Wednesday, February 18, 2009

Not exactly John's meme: Socialism Literature

Not "socialist literature", because that would be something different...

Lately, apropos of our situation and the government's response to it, I've been studying up on the Great Depression; what caused it, what the government did about it, and why it ended. I get the impression people (especially people in government) don't understand it very well, or bother to read any of the history or economics about it.

But the Depression inspired several classical works of political economics that effectively explored what makes economies work. The common theme is surprisingly simple (although it seems to elude most politicians): Incentivize the individual.

The first good book on my bookshelf inspired by the depression is one I've talked about in this space before: Capitalism, Socialism, and Democracy, by Joseph Schumpeter. Written in 1942, it starts out with an apparently sympathetic analysis of Marxism, which Schumpeter purposely put there to encourage socialists to read his book. Schumpeter went on, however, to say that "creative destruction" in the business sector, fueled by entrepreneurialism and "disruptive technologies", is essential to the long term survival of capitalism and continued economic growth and wealth creation. He then gloomily predicted that capitalism would eventually evolve into corporatism, hostile to the essential processes of entrepreneurialism and creative destruction. Schumpeter himself clear that he was not advocating the end of capitalism, writing "If a doctor predicts that his patient will die presently, it does not mean that he desires it."

It is hard to look at our current situation and not be a Schumpeterian. When I first studied Schumpeter in college, I remember thinking he was probably right, and hoping his predictions did not come true before I died, or at least before I retired. I didn't make it.

The next book talks about how the government will react to the economic trends predicted by Schumpeter. Written in 1944, The Road to Serfdom, by Frederich Hayek (what is it about these Austrian economists?) is one of the most influential and most published works in economics ever written. In it, Hayek makes the case that centrally planned economies will inevitably lead to tyranny. Tyranny is inevitable, he believed, because no government could adequately process and analyze all the variables needed to successfully implement a planned economy. Because of the inability of the organs of planning to do their jobs, disagreement and conflict was sure to arise over how to manage the economy, and the government would be forced to resort to coercion to impose its (flawed) plans. The eventual result would be a authoritarian state populated by poor and miserable serfs.

When I read them in the 1980s and the Soviet Union was still around, Hayek and Schumpeter made for highly effective critiques of Soviet Communism. But Communism was already dead at that point and just didn't know it yet (although many Communists did, right John?) and had been forcibly imposed by Marxist revolution anyway.

I'm starting to think Communism was good for our capitalist system because it kept reminding us what we didn't want to be. Now we seem to have forgotten it all and appear to be caught in the throes of some kind of demented hysteria - which if you read the history of the Depression, you may notice has happened before.

The third book talks about the role of the individual in a deteriorating economic situation. Atlas Shrugged, by Ayn Rand, was not published until 1957, although in many ways it appears to be set in the 1930s. Rand's themes are pretty well known, although they certainly seem to have been forgotten lately: namely that rational ("Objectivist") individual liberty is essential to the survival and prosperity of human civilization. Take away that simple motivation: that every person has the right to the fruits of their own labors - and it's only a matter of time until civilization collapses. Rand was particularly harsh towards collectivism, in particular collectivized labor - a particularly prescient theme in view of the current problems being suffered by the American auto industry.

As I write this I'm listening to a TV news story saying the big 3 car makers have reached an "agreement" with the United Auto Workers in which the UAW gives up essentially nothing, and guarantees at least another $25 billion will be needed to "prop up" these non-viable companies in the next quarter alone. Of course the government will not allow the car companies to enter bankruptcy, because that would give them the legal leverage to break the death-grip of the unions.

The theme of these classically liberal authors is simple: in economics, it is the power of the individual that counts, and it is the nature of human society to take away that power, with bad result.

On the other side of the fence are the "modernist" Liberals, who are currently in favor, represented most famously by John Maynard Keynes and John Kenneth Galbraith.

