By Simon Grey, on November 11th, 2011
Will you allow this question to “occupy” your minds for a moment? Seriously, what would happen to our country if we all chose to do nothing but take up space on “public” property (or even on other people’s private property as some of you have done), consume resources at other people’s expense, and spend several days in a row not producing things? Have you even thought of what might happen, if the rest of us followed your “example?”
Well, I suppose it would first depend on who all quit their jobs. If every politician, bureaucrat, and bankster quit their jobs, I would be willing to bet that everyone would considerably better off. Toss in superfluous workers that are only necessary because of government interference, like tax lawyers, compliance officers, safety managers, CPAs, etc., and suddenly this country wouldn’t be shackled in economic regression. As for everyone else, point taken.
However, it should probably be pointed out that many OWSers are able to OWS because they don’t have jobs. See, the funny thing about recessions, even those caused by massive government intervention leading to housing bubbles which are then exploited for massive profit by Wall Street banks who are defrauding home owners as well as Americans by using the Fed as an ATM machine, is that jobs tend to be more scarce. And when that recession turns into a depression, those scarce jobs don’t come back for a while. So, for the most part, Occupy Wall Street is not a matter of people quitting their jobs as much as it is a matter of people not having jobs in the first place because the government, acting as a pawn of the banks, decided to wreck the economy.
Participants in the nationwide “occupy” movement would probably be shocked to know this. But the fact is, their oh-so-important demonstrations are able to occur as they do because the majority of us in America do not think and act the way they do. In fact, to be even more precise, their choices are enabled in no small part by – gasp!- American-styled Capitalism! Yet just as those who burn the U.S. flag fail to understand that the object they desecrate is emblematic of the freedom they exercise, the occupiers fail to see that the “C-word” which they loathe is precisely what makes their occupying possible. [Emphasis added.]
Actually, it is the distinctly American form of crony capitalism, as typified by TARP and other recent bailouts, that led to the current set of choices OWSers face. The banks have looted the American economy, quite illegally, it should be noted (and note that the linked article only concerns itself with judicial rulings, not investigative allegations, which means that the assertion of fraud was either proved in a court of law or admitted to by the perpetrators!) Jobs are scarce because politicians had to tax small business and mid-sized businesses to death in order to fellate pay off the major banks that have bought them contributed to their campaigns in the past election cycles. And the cost of those taxes have been jobs that would have otherwise be filled by those currently OWSing.Quite simply, the free market is dead in America, and has been for decades. The result is exceedingly high unemployment—the U6 index indicates it’s been in the high double digits for some time—which is the direct result of massive government intervention in the economy, for the benefit of enriching the banks. This is in no way free-market capitalism. In fact, a certain someone has noted quite acutely that America doesn’t actually have a free market, in practice. Yet, said someone wants to act as if suddenly the market is perfectly free and all the decades of government intervention no longer have consequences and therefore all those who are currently OWSing are simply socialists who want to redistribute the wealth.
But yes, American-styled capitalism has not only made OWSing possible, in that it has eliminated productive jobs, but it has also made it necessary because the system is corrupt and redistributionist.
Also, in regards to the burning of American flags, could Mr. Hill please provide proof of this occurrence? I searched on Google for photographic evidence of OWSers burning the American flag, but all I could find was the occasional desecration, and a few instances of burning the Israeli flag, presumably in honor of Ben Bernanke. I would very much like proof that OWSers are actually the anti-American protestors that the conservative media make them out to be.
(For those who are interested, Karl Denninger has a rather thorough takedown of Thomas Sowell’s article on OWS.)
By Simon Grey, on October 28th, 2011
Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.
There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for causing and perpetuating apartheid and racial division. Williams seeks to correct this misconception, and does so quite adequately by pointing out how it was government legislation that created, enabled, and perpetuated apartheid and the corresponding racism.Williams’ arguments are not unique or original, in a sense, because racial biases can, and have been, easily corrected on the free market by the “inferior” race offering lower prices for their labor. The reason this didn’t happen in South Africa was because the government forbade competition, or elsewise severely hindered it.
