The Austrian School of Economics

Posted by PITHOCRATES - March 3rd, 2014

Economics 101

(Originally published February 27th, 2012)

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.

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Powerful Government Forces suppressing the Economic Principles of Friedrich Hayek in China and America

Posted by PITHOCRATES - November 16th, 2013

Week in Review

Large governments like to control their economies.  And their people.  Because those in power always want one thing.  More power. 

The United States became the world’s number one economic power before the federal government grew into the thing it is today.  Way too big.  Reaching way too far into the private sector economy.  Before Keynesian economics became all the rage to empower the growth of governments there was classical economics.  With simple principles.  Thrift.  People thought long-term and saved their money instead of buying everything they wanted today.  Banks collected their savings and transformed them into investment capital.  The more people saved (i.e., the thriftier they were) the more capital there was available to loan to entrepreneurs.  Thus lowering interest rates.  There was also sound money.  Backed by gold.  In various forms of the gold standard.  That held the value of money over time.  And the federal government taxed little.  Regulated little.  And spent little.  These classical economic principles stimulated strong economic growth.  (Principles similar to the Austrian school of economics championed by Friedrich Hayek.)  And it is these principles that we have moved away from as we turned to Keynesian economics.  And a form of state-capitalism that we have today.

During the Nineties China turned to classical economic principles.  As they slowly allowed people some economic liberty.  But just a taste of it.  For the ruling Chinese communists did not want what happened during the collapse of the Soviet Union to happen in China.  The Chinese Communist Party would not collapse like it did in the former Soviet Union.  While there were free thinkers that embraced the principles of Friedrich Hayek the state kept them on a short leash.  A leash that appears to be even shorter these days (see A Lonely Passion: China’s Followers of Friedrich A. Hayek by DIDI KIRSTEN TATLOW published 10/30/2013 on The New York Times).

Hayek believed that economic planning by the state leads to a loss of individual liberty, and that a private economy run by people whose rights are protected and enlarged by good laws delivers the best life.

‘‘There is some distance between Hayek and the current realities’’ in China, Gao Quanxi, a prominent Chinese Hayekian and law professor at Beihang University in Beijing, said in an interview this week.

Mr. Gao was probably choosing his words carefully. The gap is enormous, as he explained last Friday in a talk at the Unirule Institute of Economics, a think tank in Beijing…

In his talk, titled ‘‘Reconsidering Hayek’s Theoretical Legacy,’’ Mr. Gao did not mince words: China is less free now than 10 years ago, at the end of the Jiang Zemin era. There is no ‘‘free market of ideas’’ in universities. Publishing on topics the authorities disapprove of has become more difficult. The state is on the march…

Capitalism, several participants said, functions in China according to the unwritten rules created by the power holders, not by good laws, as Hayek urged.

‘‘Communism has failed. Socialism has failed. What we have here is statism. And Hayek really opposed that. So how should we understand Hayek in the context of today’s China?’’ asked Mr. Gao…

Many economists, scholars and politicians believe that China is facing deep challenges to its economic model, that it needs to shift from a fixed investment-fueled economy, where the hand of the state is heavy, to one with more private enterprise and market forces.

President Obama and the Chinese communists share something in common.  They both are trying to move their economies in the same direction.  Only the Chinese communists don’t publicly bash capitalism as much as President Obama and his fellow Democrats do.

When China was enjoying double digit GDP growth the liberals in the United States wanted to do what the Chinese were doing.  To manage the economy more.  As they thought they were even more brilliant than communist state planners in China.  And could even outperform the Chinese economy.  If they could only control it.  Decide what we make.  Like solar panels.  And electric cars.  Of course, most of China’s economic growth produced exports.  And they sold well because of China’s low wages.  Which is pretty much all they had going for them.  Their middle class did not grow.  And with the worldwide decline in economic activity thanks to Keynesian economic policies by state planners everywhere who think they are smarter than the market their export market cooled.  As it cooled so did their GDP growth.

