Citizen Economists » Communism

Jittery Regimes Fix Prices

Ajay Shah — Wed, 23 Feb 2011 20:59:45 +0000

The puzzle

All of us are now curiously thinking about the abrupt phase transition that seems to sometimes occur in the endgame of an authoritarian regime. The traditional script was: The people rise up to rebel and the strongman murders them.

When the USSR collapsed, we thought it was special: it was a defunct regime that had just lost the will to live. But for the rest, the basic rulebook stood: the people get mowed down. And sure enough, that happened in Tiananmen Square.

But now, there are an increasing number of success stories with `velvet revolutions’, and one has to think more carefully about what goes in an authoritarian regime.

Conflicts beneath the surface

What appears like a monolithic regime from the outside can actually often reflect a diverse array of interests tugging in different directions. In this beautiful article by Laurence Wright on Saudi Arabia, he says:

I had begun to look at Saudi society as a collection of opposing forces: the liberals against the religious conservatives, the royal family versus democratic reformers, the unemployed against the expats, the old against the young, men against women.

On that same thread, Why do protests bring down regimes? A follow up by Graeme Robertson says:

While the news media focus on “the dictator”, almost all authoritarian regimes are really coalitions involving a range of players with different resources, including incumbent politicians but also other elites like businessmen, bureaucrats, leaders of mass organizations like labor unions and political parties, and, of course, specialists in coercion like the military or the security forces. These elites are pivotal in deciding the fate of the regime and as long as they continue to ally themselves with the incumbent leadership, the regime is likely to remain stable. By contrast, when these elites split and some defect and decide to throw in their lot with the opposition, then the incumbents are in danger.
So where do protests come in? The problem is that in authoritarian regimes there are few sources of reliable information that can help these pivotal elites decide whom to back. Restrictions on media freedom and civil and political rights limit the amount and quality of information that is available on both the incumbents and the opposition. Moreover, the powerful incentives to pay lip service to incumbent rulers make it hard to know what to make of what information there is.

I have also read others write similarly about China (but sadly, I do not have the reference): That in the absence of freedom of speech, the regime actually has no idea about where the problems lie, and is hence hypersensitive about criticism, and about solving the problems that it thinks do matter.

The behaviour of a jittery regime

Democracy matters in two ways. First, the regime has legitimacy. It is not worrying about a sudden upheaval that will destroy the regime. And, freedom of speech carries a steady flow of information to the regime. The UPA leadership does live in a bubble, but even they know that 8% inflation is a serious problem.

When a regime lacks legitimacy, and does not know what is going on, it is constantly fearful. It does not know what is going wrong and it can go off into extremes in trying to stave off some problems that it believes are first order. One area where this shows up is inflexible prices. To an external observer, it may be obvious that allowing price flexibility is better, but the regime is terrified about what will happen, so the price stays fixed.

Three examples

Egypt

In a blog post titled Garam Masala: Bread And The Life Of Egypt, Vikram Doctor writes:

I first realised how different Egypt was when I saw the bread in the street in Cairo. It was piled on low charpoy-like tables, thick rounds of freshlybaked bread, slightly scorched from the oven, a bit like tandoori rotis, but heavier…. Someone would replenish them from the bakery close by, and collect the money that people left, but nothing seemed to stop them just taking it away… the other reason why no one took the bread free was that it was so ridiculously cheap that they might as well just leave the few coins needed (in fact, buying bread seemed to be pretty much all that the piastre coins were used for). I calculated that, at that time (over 12 years back), the cost of a round of bread converted to something like three paise : something I could not imagine anything costing in any large Indian city. But this was the point: the price was unreal because a massive bread subsidy was one of the basic ways the Mubarak regime stayed in place.