Williams’ book, then, is useful primarily as an academic resource. It is not easy or enjoyable to read, part of which is due to the structure of the book. For me, it only reinforced my beliefs in the general equitability of the market. I imagine that the same will be true for those who are inclined to read this. My recommendation is to only read this book if you are doing research on South Africa or apartheid.
By Simon Grey, on May 10th, 2011
I was talking to a preacher buddy of my dad’s a while ago, discussing my future plans, and I told him how I wanted to be an economist. Being a free-market apologist who had the audacity to challenge him on his favorable views of unions (from a historical perspective), he felt compelled to tell me that while he was pro-capitalism, he thought that some restrictions were necessary.
His argument for interfering in the market was based on how God had interfered with the free market under the old law. Specifically, he cited how God required that farmers leave remnants in their fields for the poor to borrow and how God forbade the Israelites from charging their brethren interest on loans). Unfortunately, there are at least three problems with this line of thinking.
First, God presumably possesses more knowledge than any central planner would. This difference is crucial because it means that the Old Testament theocracy is not comparable to any human-devised system. The biggest difference between the two systems would be that the theocratic system would not face near the knowledge constraints that a human system would. As such, God could be reasonably sure of the future and plan accordingly; mere mortals do not have these powers and abilities and thus would not have the ability to plan out an economy.
Second, not even God’s command was enough to ensure compliance with regulations that would work in theory. Time and again, the children of Israel ignored God’s laws. (It should be noted that usury laws and gleanings laws are not the only “economic” laws. Mandatory sacrifices have an economic component, as do the various regulations on commerce and production.) There were multiple times when the Israelites failed to keep God’s commands, which goes to show that even the laws implemented by the Lord of Hosts can be violated. If God’s laws can be violated then how can we expect any different for man’s laws?
Finally, note that some of God’s laws were intended to be signs of the Abrahamic covenant (e.g. dietary restrictions). Also note that some of God’s laws were intended to be signs of the coming Christ (e.g. sacrificial laws). As such, a good portion of God’s interference served a spiritual purpose. Not all laws that interfered with the Israelite economy had spiritual significance, but some did, and it is not always easy to discern between the two (e.g. Lev. 19:19).
At this point, it should be obvious that the argument that God’s interference in the Israelite economy during Old Testament times justifies Man’s interference in any economy today fails because it is an invalid comparison, it neglects to consider how even with God non-compliance with economic statutes was possible, and it fails to consider to consider the spiritual component of some of God’s economic laws, which is also an invalid comparison.
By Simon Grey, on March 30th, 2011
Cohen’s book proceeds as follows. First, he has us imagine a camping trip among friends. Food and goods are shared freely. Everyone abides by (purportedly) socialist principles of community and equality. Everyone does his part. No one takes advantage of anyone else. No one free rides. Everyone contributes. Everyone shares.
After a while, people begin to act like capitalists (as Cohen understands realistic capitalistic behavior). Harry demands extra food because he is especially good at fishing. Sylvia demands payment when she finds a good fishing spot. Leslie demands payment for her special knowledge of how to crack nuts. Harry, Sylvia, and Leslie refuse to share without extra payment. Morgan, whose father left him a well-stocked pond 30 years ago, gloats over having better food than the others.
The fundamental flaw in this argument is that there is an assumption of scalability, which simply means that socialism, which works well on a small scale, should also work well on a large scale. Unfortunately, this assumption is simply incorrect.
In the first place, socialism requires a large degree of knowledge in order to be systemically efficient. When one is dealing with a small number of people (e.g. a family), it is possible to have a large degree of knowledge without necessarily possessing a large amount of knowledge. When more people enter the people, the degree of knowledge necessary remains the same while the absolute amount of raw knowledge required increases correspondingly (e.g. 60% of 10<60% of 100). As the famous Dr. Sowell has remarked, “economic decisions are about tradeoffs, not absolutes.” This principle applies to determining which economic system should be used.