China is suffering a little economic malaise now because they don’t have a thriving middle class of entrepreneurs starting small businesses.  All they have are large state-run factories.  That produce exports.  Because they don’t have a thriving middle class to buy these products.  Which is what happens when you don’t have individual liberty.  Friedrich Hayek understood this.  Pity the Chinese communists don’t.  Or President Obama and his fellow Democrats.  Then again, perhaps they do.  But they know the price of individual liberty is less government power.  And that’s just something anathema to communists.  President Obama.  And Democrats.

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The Austrian School of Economics

Posted by PITHOCRATES - February 27th, 2012

Economics 101

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.

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China adopts Keynesian Policies and Wastes Capital on a lot of Hayekian Malinvestments

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Keynesians love Big Government.  And state capitalism.  Where the state actively intervenes in the private sector.  So you know the Keynesians love China.  As the Chinese leadership loves Keynes (see Keynes v Hayek in China posted 11/17/2011 on The Economist).

The present leadership of the Chinese Communist Party, Hu Jintao and Wen Jiabao, have embraced Keynesian prescriptions with great determination. In response to the financial crisis of 2008 they approved an audacious stimulus package, unbalancing the government’s books and spurring the country’s banks to lend. That helped defend their peculiar brand of capitalism from a crushing slowdown…

Whereas Keynes worried about inadequate investment—too little entrepreneurial spending to keep everyone gainfully employed—Hayek worried about bad investment. If credit were too easy, he argued, entrepreneurs would embark on overambitious projects that take too long to reach fruition and make insupportable claims on society’s resources.

It is not hard to find overambitious projects in China: think of the country’s “ghost cities”, such as Ordos in Inner Mongolia, which is being built by government fiat long before people are ready to live in it…

Spurred on by the government, China’s banks increased their lending by almost 9.6 trillion yuan ($1.5 trillion) in 2009. That is roughly twice the size of the Indian banking system, as Bank Credit Analyst, a research company, has pointed out. In other words, China’s lenders added two Indias to their loanbooks in the space of a year…

China’s authorities now admit what was always obvious: many of these projects will fail to raise enough revenue to repay their creditors. Defaults have already surfaced in Yunnan province and elsewhere. Some of these projects will be abandoned halfway. They are what Hayek would call “malinvestments”, investments in capacity that no one is willing to pay for or wait for.

It is clear that China’s Keynesian policies have produced exactly what Hayek said they would.  A whole bunch of malinvestments.  A great misallocation of productive capital.  Building things that no one wants.  Such as empty apartment buildings in ‘ghost’ cities.  Capitalists could have used that capital to build who knows what.  But we’ll never know.  Because the free market didn’t allocate that capital to where capitalists would have used it to produce things people wanted.  Pretty much anything but empty apartment buildings in ‘ghost’ cities.

If those empty apartment buildings have to demolished a Keynesian would be okay with that.  Because those demolition crews would be paid.  And they would then take those wages and buy stuff.  Thus generating more economic activity.  Just as a Keynesian would be okay with you buying 4 identical flat-screen televisions only to throw 3 away.  Because the purchase of 4 flat-screens generates more economic activity than the purchase of only one.  So if you’re a fan of Keynesian economics and state capitalism you can do your part.  Whenever you buy anything by an extra 3 so you can throw them away.  And see how Keynesian economics makes you, the capital provider, feel.

I’m guessing it may convert you from a Keynesian to a Hayekian.  When you learn how terrible it is to waste good capital, a.k.a. your paycheck.

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Paul Krugman likes Keynesian Economics because it is more Political than Austrian Economics

Posted by PITHOCRATES - December 11th, 2011

Week in Review

Keynesian economics is a lot like the first 2 rules of business.  Rule number 1: the customer is always right.  Rule number 2: when the customer is wrong see rule number 1.

Keynesian economics has a similar set of rules.  Keynesian economic rule number 1: Keynesian economics always works.  Keynesian economic rule number 2: when Keynesian economics doesn’t work see Keynesian economics rule number 1.