Iran

From The regime tightens its belt and its first, in the Economist:

From top ayatollahs to the IMF, everyone agrees that spending $100 billion each year to pin down petrol, gas and electricity prices, besides the cost of staples such as flour and cooking oil, is a bad way to dispose of Iran’s hydrocarbon revenues, accounting for more than 10% of GDP and encouraging waste on an epic scale. The symptoms of the malaise are legion: tea kettles simmer all day; the streets clog with recreational drivers out for a spin; lights glare because no one can be bothered to turn them off. `We can do it because we have oil,’ Iranians used to tell incredulous visitors.

China

The outstanding price inflexibility of China is that of the exchange rate. Consider the Chinese and the Indian exchange rates of recent years:

There is a dramatic difference in the exchange rate flexibility. The Chinese authorities are extremely loath to allow the exchange rate to fluctuate, even though it induces massive distortions in the economy. Why? I would venture to guess that once a large export reprocessing sector has built up, the regime is just scared to rock the boat, to displease many workers.

The exchange rate is the most important price in any economy. A country that can handle a floating exchange rate is a flexible economy, one in which firms are born and die, workers move across locations and industries, and prices fluctuate. Deep and liquid markets are shock absorbers. Firms have ample equity capital, i.e. low leverage, so that they are able to absorb shocks. There is a whole configuration of institutional arrangements which are conducive to price flexibility. By and large, India fares well on these counts, particularly in the vast informal sector where there is extreme flexibility. And most of all, when things do hurt, individuals are able to express their discontent through democratic politics.

If India did not have these long-standing strengths, Governors Reddy and Subbarao would not have been able to move to a flexible exchange rate. And this exchange rate flexibility, in turn, enables an array of other economic reforms in favour of a market-based system.

Also see: The message for China from Tahrir Square by Minxin Pei in the Financial Times and The Secret Politburo Meeting Behind China’s New Democracy Crackdown by Perry Link, on the New York Review of Books Blog.

Stability that is illusory

The regime change of recent years should make us think afresh about the notion of `political stability’. Democracy is always messy: demonstrations, machinations of party politics out in the open, colourful and often intemperate figures on television, elections, change in the ruling arrangement. But at a deeper level, this can be a more stable arrangement; there is no revolution at the end of the tunnel.

Similar reasoning applies in economics. Economists have always known that when prices appear to be stable, they often mask real trouble underneath. It is far better to have a small fluctuation every day, i.e. a steady flow of vol. The alternative — of clamping down on price movements on most ordinary days — merely yields big price movements on some days, which are far more difficult to handle.

Economic agents are not fooled by this stability on the surface. As Mark Roe says on Project Syndicate:

Even if all of the rules for finance are right, few will part with their money if they fear that an unfavorable regime change might occur during the lifetime of their investment.
More importantly, the grim stability of the type displayed by Hosni Mubarak’s Egypt is oftentimes insufficient for genuine financial development. Authoritarian regimes, especially those with severe income and wealth inequality, inherently create a risk of arbitrariness, unpredictability, and instability. They are themselves arbitrary. And everyone knows that beneath the stability of the moment lurk explosive forces that can change the regime and devalue huge investments. Because financiers and savers have limited confidence in the future, such regimes can’t readily build and maintain strong foundations for financial development.

Implications

This is a `capitalism and freedom’ style argument: that democracy and markets interact in the double helix of modern civilisation.

Price flexibility works best when there is price flexibility in a lot of markets. If all prices were fixed, and you only freed up one, then it could easily make things worse. It is hard, crossing the hump, and reaching over to the other side where all prices are flexible. And, price flexibility goes well with democracy. Flexible prices are constantly disruptive. Every day, there are a few pockets of the economy that are really getting hurt in the creative destruction. It requires a confident regime to take these fluctuations in its stride. A jittery and illegitimate regime may be more likely to clamp down on price fluctuations since it fears these could destabilise it.

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¡Nuevo! Read Reed Hundt’s book, “In China’s Shadow”

D H Smith — Mon, 18 Jan 2010 16:22:42 +0000

If you want to understand Democrat fantasies in the absence of financial constraint or common sense, read Reed Hundt’s book, “In China’s Shadow.” Reed Hundt is a permanent member of the American politcal class, a Yalie, a partner in a high-powered law firm, head of Bill Clinton’s FCC, and a member of Barack Obama’s transition team.