In the second place, socialism requires that actors within a system be close in proximity. It is difficult to ensure that all producers are producing enough if they are scattered over a large geographic area. It is also difficult to determine who isn’t pulling their weight if people are not close in social proximity as well, which simply means that people who aren’t “close” to one another, in a platonic sense, are not likely to know what the others do.
Again, these two factors play a significant role in determining which system to use. For small-scale societies, like the nuclear family, the socialist system makes more sense, for the absolute knowledge demands are low, and proximity is near. This, then, is a very economical way of determining how to distribute production and resources, based on the specific skill sets and desires of the individuals working within the small-scale society. In fact, socialism naturally lends itself to a system of informal barter.
Socialism is not, however, well-suited to a large-scale society. The knowledge demands are simply too great for one person, or even a large number of persons. And since large-scale societies also require large amounts of land for sustenance, there is then not enough proximity to reinforce the necessary social norms, leading to a significant free-rider problem. Capitalism (or, more accurately, the free market) solves this problem through the division of labor, which requires only that system participants pay attention only to those things which are directly related to their interests, thus solving the knowledge problem and, to some extent, the proximity problem.
The break-even point for these systems is unknown, but I am willing to bet that the system size strongly coincides with Dunbar’s number. At any rate, it should be obvious that advocating wide-scale socialism based on the success of small-scale socialism is as foolish as advocating small-scale capitalism based on the success of large-scale socialism. Note: I use the word “capitalism” interchangeably with “free market” in this post, simply for the sake of syntactical brevity.
By Thersites, on January 7th, 2010
In tomorrow’s episode of John Stossel’s new show on Fox Business, he will address the question, “Who is Wesley Mouch?” in speaking to the parallels between Atlas Shrugged and contemporary America. As one might expect, in my view it seems as if almost all businessmen (given their predilection towards using government to destroy markets to their own advantage) in one way or another embody the qualities of Wesley Mouch.
One exception who will be on Stossel’s program is John Allison, an executive at BB&T Bank, who staunchly opposed TARP, has repeatedly refused to use the law to plunder the property of others and as one might guess is an ardent Austrian-school libertarian. In a scene reminiscent of the smoke-filled rooms of Atlas Shrugged, Allison divulged at an NYU lecture this past fall that the Feds threatened to go in and audit any bank that wouldn’t take government funds, forcing healthy banks to comply so as to cover for the fact that the government was only propping up a select few sick ones (at the expense of the solvent I might add).
In response to Stossel’s call in the aforehyperlinked column for suggestions for a follow-up show on “crony capitalism,” I posted:
John,
If you want to talk about crony capitalism, it may pay to have Burton Fulsom who wrote “The Myth of the Robber Barons” on the program. I think the key is to delineate between political entrepreneurs and market entrepreneurs, something which he does astutely in that book.
Political entrepreneurs seek to use government decrees to profit, largely by cartelization, monopoly advantages and other barriers to entry, while market entrepreneurs generally seek to win profits in the market by merit – by producing the best product at the cheapest price.
More generally, the Mouch problem lies in the fact that while initially businessmen extol the virtues of little regulation, low barriers to entry and minimal governmental interference generally, once they become successful, out of self-interest they support any and all legislation that will cement their position in the market. They support all of those things anathema to the free market that they had used to their advantage in the first place.
This is akin to the economic plight of America as a whole. While up until the early 20th century (though some libertarians will argue that it was really only up until the time of Lincoln), America functioned under a largely laissez-faire economy, with the wealth and progress generated by this economy, we forgot about the virtues that led to our success and rewarded those tending towards failure. We created a welfare state from the riches of a relatively free state, throwing under the bus the very principles that elevated to us to our position as a great nation.
By Rok Spruk, on November 27th, 2009
Tuesday’s Hardtalk on BBC World News (link) discussed the political, economic and social aspects of communism versus liberal capitalism with Slavoj Zizek ,a philosopher and professor at European Graduate School.