Paul Krugman holds these Keynesian economic rules sacred.  He can go and an on about Keynesian macroeconomic principles to explain why the economy is still wallowing in recession despite massive doses of Keynesian economic stimulus.  Because it always goes back to these two Keynesian economic rules.  You see, in his world there is no such thing as a Keynesian failure.  For when there is there is a reason.  And that reason is that we didn’t go Keynesian enough.

It’s obvious that Keynesian economics works.  Just look at Keynesian economics rules 1 &2.  Need I say more?  At least, this is ultimately the argument Paul Krugman makes.  Which is purely political.  And rather ironic.  For he calls the non-political economic system, Austrian economics, political (see Krugman Disses Hayek by Peter Klein posted 12/6/2011 on The Independent Institute).

Krugman closes with the unintentionally funny snark that “the Hayek thing is almost entirely about politics rather than economics.” I suspect if one polled professional economists on which recent Nobel Laureate received the prize not so much for technical contributions, but because the Nobel committee wished to make a political statement, the answer would overwhelmingly be Krugman. I don’t know anyone who thinks Krugman’s work on trade and geography merited the Nobel at the relatively tender age of 55. Indeed, the Krugman thing is almost entirely about politics rather than economics. Quelle Ironie!

Hayek’s Austrian economics does not feature the government playing an active role.  Keynesian economics does.  That’s why it’s the economics system of governments everywhere.  Because it empowers them.  Gives them ‘authority’ to tax and spend and ‘stimulate’.  Because a lot of macroeconomic graphs say it works despites all empirical evidence that it doesn’t.

Now if that doesn’t say politics nothing does.  Keynesian economics is political economics.  Which explains why the biggest of Big Governments choose it for their economics.  Not because it works.  But because it gives them political power.

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LESSONS LEARNED #71: “For socialism to be successful no one can be allowed to escape it.” -Old Pithy

Posted by PITHOCRATES - June 23rd, 2011

Socialism Oppresses and Kills tens of millions of People

It’s easy to point at Cuba as an example of socialism’s failure.  You don’t even have to go to the island.  You don’t have to study their institutions.  All you have to do is to look at the risks people will take to escape Cuba.  And they take some crazy risks to escape.  They will board some barely-seaworthy water crafts and paddle out into the ocean.  Away from Cuba.  And towards Florida.  Away from socialism.  And towards capitalism.  Away from a wretched life of despair and deprivation.  And towards a life of plenty and opportunity.  As they paddle their way to America, how many people do you think they pass who are paddling their way to Cuba?  How about zero?  Because when it comes to refugees, the direction is always towards America.  It’s never the other way.

And it’s easy to point to Mao in China.  His Great Leap Forward killed a lot of his own people.  And by ‘a lot’ I mean in the tens of millions.  Depending on the numbers you use.  It could have been anywhere between 15 and 50 million people.  The Chinese communists were not the record keepers the Nazis were.  Though the actual number may be in doubt the magnitude isn’t.  In the spirit of brotherly love that is the hallmark of socialism, millions were beaten, tortured and killed to ‘encourage’ acceptance of the forced collectivization of farming.  And the funny thing is (not ha ha funny but funny as in sad and ironic) that after beating, torturing and killing so many people to collectivize farming, the agriculture output plummeted.  Partly because of bad planning.  And partly due to nature.  But local party officials reported record harvests to avoid beatings, torture and killings by party superiors.  So China exported much of these record harvests.  Leaving nothing for the peasants to eat.  Resulting in famine.  Again, the record keeping is sparse.  As they often are when your policies end up killing your own people.  But deaths were in the tens of millions.  The Great Leap Forward was a big push to modernize China.  To industrialize it.  For there was little infrastructure in China.  Most of it was rural.  Dotted with peasant farms.  Stretching across vast lands.  With little ways to move around.  Where you probably died less than a day’s walk from where you were born.  Which made it difficult to escape the Great Leap Forward.  Or Mao’s ruthless communist rule.

