (GDP minus government spending) divided by government spending, and in the all countries we must include state, local, and federal spending. When we do this, Sweden and Denmark are spending more than their private economies, 108% and 146% respectively. A situation which is demonstrably unsustainable regardless what you think of the benefits.

  3. "Sweden or Denmark in which the public spending is high (~ 55% GDP versus 40% in the US), so the social rights (health care, pensions, etc) are excellent and public employment is almost twice than in the US (~ 27% against 15%), so the total employment rate is 6 percentage points larger than in the US is, so that salaries are much higher and everyone has access to decent housing, education (including day care from age 0 to college), health care, decent pensions, etc."

    That is completely false. Read about homelss in Scandinavia - Sweden etc -for example.

    And what you social rights are not social right are violent rights. They only exist because of a violent threat of the majority over the minority.