Mr. Zizek discussed the role of liberal capitalism in the modern age. He condemned communism as a failure of the mankind and reaffirmed the liberal capitalism as the greatest invention of the mankind. The topic discussed was the future of liberal capitalism. In arguable words of Mr. Zizek, liberal capitalism, although dynamic and powerful in delivering ends of political and economic freedom, is doomed to fail and it thus requires new politico-economic alternative, divisible at the intersection of market and the state. Despite the interactive debate, I would like to add some points to the discussion which were, in my opinion, either mismatched or misinterpretated.
The evolution of liberal capitalism throughout the course of human history has been emphasized by the expansion of economic, political and human freedom. The greatest inventions in human history were not conducted under dictatorial political regimes. But they were conducted during the age of limited government and free innovation environment. Anytime the powerful wit of government was enforced, innovation and discoveries suffered. Although Mr. Zizek recognizes the failure of totalitarian regimes to stimulate intellectual creativity, his analysis of liberal capitalism inherently neglects its role.
The ability of individuals and firms to pursue their own goals in liberal capitalism is enabled not because of the design of desirable goals but because the free-market capitalism evolved as an undesigned system of ideas under strong rule of law. If liberal capitalism, as Mr. Zizek argues, would be doomed to fail, the individuals never witnessed an unparalleled increase in prosperity and in the 20th and 21st century.
What has distinguished communist political regimes from liberal democracies are the institutions of economic freedom. There is a clear and remarkably positive empirical relationship between economic freedom and standard of living. The experience has shown that political liberty is a neccesary but not sufficient condition for prosperity. Both, the neccesary and sufficient condition for the pursuit of prosperity is economic freedom. Without economic freedom, when governments replace the rule of law with the rule of man, and heavily interfere with free-enterprise activity, these countries are doomed to stagnate. Totalitarian political ideology, claiming to create heaven on earth, has always turned towards the hell on earth.
During the interview, Mr. Zizek argued several times that liberal capitalism can eat itself and fail in a similar vain as communism did. The Soviet Union and the communist block certainly hadn’t failed because of the lack of technological investment, but because communist political ideology erased the system of incentives. Even today, when several politically totalitarian countries sustained high growth rates, the superiority of liberal capitalism is even more obvious. The motion behind the economic miracle of Gulf countries, such as UAE, Bahrain and Qatar, is the institutional arrangement that promotes solid economic performance under robust system of law, market economy and incentives that allocate scarce resources into the most appropriate uses. In the interview, Mr. Zizek described Dubai’s miserable labor conditions as “labor concentration camps” where workers from other countries reside. Although this view sounds very compelling to Marxist philosophers and political thinkers, no government agency forced foreign workers to go to Dubai and work there.
In fact, the economy of United Arab Emirates went through a remarkable restructuring with the creation of the robust financial and service sectors. As productivity growth and capital investment soared in recent decade, wage rates in Dubai are much higher than in other Arab countries. Still in doubt? Ask foreign workers in Dubai how many of them would leave the place and returned to work in their home countries; and why they don’t do that. In addition, in Mr. Zizek’s home country, labor conditions for foreign physical workers mostly from ex-Yugoslavia are not the envy of the world despite the most regulated labor market in the world.
There is also a wide array of case studies from recent economic history that show how economic freedom crucially determines the wealth of nations. In 1955, Hong Kong was a miserable place flooded with refugees from the mainland China. In 1960, Hong Kong’s average income per capita was 28 percent of that in Great Britain. In 1996, it rose to 137 percent of that in Britain. Neither the dictatorial political regimes led to the economic boom in Hong Kong, nor the desire to create heaven on earth. It was a set of strong rule of law of British origin, limited government spending and free markets that propelled Hong Kong to the climb up the ladder.
Mr Zizek arguably enforced the proposition that global financial crisis led to the crisis of liberal capitalism. Although the global financial crisis led to the recession, high unemployment and deflating prices, it certainly has not put the existence of liberal capitalism into doubts.