And it’s easy to point to the former Soviet Union.  Where it all started.  CommunismJoseph Stalin gave Mao Tse-tung a run for his money in the greatest mass murderer of all time contest.  Again, the record keeping was a little sparse.  But the Soviets took socialism to a grand scale.  The government controlled the economy.  And your life.  If you grew up in the Soviet Union, you learned how much better it was there than in the decadent West.  Especially the USA.  Of course, when some Soviets were lucky enough to travel outside the country, they learned that their Soviet teachers were liars.  The West was awesome.  Never before did they see such a wonderful world of plenty.  And some Soviets defected to that better life.  Which was a crime.  And a huge embarrassment for the Soviet Union.  Even Joseph Stalin’s daughter (Svetlana Alliluyeva) defected.  Others included Rudolph Nureyev, Mikhail Baryshnikov, Alexander Godunov, Sergei Fedorov, Martina Navratilova, Ivan Lendl and Nadia Comăneci, to name a few (both from the Soviet Union and the Eastern Bloc).  Some got preferential treatment to keep them from defecting like Katarina Witt.  Or they held family members as ‘hostages’ when some traveled out of the country.  It was a real problem for the KGB.  Who had agents living undercover in the West.  And a lot of them didn’t want to come home.  Of course, there was no such problem with people defecting from the West into the Soviet Union.  There were a few.  Like Lee Harvey Oswald.  But he wasn’t playing with a full deck.  And he did return to the United States.  Because even he found it was better in America.  And he hated America.

It’s easy to point at the big socialist failures.  But just about every story of socialism is a story of failure.  And as different as some of the stories are, they all have much in common.  In particular, the exploitation of the people to serve the state.

In Socialism, Slavery is Freedom

In George Orwell‘s Nineteen Eighty-Four, we see a frightening look at totalitarian socialism.  Big Brother is the leader of an oppressive regime.  Where the government plays with language to control the people.  War is peace.  Ignorance is strength.  And freedom is slavery.  War unites a people against a common enemy.  Who then beg for the government to protect them from this enemy.  And they will suffer through any hardship required to defeat this enemy.  Which makes continued war a handy way to control the people.  And to keep the peace among an unhappy and suffering citizenry that might otherwise rise up and complain.  Or riot.  Or attempt to overthrow the government.

Ignorance is strength.  If you don’t know how rotten your existence is you have no reason to be unhappy.  If you don’t know about that better life on the other side of your border, you have no reason to cross that border.  You’ll stay where you are.  And be a good citizen.  You’ll toe the party line.  Work hard.  Sing party songs.  And be happy.  More importantly, you’ll be subdued.  Easier to control.  And easier to lie to.  There’s a reason revolutionaries rounded up intellectuals and people with glasses (people with glasses can read and may be intellectuals) for ‘reeducation’ during revolutions.  Thinkers are trouble makers.  So it behooves them to keep the people ignorant.  So they don’t get distracted from their patriotic duties.  So they can continue to sacrifice to build a stronger nation.

Slavery is Freedom.  Because slaves never have to make a decision.  Or provide for themselves.  What a joyous and simple life.  Someone provides everything you need.  Your job.  Your clothes.  Your food.  Your home.  Your health care.  And your funeral.  And all you have to do is give yourself to the state.  Give up all your freedoms.  Give up all hope.  All your dreams.  And all of your comforts.  You have no bills to pay.  Because you don’t have anything.  You get up, work, eat and sleep.  Simple.  Easy.  And carefree.  True freedom.  Lucky slaves.

Adolf Hitler was a Socialist

Of course, if you talk to some slaves you’ll probably hear a different story.  Real slaves.  Like 19th century American slaves.  Those working the plantations.  They didn’t all buy that ‘slavery is freedom’ line.  If any did.  Because a lot of them did try to escape.  Just like those who tried to escape from Soviet socialism.  Interestingly, there are similarities between the two.  Because if you take socialism to its logical end you do arrive at slavery.  Friedrich August von Hayek wrote a book about this.  The Road to Serfdom.  Even said that if socialism grew unchecked in a state some guy named Adolf Hitler may come along and create an oppressive state dictatorship.  He didn’t quite say it like that.  But a guy named Adolf Hitler did come along and created an oppressive state dictatorship called National Socialism.  Or Nazism.  Anyway, suffice it to say that Hayek was right.  As proven by people everywhere who have tried to escape their socialist utopias.