Free money is Reed Hundt’s great idea.

Here’s how it works. Muggins, that is you & me, the hard-pressed American taxpayer, should buy everyone from Nome to Tierra del Fuego a pension, healthcare, and education. By these means, the United States will win in the economic competition with China that furnishes the title of his book and a small fraction of its other content.

No, it’s not a joke! He is being serious — if you’re an American with a job, you should spread the wealth around the hemisphere.

The leftist cabal currently in power and the pointy-headed intellectuals who influence them really think this way.

Liberalism vs. Socialism

Rok Spruk — Fri, 27 Nov 2009 20:15:29 +0000

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.”

Economic Costs and Benefits of German Unification

Rok Spruk — Fri, 13 Nov 2009 16:02:28 +0000

On Wednesday, it had been 20 years since the fall of the Berlin wall and the eventual collapse of communist political and economic system in Central and Eastern Europe. However, there is still discussion about economic costs and benefits of German reunification (Wiedervereinigung). I’ve been motivated to open this debate by professor Becker’s analysis (link) on the size of countries and by the recent article in Financial Times by the contributing German economist (link).

Economists in Germany and the rest of the world have long warned against the consequences of the unification of East and West Germany. After the unification, German central bank set the exchange rate at 1:1. Because East German workers’ relative productivity level lagged far behind the West German level, East German workers migrated to West Germany in search of higher wages. When wage rates between West and East Germany were equalized in the absence of productivity catch-up in East Germany, the excess labor supply in the East led to high unemployment and slow changes in the economic structure. As the exchange rate was equalized and wages prevented from the natural adjustment to productivity growth, the unemployment soared as East German manufacturing sector couldn’t employ labor anymore. The unemployed received massive transfer payments which, even more than a decade after the reunification, still present about 4 percent of total German income.

Today, the figures suggest that East German GDP per capita is roughly 70 percent of the Western German level and the unemployment rate exceeds 12 percent – more than twice the Western level. Low population density and high share of rural population are the main structural obstacle to higher productivity growth in the East. The majority of models in economic geography and urban economics suggests that agglomeration economies occur where population density is high. The latter yields significant advantages in terms of spillovers, search cost, factor mobility, know-how and economies of scale. Low population density is a major obstacle in attracting investment mostly because firms are not eager to locate at the periphery in the presence of high search costs and in the absence of high-skilled labor, agglomeration and linkages to economies of scale. In the U.S, for instance, Pittsburgh’s industrial restructuring from resource-based steel industry into knowledge-intensive information technology, biotechnology and software development required agglomeration which combined high-skilled labor, human capital, access to regional and international markets as well as high population density.

In Germany, for example, Hamburg generated the highest GDP per capita (€51,000) among cities and Bavaria (Bayern) generated the highest GDP per capita (€36,000) among German states. Hamburg and Munich, as well as the linking cities located in their vicinity are among the most densely populated areas which enabled them to develop core industries, spillovers, know-how and dynamic knowledge externalities. There is an overwhelming evidence that differences in population density are a good source of growth difference between east and west Germany.

After the unification, German fiscal policymakers favored an expansive fiscal policy which directed federal expenditures into poorer regions of the East to boost the development of infrastructure. However, at an exchange rate 1:1, West German firms were reluctant to invest in East Germany mainly because of higher relative price of labor. As East German workers moved to the Western part of the country, west German firms hired eastern workers. As brain drain became widespread, the convergence of east German income per capita slowed.