Keynes' most famous work, The General Theory of Employment, Interest, and Money, says that most of what we think we know about economics, supply, demand, etc., is wrong, and instead there are complex and cointerintuitive forces governing consumer spending, prices, and interest rates. Written during the Depression, General Theory says that, under such conditions, governments must engage in radical deficit spending to "jumpstart" the economy. Sound familiar?

Later, Keynes was one of the founding directors of the World Bank and the architect of the Bretton Woods agreements, and advocated creation of a centrally planned world economy with a single world currency.

John Kenneth Galbraith was perhaps most famous for being FDR's chief of the Office of Price Administration during World War II, responsible for the government's setting of prices for everything from table salt to ocean liners at the point of a gun. His most famous postwar work, The Affluent Society (1957), drew on both his wartime experiences and the theories of Keynes to say that only the government is smart enough to decide how to manage modern complex economies, and governments should use consumption taxes to shape public behavior. Galbraith, perhaps even more than Keynes, was very paternalistic, repeatedly making the point that intellectual elites (usually in government but also in big business) must make decisions for the ignorant masses on how to manage their affairs. He was consistently dismissive of the power of the free market, and even of the classical entrepreneur, writing that it was big business that was the main engine of technological progress.

So the intellectual debate that we haven't had in this current crisis boils down to this: Who can better decide how you spend your money: you, or the government?

I've spent a (mostly wasted, I'm afraid) lifetime in and around big government, and my overwhelming experience is that government is usually about the worst way to do anything. The bureaucratic system promotes mediocrity and corruption and the more I learn the more government seems functionally almost identical to organized crime - and I know a lot about organized crime as well.

The Congress just passed and the President just signed the largest spending bill in the history of the world, and not a single one of them even read it. They read only "their part", namely the sections where their patrons (in organized crime, or banking, or the car industry, or whatever) get their money. And this is not surprising or even noteworthy in Washington because that's how it always works.

I have my own non-scientific theory that a big part of the world's economy comes from crime or some kind of illicit activity. Every economic system is a continuum between legitimate, legal activity (you make or buy something honestly and sell it honestly) and purely criminal activity (you steal something and sell it or sell something you don't own, or which doesn't exist). In between is a wide spectrum of "grey area", from not paying taxes on cash transactions, to artificially but legally inflating prices, to deceiving people about what they are paying for, to charging people outrageous but secret interest rates (That means you, Chase Bank), to smuggling legal commodities from one place to another to avoid taxes, to a zillion other complicated and shady but profitable activities.

My theory is based on my own observations of money being spent that has no apparent legitimate origin, from the local scale (your neighbor has no job, but a new $400,000 yacht) to the macro scale (Russia). Non-scientific extrapolation suggests to me that as much as 40% of even healthy economies is dirty. In non-healthy economies the 'crime fraction' may be much higher, nearing 100% in places like North Korea.

The other thing I notice is that the more authoritarian the regime, the higher the crime fraction, because when you take away the incentive for legal entrepreneurialism the void tends to be filled by the criminal variety. Do your own analysis and form your own conclusions.

Criminal activity, in almost all of its forms, is very corrosive to a healthy economy. The current economic crisis was precipitated by an epidemic of corrupt "gray area" activity: a big chunk of the financial industry made loans they knew were bad then packaged and resold those loans without disclosing the risk associated with them, in order to keep inflating the real estate bubble, encouraged by politicians who not only took money from but openly conducted homosexual affairs with the financial executives making the bad loans. (Want to see an eerie coincidence: study the biography of John Maynard Keynes.)

Governments rest on legitimacy in the eyes of the governed, even authoritarian ones. As authoritarianism increases, individual liberty decreases, and the crime fraction grows, loss of legitimacy accelerates the process, leading to a "failed state". A failed state may lash out against its neighbors or become a humanitarian and economic sinkhole, draining resources from neighbors.

We are now at the decisive moment for the United States, and are betting our whole future that Keynes and Galbraith are right and Schumpeter, Hayek, and Rand are wrong - that government really does know better than you and me.