The origins of the last year’s financial crisis go back to the New Deal and presidential time of Jimmy Carter and Bill Clinton whose administrations, as benevolent social engineers, enforced numerous acts to boost home ownership. Back in 1996, president Clinton signed Community Reinvestment Act which forced banks to allocate housing borrowings to low-income neighborhoods. In the aftermath, Fannie Mae and Freddie Mac securitized risky sub-prime mortgage loans to save banks from default. Meanwhile, they inflated debt-to-equity ratio to 60:1. It means that for deposit of USD, there were 60 USD behind in debt that nobody was willing to bear.
In addition, the monetary policy of the Greenspan era kept low interest rates for too long which causeed an asset bubble and led to the decrease of mortgage values It led to the federal bailout of Bear Sternes and the failure of Lehman Brothers. It also triggered innumerable quests for federal bailout of financial institutions. Thus, it would be foolish to speak about the crisis of liberal capitalism after the financial meltdown. Is liberal capitalism to blame? Of course not. It is rather the greedy political apetite for destructive policies that compromised the stability of the world economy for the sake of short-term political goals.
Mr. Zizek wisely avoided the question of the post-communist politico-economic status of Slovenia after the collapse of Tito’s Yugoslavia. True, Slovenia’s superior economic performance in Yugoslavia was mainly due to its export orientation and higher growth compared to the rest of Yugoslavia. At the beginning of the independence in 1991, Slovenia was, by all measures, the most developed former communist country; far ahead of countries such as Czech Republic, Slovakia and Estonia. Today, Czech Republic virtually caught-up Slovenia’s level of standard of living. In 2008, Czech Republic’s GDP per capita was 94 percent of that in Slovenia. In 1991, it was merely of 60 percent of that in Slovenia. The politicians, of the same “market socialist” politico-economic beliefs as Mr. Zizek, designed the statist economic policy based on high tax rates, state-owned enterprises, weak rule of law and rigid market structures. Today, Slovenia’s economic and political system more closely resembles Russia’s mafia state than a liberal society based on economic freedom, rule of law and limited government. In a great part, thanks to the political ideology of “market socialism.”
By Thersites, on August 31st, 2009
The community organizers’ struggle is one of class warfare. As Saul Alinsky wrote, “A People’s Organization is the banding together of large numbers of men and women to fight for those rights which insure a decent way of life…A People’s Organization is dedicated to an eternal war. It is a war against poverty, misery, delinquency, disease, injustice, hopelessness, despair, and unhappiness.”
Interestingly enough, the very system that defeats the conditions that Saul laments is capitalism. It has improved the lot of many, leading to higher living standards and a more moral economy than any to come before it. Yet it is this very philosophy that these groups decry – one which is also ironically their lifeblood.
As a WSJ editorial notes, ACORN is “a union-backed, multimillion-dollar outfit that uses intimidation and other tactics to push for higher minimum wage mandates and to trash Wal-Mart and other non-union companies…its organizers are best understood as shock troops for the AFL-CIO and even the Democratic Party.” Indeed, much of the steering committee for HCAN (Health Care for America NOW), a good proxy for the socialist movement is tied in one way or another to labor, labor which would not exist without capitalism.
Without capitalism (the antithesis of the socialism they relish), the jobs that it creates, the living standards it furnishes and the varying degrees of wealth that it naturally leads to, these comrades would have nothing to fight against.
Without capitalists to build businesses, there would be no jobs save for those provided by the state, and no labor unions. Living conditions would be miserable. The poorest would only dream of televisions, cars, cell phones and computers, not to mention cheap generic drugs, food, clothing and running water. FDR’s “Second Bill of Rights” would not have been conceived of because these so-called “rights” (if they had developed at all) would have been reserved solely for kings and queens, not middle class Americans.