East Germany were far better off, if the country remained independent. The reunification of Germany would yield significant economic benefits, if the unification itself were based on close economic integration with the establishment of free trade area and free movement of capital, goods and labor. If East Germany remained independent and retained its own currency without the uncovered exchange rate realignment to to West German exchange rate parity, the relative price of East German labor wouldn’t increase and thus the unemployment rate would be significantly lower than it has been ever since the reunification. Thus, West German firms would easily find attractive investments in East Germany. The process would dramatically reduce disparities in population density compared to the West. Under such scenario, East Germany’s macroeconomic stabilization and institutional reforms would be a lot easier and the overall economic and political transition much less painful.

East Europe after 1989

Ajay Shah — Mon, 09 Nov 2009 15:57:22 +0000

I have an article in Financial Express where I look back economic development in Eastern Europe in the last 20 years, and compare and contrast with India.

In recent weeks, a lot of very interesting writing, looking back at 1989, has come out. My suggestions for further reading follow. Readers of age 40 and below should try particularly hard to read these and other materials so as to comprehend these earth-shaking events. These events matter because they have had a huge influence on the world that we see today. And, they matter because they help us think more effectively about the drama that will come about in China in coming years.

1989! by Timothy Garton Ash in The New York Review of Books. Am eagerly waiting for part 2 of this. Also by him in The Guardian: This tale of two revolutions and two anniversaries may yet have a twist (May 2008) and 1989 changed the world. But where now for Europe? (now).
A great story of the big day by Alison Smale.
The unknown war by Matt Welch on reason.com. We feel this intuitively, but the statistics are stunning:

In 1988, according to the global liberty watchdog Freedom House, just 36 percent of the world’s 167 independent countries were `free,’ 23 percent were 1partly free,’ and 41 percent were `not free.’ By 2008, not only were there 26 additional countries (including such new `free’ entities as Croatia, Estonia, Latvia, Lithuania, Serbia, Slovakia, and Slovenia), but the ratios had reversed: 46 percent were `free,’ 32 percent were `partly free,’ and just 22 percent were `not free.’ There were only 69 electoral democracies in 1989; by 2008 their ranks had swelled to 119.
A beautiful section from The Economist:
Walls in the mind;
So much gained, so much to lose;
The man who trusted his eyes;
A globe redrawn;
Less welcome;
Keep calm and carry on;
Wall stories;
Down in the dumps
The peaceful revolution of 1989 by Adam Roberts in The Independent.
Brain drain in reverse behind fallen Berlin Wall by Carter Dougherty, in the New York Times.
A slideshow by Erik Berglof which summarises the Transition in crisis? report released by the European Bank of Reconstruction and Development.
My take on the new dangers that we face today.

The Decline of the Left

Ajay Shah — Fri, 22 May 2009 15:30:25 +0000

riting in Business Standard today, Surjit Bhalla has a table of the vote share of the CPI and the CPI(M) put together. I thought it would be useful to see this data as a time-series, so here is the result.

Click on the graph to see it more clearly. Each circle is a data point. The dashed line is a (robust) regression with a shift in the intercept in 1991, reflecting the fall of communism. As we can see, the fall of communism seems to have gone along with a loss of vote share of 1.3 percentage points for the Left.

The latest result is a bit worse than the trend line might have suggested: tactical factors went a bit against the Left. At the same time, the CPI and CPI(M) leadership can take heart: the latest result is not all that far from the historic decline of the left, so this does not suggest that the leadership made particularly large tactical errors. What they are perhaps up against is historical forces.

The red coloured plus sign is the linear extrapolation for 2014; the slope implies losing roughly 0.13 percentage points of vote share each five years. (The statistical signifiance is weak; it’s a t stat of -1.52).