The stimulus bill signed yesterday contains a provision to allegedly spend $81 billion "protecting the vulnerable" (plus another $61 billion of vulnerable-protecting deceptively lumped under "tax relief"). No information, so far, about what that means, but it probably means welfare or straight-up wealth redistribution - maybe that plan to give tax refunds to people who paid no taxes.

However, the government promises:
This is your money. You have a right to know where it's going and how it's being spent. Learn what steps we're taking to ensure you can track our progress every step of the way.
That is, without telling us what $142 billion worth of "protecting the vulnerable" means. I downloaded the bill, and studied it for a while (It's 407 pages, I haven't read the whole thing yet, either, but then again I didn't vote for it.) and can find no reference or explanation about protecting the vulnerable.

If it works, we'll be fat, dumb, and happy serfs. If it doesn't work, what will happen?


Eric said...

CW, did you really need to engage in queer-baiting towards the end to make your point?

While one might argue that the time of the unions has passed and they no longer serve the legitimate functions they once did, at the bottom of that argument, I think, is the fact that unions may have made themseles unnecessary by being largely successful. That is, when the unions formed they were dealing with specific and grotesque abuses: unsafe working conditions, intolerable working hours, unliveable wages, unconscionable vertical integrations (i.e. the "company stores" and "company towns" that allowed unethical corporations to literally turn their "employees" into indebted serfs by making employment contingent on a living arrangement in which the employer controlled the goods and services made available to workers), etc. Because of the violence of the labor wars of the twenties and thirties, many of the worst private-sector abuses were outlawed--stripping the unions of many of their core issues. Much later (and more recently), employers in right-to-work states (e.g. automakers like Toyota and Honda) have avoided organization by their employees by making "unionesque" benefits a default part of the employment package--it is likely that if there weren't unions, these employers would be much more likely to offer "take it or leave it" employment packages.

The argument over whether government or the individual is in a better position to decide how to use their wealth is based on a false premise in a democratic/republican society: in such societies, individuals are the government, directly or through their chosen representatives. If you're unhappy with the economic theories of your elected legislator, you're welcome to vote against him or her (and you need to accept, however grudgingly, that a majority consensus may disagree with you about priorities).

Furthermore, some degree of collectivization or pooling of resources is necessary for a society to function: I have yet to meet the fiscal conservative so principled as to refuse the benefits of public streets, firefighters, police officers, or a publicly-financed military to keep foreigners from depriving him of the fruits of his labors. Leaving such things to the individual is dangerous and impractical--many would no doubt leave it to their neighbors to deal with inconveniences like a large fire at home putting many others at risk, and the only way to purchase a fleet of multi-billion-dollar jet fighters is for everyone to pool their money to do so.

No sane person believes in complete liberty or complete totalitarianism, and the real debate is over where the lines along the spectrum are drawn and held. To live with other human beings--a necessity, as man has evolved as a social animal and being a part of a group is his nature--certain things must be given up for the group. Too much can be sacrificed--tyranny is an evil thing; but a failure to make some sacrifice for the whole is just as dangerous, equally suicidal. It is indeed the nature of human society, then, to take away some degree of freedom, and it must be so--and you don't think of it as a bad thing when you're watching some idiot get pulled over for running a traffic light.

I cannot speak to whether the stimulus bill will work or fail; I suspect it contains much that I would like and a great deal I'd loathe, which is the nature of compromise. I hope it succeeds, and I won't consider myself a serf (or dumb, though regrettably I am fat). And if it fails... hopefully, we'll survive: the alternative is far worse, no?

CW said...


The situation would be the same if Barney Frank was heterosexual: he both had sex with, and took money from, an executive of the Federal National Mortgage Corporation, the oversight of which, as chairman of the House Financial Services Committee, he was responsible. My particular point, upon which I did not elaborate in the original post, is that I suspect he wouldn't have gotten away with it had it been a heterosexual affair.