The community organizers use the fruits of capitalism to fund themselves. Many of these groups are taxpayer-subsidized. Donors also consist of private charities and fat cats like George Soros. All government funds come out of the pocket of the taxpayer, who earns his income from his work, work attributable to the market. Others such as private foundations and “Soros-ites” use their own funds, again earned from their labor in the (nominally) free market to bankroll these radicals.
The socialist groups use instruments created by capitalism to propagandize. They use the computer to disseminate information (I grant that R&D for the internet was partially attributable to government, but practically all of the applications were created by the private sector), signs, t-shirts and other merchandise all produced by private enterprises to advertise and lastly books put to market by private publishers and sellers to spread their message.
Read “I, Pencil” and tell me that the tools the organizers use are attributable to anything other than the spontaneous order of capitalism.
The aforementioned groups all fight to kill capitalism, but without capitalism they would not have their natural enemy. Without capitalism they would not have a conception of what “decent” living standards were. Without capitalism they would not have jobs besides being agents of the state (which admittedly they might prefer), let alone their precious unions. Without capitalism they would not have the means to mass propagandize. Without capitalism these parasitic groups would perish. But instead they feast on the fruits of capitalism, drinking the sweet nectars of which the productive members of society are responsible.
By J.D. Seagraves, on June 4th, 2009
Thinkers on the Left blame the current financial crisis on the excesses of capitalism. Free-market partisans say it’s the government’s fault. Distributists say they’re both right, and their “third way” philosophy has a lot of appeal to the majority of Americans who are somewhere in the middle between socialism and laissez-faire, and yet recognize that the current “mixed economy” welfare state doesn’t work.
Speaking in the past tense, Ode Magazine says this of distributism: “The distributists saw private property as the salvation of society, and its concentration in too few hands as the greatest scourge.” But far from being an extinct school of thought, distributism is on the rise in the marketplace of ideas.
What is Distributism?
Distributism—also known as distributivism and distributionism—is an economic philosophy formulated by Roman Catholic thinkers in accordance with the principles of Catholic Social Teaching. It holds that the “means of production and distribution” should not be owned collectively (as with socialism), nor allotted haphazardly by the free market (as with capitalism), but dispersed widely among the general populace. In this way, it is like socialism in that it attempts to keep capital out of the hands of “capitalists,” but like capitalism in that it affirms the desirability of private ownership. Distributism is equally scornful of Wal-Mart and the welfare state, and thus has appeal to middle-America populists.
Distributists also support a guild system for the regulation of business, and are opposed to for-profit banking. The philosophy emphasizes radical decentralism to the extent that it holds that nothing that can be done by a smaller unit should be done by a larger unit. If a town can produce its own bread, for example, then it should not trade for bread produced elsewhere. In this way, it rejects the basic tenets of Adam Smith’s capitalism.
Distributism: From Left to Right
Distributism has its roots in the nineteenth century but reached its greatest heights in the mid-to-late twentieth century as the economic philosophy propelling the Catholic Worker Movement. Then, distributism was considered a “left-wing” phenomenon, but now its strongest constituency is on the far right of the American political sphere. Indeed, full page ads for distributist books have been featured on the back cover of the last two issues of The American Conservative.
The American Conservative (TAC) is a paleoconservative publication, and paleoconservatism differs from neoconservatism in that the former is staunchly antiwar: you will not find praise for Dick Cheney within TAC’s pages. But unlike libertarianism, the other antiwar philosophy of the right, paleoconservatism is ambivalent (at best) towards free-market capitalism. Paleocons are traditionally opposed to free trade and strongly support immigration quotas. More shockingly, they tend to support limited nationalization of industry: this month’s issue of TAC features an editorial in favor of “bailing out” the U.S. auto industry.
Generally, however, paleoconservatives are unconcerned with economics. Their chief causes are non-intervention in foreign policy (which, when combined with their anti-free trade views is correctly considered “isolationism”) and the promotion of “traditional values.” These concerns dovetail nicely with distributism, which supports the Christian Just War doctrine (under which virtually no wars are justified) and the primacy of the “Trinitarian” family consisting of one man, one woman, and their children. Thus, paleocons—which are far from being insignificant in number—who are exposed to distributism are likely to find the philosophy tailor made for the preexisting prejudices.