Here’s the R code which you can experiment with:

library(MASS) dates <- c(57,62,67,71,77,80,84,89,91,96,98,99,104,109)+1900 vshare <- c(8.9,9.9,9.4,9.8,7.1,8.7,8.6,9.1,8.7,8.1,6.9,6.9,7.1,6.8) post1991 <- dates > 1991 m <- rlm(vshare ~ -1 + dates + post1991) summary(m) m$coefficients[1]*5 # lose this much each gen. election

png(”ic.png”, width=550,height=550, pointsize=16)
par(mai=c(.8,1.1,.2,.2))
plot(dates, vshare, type=”p”, xlim=c(1957,2014), xlab=”", ylab=”Vote share of CPI + CPI(M)”)
lines(dates[1:9], fitted.values(m)[1:9], lty=2, lwd=2)
lines(dates[10:14], fitted.values(m)[10:14], lty=2, lwd=2)
abline(v=1991, col=”red”, lwd=2)
points(2014, m$coefficients %*% c(2014,0,1), cex=3, col=”red”, pch=3)
text(1966,9.1,”Regression line pre-1991″,cex=.7)
text(2003,7.3,”Regression line post-1991″, cex=.7)

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Is the U.S. on the Road to Socialism? (Part 2)

J.D. Seagraves — Wed, 29 Oct 2008 21:00:14 +0000

Last week, I looked at the first five planks of Karl Marx’s Communist Manifesto and the extent to which they have been integrated into the U.S. government. This week, I’ll examine planks 6-10.

6. Centralization of the means of communication and transport in the hands of the State.

Check. We have the Federal Aviation Administration (FAA), the Interstate Commerce Commission (ICC) and government ownership of Amtrak, the U.S. Interstate Highway System and its centralized funding, and the Federal Communications Commission (FCC) to regulate everything from radio and TV to telephones. Even satellite radio is regulated by the state, limiting the band to just two stations (Sirius and XM) who then had to ask the government’s permission to merge.

7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands; and the improvement of the soil generally in accordance with a common plan.

President Truman socialized the steel industry in 1952, reasoning that steel was vital to America’s defensive interests. With a military-industrial complex so vast, what isn’t “vital” these days? Regardless, the Supreme Court rejected this Marx-like expropriation after the fact. Would today’s SCOTUS remain as true to the Constitution? The EPA and various environmental regulations do much of what’s included in the second half of the plank above. Overall, we’re not quite there on #7 — a half-hearted cheer (perhaps more of a whimper) for capitalism.

8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.

Both John McCain and Barack Obama favor some type of mandatory “national service.” The Army Corps of Engineers is a psuedo-industrial army. FDR’s WPA projects would certainly fit the bill, and as the current recession turns into a depression, don’t be surprised to see the next president reinstitute public works projects.

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

Various zoning, anti-”sprawl,” and “smart growth” policies fit the bill here.

10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production.

Just as with plank #5 (”Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly”), the U.S. passes this test with flying colors. Not only is education in America “free and cumpulsory,” it is also federally controlled, now more than ever thanks to the disastrous No Child Left Behind. Anti-child workplace discrimination was codified by various “progressive” reforms in the early 20th century — long after most child labor had stopped, voluntarily, as living standards rose thanks to the free market — and today’s schools meet an updated version of combining education with “industrial production” in that they’re designed primarily to train children to be “good” employees.

In Conclusion

Karl Marx was a brilliant man who properly diagnosed the ills of what he called “capitalism” — a system in which the rich and propertied classes were given legal sanction to plunder the poor and working classes. Marx believed that all nations with “capitalism” (as he defined it) would eventually disintegrate into socialism and then the true worker’s paradise of Communism. The five tenets above, along with the previous five, were the preconditions that Marx thought needed to be met before a “capitalist” nation could become socialist (and then Communist). We’re almost there.

But as brilliant as Marx’s analysis of “capitalism” was, his solution — Communism — was utterly off the mark.

What we need in America is true capitalism: a system of peaceful and voluntary exchange, wherein capital is employed in the best interests of its private owners and without government interference. To the extent that capitalism and its Invisible Hand are allowed to operate, living standards of all from the poorest to the richest are improved. To the extent that the government intervenes, we become more like Marx’s version of “capitalism” and take another step on the road to his nightmarish vision of the total state.