Other than that, I agree with you that organized labor succeeded so well it created its own obsolescence. I certainly believe the unions helped a lot of people in the early years and were generally a Good Thing. But now they are bringing down much of what used to be good about American industry. What they have done to the airline industry is grotesque - and that's nothing compared to the car makers.

There's a long complicated argument, more worthy of a lengthy post rather than a comment, about federalism, republicanism, and states' rights. As a libertarian, I think government should be kept as close to home and be as responsive as possible to the local community, because it's never a very good thing. I no longer have that option, however, because over time the Federal government has claimed more and more of the prerogatives of governance to itself. I didn't get to vote for Nancy Pelosi, and had absolutely no say in her ascension to power, but she now has near-totalitarian power over me. My options are to emigrate to another country, and that's about it. Everyone here in North Carolina could vote libertarian (which I guess you can assure me will not happen) and it wouldn't change a thing. The country is so large, and the government is so large, that there's pretty much no longer anything an individual can do to affect their own fate. I can choose not to live in California, but Washington seems determined to bring California to me wherever I go.

My main point, however is neither political nor ideological but pragmatic: the people making the decisions that will determine our collective fate are both stupid and crooked, and arrogant beyond comprehension. That's not going to work out well for us.

Eric said...

Arguably the peculiar brilliance of our system (at least on paper) is that stupidity and crookedness are taken into account by the separation of powers and electoral process. Granted, I think it's broken down in practice because of the two-party-monopoly and because of a certain degree of moral cowardice on the part of Congress in recent years; it's still hard to come up with a preferable alternative.

It's interesting that you mention NC (I don't think I realized you were around here)--I wouldn't assure you that our state won't go libertarian, I'd express gratitude. That's not meant as a snub to you--it's not going to go Green, either (a party I don't wholly agree with, but probably have more common ground with than the Dems), which I imagine you'd be grateful for. The point, rather, is that for better or worse we do have to have these compromises that allow us to live as neighbors. I'd be lying if I claimed I was always happy with those compromises and moves to the center--there are times when I wish there would be a massive partisan roar from the Left for Truth, Justice and the American Way (as I see it); but then I have to remind myself that a similar partisan roar from the Right (which they must want, sometimes, as much or more as I want my groundswell) would strike me as a triumph of the fatuous at best and fascist tyranny at its worst.

I think the idealization of local government is something that's on the losing side of history, to be honest with you. The world began to change in the 19th century--whether to the good or ill doesn't even matter any more--and we're long past the day and age when things were small and remote enough for local governments to really be effective at most things; local governments still have their place, mind you, and I'm not saying otherwise; but (at the risk of sounding cliched) you have global economies and a global environment and global political issues at a level of saturation that was unprecedented in the early 1800s. What happens in Mexico City has an effect on what happens in Gastonia, and sooner rather than later.

As for Congressman Frank: CW, your point would have been the same had you simply said he'd taken money, or that he'd had affairs, or that he'd taken money and had affairs. You wouldn't have said "openly conducted heterosexual affairs" if Frank were straight--you threw in the orientation because you somehow thought it was relevant to your argument, and it just isn't. And the only point it could make, of course, would be that some people find homosexuality so repulsive that a homosexual affair--open or not--is somehow worse than a straight affair, and therefore even more of a blemish on Frank's questionable character, ethics or judgement. So I have to stand by what I said to start with: it was queer-baiting, and it wasn't necessary to your point. And I have no idea what Frank being gay has to do with John Maynard Keynes' sexuality at all; it appears Keynes was gay or bisexual--well perhaps so were Abraham Lincoln and King David, so what? The validity or invalidity of Keynes' economic theories doesn't rest with wherever his penis went, and your parenthetical about an "eerie coincidence" (what "eerie coincidence"?) is just an attempt at a cheap sideswipe that isn't worthy of the rest of your post (which I enjoyed, despite obvious disagreements, until it went off the rails with these weird irrelevancies).