So What’s Wrong with Distributism?
So what’s wrong with distributism? Well, as theological ethicist Dr. Todd R. Flanders told the audience of an Austrian economics scholars conference in 2000, distributism isn’t really an economic theory at all, but an ethical one. Distributists have no coherent or practical plan for implementing their vision of a society of widely diffused property ownership; they only hold that it is morally just.
But is it really? Distributists refer to capitalism as “neo-feudalism,” but in reality, what they propose is a return to pre-capitalistic, medieval life. Their antipathy for the division of labor—that basic Smithian principle that has brought so much prosperity to the world—is grounded in a Marxist understanding of “worker alienation.” Indeed, distributism could be considered a kinder, gentler Communism, and we all know how well that worked.
A Preemptive Defense
The danger presented by distributism may be minimal, but that is not to say it’s non-existent. Big ideas have a way of sweeping over the world quickly, particularly in times of economic and political turmoil—times we are likely to be facing in the very near future. The economic ignorance fostered by a century of public schooling plays right into the reactionary creed of distributism. Its appeal to the Left, which thinks capitalism has failed; and to the Right, which blames the welfare state; makes it a potentially unifying force for anti-capitalists.
As a preemptive defense, capitalists must educate themselves on distributism and refute arguments made in favor of its core tenets: protectionism, socialized banking, occupational licensure (the guild system), glorification of smallness for smallness’s sake, etc. Free-market capitalists must articulate their arguments in a way that convince would-be distributists that their goals are best served by a truly free-market economy in which unhampered property rights are the foundation of ethics and prosperity.
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By Winton Bates, on April 13th, 2009
“Conventional economic theories exclude the changing thought patterns and modes of doing business that bring on a crisis. They even exclude the loss of trust and confidence. They exclude the sense of fairness that inhibits the wage and price flexibility that could possibly stabilize an economy. They exclude the role of corruption and the sale of bad products in booms, and the role of their revelation when the bubbles burst. They also exclude the role of stories that interpret the economy. All of these exclusions from conventional explanations of how the economy behaves were responsible for the suspension of disbelief that led up to the current crisis” (George Akerlof and Robert Shiller, “Animal Spirits”, 2009, p 167).
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to…give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
By Bron Suchecki, on March 16th, 2009
When the economic crisis becomes acute, when the rate of profit sinks towards zero, the bourgeoisie can see only one way to restore its profits: it empties the pockets of the people down to the last centime. It resorts to what M. Caillaux, once finance minister of France, expressively calls “the great penance”: brutal slashing of wages and social expenditures, raising of tariff duties at the expense of the consumer, etc.
The state, furthermore, rescues business enterprises on the brink of bankruptcy, forcing the masses to foot the bill. Such enterprises are kept alive with subsidies, tax exemptions, orders for public works and armaments. In short, the state thrusts itself into the breach left by the vanishing private customers. …
In richer, more fortunate countries, the bourgeoisie seems to have succeeded, not in escaping the crisis permanently, but at least in extricating itself for the time being from its difficulties. They have been able to start up again, after a fashion, the mechanism of profit, resorting to expedients which at least have not required the substitution of dictatorship for democracy. But they used basically the same methods in both cases: the state refloated private capitalism, revived it with great public works and huge “defense contracts.”
Guerin, Daniel. Fascism and big business. 2nd ed. 1973.
Originally published in 1939 by a French journalist and scholar. I found this in a used bookshop many years ago and had never got around to reading it (there are a number of books in a similar state of limbo in my library). It title on its spine caught my eye tonight and I thought the chapter titled “Big business finances fascism” might yield something relevant to our current situation. Didn’t take long to find the paragraphs above. History repeating? Question is: if the “bourgeoisie” can’t start capitalism back up, are we headed for fascism? Some may say that the fact that the President/Prime Minister changes every now and then just distracts us from the fact that we are already there!
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