Financial Bailouts: Is the U.S. on the Road to Socialism? (Part 1)

J.D. Seagraves — Wed, 22 Oct 2008 21:00:31 +0000

All nation-states reside somewhere on the continuum between laissez-faire and total-state central planning. No country is completely capitalist and no country (with the possible exception of North Korea) is entirely socialist. So how are we to define roughly “capitalist” and “socialist” countries? Where is the dividing line? How do we know if we are still a capitalist country?

Ludwig von Mises said the difference between a roughly capitalist country and roughly socialist one was a functioning stock market. In a socialist country, Mises said a market simply could not function. With the recent unprecedented interventions into the economy, the stock market isn’t functioning. Is this a temporary setback or have we passed a crucial threshold into socialism?

In this first of a two-part blog series, I will examine how the American system compares to the 10 planks of Karl Marx’s Communist Manifesto . According to Marx, these were the ten preconditions a country needed to meet before transitioning from capitalism to socialism.

1. Abolition of property in land and application of all rents of land to public purposes.

We still use the term “real estate,” which is derived from the historic “royal estate,” meaning that royalty (the government) was the true owner of all lands. Although the U.S. has a noble history of homesteading and laissez-faire, we now impose property taxes on the supposedly private property of individuals and evict them if they don’t pay. That sounds an awful lot like the rent system of feudalism and Marx’s manifesto.

Eminent domain further calls into question whether people really own their land. The Constitution, itself a step away from the comparative laissez-faire of the Articles of Confederation, gave the federal government the authority to seize private property for public purposes. Now, thanks to the Supreme Court’s Kelo Decision, government at all levels can take “your” land and give it to Wal-Mart for the “public purpose” of “economic development.”

2. A heavy progressive or graduated income tax.

Although the top marginal tax rates have dropped considerably from the peaks above 90%, the graduated income tax is a staple of the U.S. economic order. Barack Obama would raise taxes on the wealthiest, making the tax code more “progressive,” but John McCain wouldn’t undo the progressivism of the code: it’s here to stay.

3. Abolition of all right of inheritance.

We still have the right to transfer property upon our deaths, but that right is subject to taxation. Still, not “all rights” of inheritance have been abolished, so I guess we fail to meet Marx’s third condition.

4. Confiscation of the property of all emigrants and rebels.

We don’t quite meet the grade here, either. No one dare act in open rebellion to the all-powerful federal government — we haven’t had any “rebels” since the War Between the States, in which the North followed Marx’s prescription and confiscated the property of rebels. Marx, it is said, was an admirer of Lincoln.

5. Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

There’s no ambiguity whatsoever here: we have exactly the system Marx envisioned in the Communist Manifesto. And what’s more, there’s literally no disagreement on the matter between the nation’s dominant political parties.

Credit is centralized in the hands of the Federal Reserve, the country’s national bank. The Federal Reserve System acts as a cartel with an exclusive monopoly on credit and money creation. Thus, the government can easily fund pseudo-Marxist schemes via its printing presses — which has allowed it to cut back on Marx’s heavy progressive tax code. Even Marx could not have imagined the willingness with which people all over the world trade real goods and services for essentially worthless paper notes. In this area, we’ve out-Marxed Marx!

Next time, I’ll look at the remaining five planks:

Centralization of the means of communication and transport in the hands of the State.
Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands; and the improvement of the soil generally in accordance with a common plan.
Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.
Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.
Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production.

Monetarism or the Austrian School: Which Is More Effective?

Stephan Zimmermann — Tue, 14 Oct 2008 13:59:18 +0000

At a most appropriate time, Sukrit asks:

What is the difference between the Austrian business cycle theory and monetarism, and which one do you think is a more accurate description of how the economy works?

The first part is fairly easily explained, since much material is written on both. The second part is much more difficult and subjective.

By way of background, the Austrian school is generally based on the economic theories of Ludwig von Mises (1881-1973) and Friedrich A. von Hayek (1899-1992). The latter received the Nobel Prize for economics in 1974.

Monetarism, on the other hand, is primarily based on the seminal works of Dr. Milton Friedman (1912-2006) in the Chicago school who received his Nobel Prize in 1976.

All three economists were avid defenders of freedom and capitalism.

In brief, the Austrian schools’ business cycle theory describes fluctuations in an economy based principally on intervention in the country’s money supply, resulting in inflation or deflation. In turn, this occasions recession or growth. Interference in the money supply is reflected in the level of interest rates and directly affects the level of borrowing in the economy. That level of borrowing reflects “rational economics.” Rather than relying on inductive reasoning, the Austrian school depends on deductive thought and a continuous cycle of business. The cycle, however, is not steadily predictable.

Both schools view monetary theory in the maintenance of full employment, inflation, growth and stability.

However, Milton Friedman elaborated further and suggested that money growth should be limited to a relatively stable increase of roughly three to five percent per annum. This directly contradicts the Keynesian assumption that monetary policy should be demand driven, therefore insinuating a direct political solution.

The quantity of money, then, can reasonably predict the growth of production or inflation in an economy according to Friedman. He did not, however, stipulate the Federal Reserve, often opining that central banks err regularly in their attempts to control money supplies.

The key difference between the two schools is that the Austrian school believes in cycles of business and prefers to adjust its monetary policy accordingly. Friedman, on the hand, believes that adherence to steady monetary growth without constant adjustment creates better results on a macroeconomic basis.

Unfortunately, during the last two decades – and especially during the current crisis – the U.S. Federal Reserve failed to follow Dr. Friedman’s theory of monetary aggregates. Instead of following his prescription of stable growth in the neighborhood of three to five percent per year, money was allowed to fluctuate throughout the period. It reached as much as 19% earlier this year, then slowed rapidly to two percent.

The results were pre-ordained and inevitable. Yet responsibility cannot simply be laid at any one individual’s feet.

Alan Greenspan served as chairman of the Fed from 1987 – 2006. Despite his popularity under four successive presidents, from Reagan to George W.Bush, Greenspan – and now successor Ben Bernanke – is largely blamed for the current worldwide liquidity crisis.

Certainly low cost of money and credit fueled both growth and speculation under his chairmanship. However, unforeseen circumstances like the Savings & Loan crisis, the Enron and WorldCom scandals, the World Trade Center attacks, and finally an administration that fostered the wars in Iraq and Afghanistan were destabilizing influences on Fed policy and contributed heavily to the eventual burst of speculative “bubbles.” Greed and fear were as responsible as government policies.

The main fault of Greenspan’s administration of monetary policy was to focus more on growth and inflation rather than on stability. Instead of bowing to the federal and private sector’s headiness for growth and “easy money,” a strict adherence to Friedman’s guidelines might not have led to the spectacular growth achieved. On the other hand, it might have avoided the excessive borrowing or speculation underlying today’s liquidity crisis.

It is hard to envision the Austrian school’s reliance on business cycles as performing any better than simple adherence to Friedman’s monetary policy recommendation. Even with a hard-asset economic base such as gold, speculation and suspension of convertibility during times of war can result in similar dislocations. See a fuller discussion of potential modern gold standard applications in the analysis by Cato Institute’s Lawrence White.

The trouble with both systems – and with economics in general – is that the theories for stability, growth, inflation, currencies, not to mention social issues, assume a fairly strict adherence to established guidelines and principles.

More honored in the breach rather than the observance, those guidelines or principles of an economic theory all too soon fall prey to the vagaries and convenience of politicians and the public will.

Politicians, of course, are generally more concerned with votes than with the correctness of an applied theory.

This election year is no different. The international liquidity crisis makes it a more difficult one, especially with uninformed, acrimonious candidates and an electorate bathed in ignorance and fear. The class division engendered by the euphemisms of “Main Street” versus “Wall Street” would cause a devout Communist to smile with delight! Unfortunately, it reluctantly calls into question the very principle of freedom and democracy, its costs, and its responsibilities.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. Read his full bio at and submit your economics-related questions to his post “Got an Economics Question?”