Despite popular belief, everyone was not equal in these socialist utopias.  The inner party people lived well.  And their apparatchik.  But little changed for the masses.  In fact, life often got worse for them.  They were hungry, living in crowded quarters, with poor sanitation, some without running water, living in fear of state punishment for breaking a rule or not making quota, days of endless labor, no say in your future, no liberty and little hope for a better tomorrow.  Very similar to a 19th century American slave.

The American plantation is a microcosm of socialism.  The few at the top did very well (the glorious leaders).  Those close to them that ran the plantation (the party apparatchik) did not do as well but did much better than most.  And then there were the slaves at the bottom.  Who were all equal.  Equally miserable.  And without any hope.  Living in fear of abuse for breaking a rule or not making quota.  And working days of endless labor.  This is socialism taken to its logical end.  Which is why people risked death to escape places like the Soviet Union.  East GermanyCzechoslovakiaRomania.  Cuba.  To escape servitude.  Because the state could do anything they wanted to you.  And often did.  Just like a plantation overseer.

Slaves of the Social Democracies Riot

Of course, the critics will say that this isn’t true socialism.  That these are just mad dictators who corrupted socialism in their quest for absolute power.  And I’ll say, well, of course.  You’re right.  But they all used socialism in their rise to power.  Not a one of them said anything about cutting taxes or reducing stifling government regulations in their climb to power.  Quite the contrary.  They used every facet of socialism (egalitarianism, redistribution of wealth, taxing the rich, nationalization of private companies, etc.) in their climb to power.  In fact, one could say that without these tenets of socialism to unwittingly rally the people behind them they could never have risen to power.  Which is why socialism is not just a Road to Serfdom.  It’s a blueprint as well.

Some will roll their eyes at this.  And say Europe is full if social democracies that treat their people pretty damn well.  Let’s call it socialism-light.  These socialist countries have large and generous social welfare programs for their people.  Generous unemployment benefits.  Generous vacations.  Generous health care benefits.  Generous pensions when they retire.  Some at the ripe old age of 50.  A large and generously paid public sector.  Clearly these people aren’t oppressed.  And I’ll agree.  The people receiving these benefits are not oppressed.  But it places an incredible tax burden on those who work.  Who must make continuous sacrifices as their taxes continuously rise.  Let’s call these people slaves-light.  Because they are not allowed to enjoy the full fruits of their labor.  So, yes, the people in these social democracies in general are free.  And happy.  When they’re not rioting, that is.  Like in Greece.  Again.  Where the nation is broke.  And had to borrow money to pay its bills.  Which they have.  But one of the conditions for getting these loans was to cut back on those generous benefits.  Which hasn’t gone over well with the people receiving those benefits.  So they rioted.

Of course they rioted because they had become slaves of the welfare state.  Politicians promised them everything they wanted for their vote.  And delivered.  Until they could deliver no more.  Having become so dependent on the state the thought of taking care of themselves frightened them so that they ran into the streets and started burning things in protest.  The state had no problem keeping these people from escaping their country.  Unable to take care of themselves they were afraid to leave.  But the people with the jobs, and those who created the jobs, that’s a different story.  They could leave.  And a lot did.  So the state made it as difficult as possible for their money to follow them.

You may be able to Escape the Socialist Welfare State, but your Money may Not

New York City is the financial capital of the world.  For now, at least.  It costs a lot to live in the city.  Cost of living is high.  And the taxes are higher.  Way higher.  Which was never a problem for rich people.  Or rich companies.  Rush Limbaugh did his radio program out of New York City for awhile.  But he left because of the excessive taxation.  Went to Florida.  Where there is no income tax.  But every time he traveled to New York City he was required to pay income tax on his earnings for those days in the city.  The New York tax authorities put him through incredible hurdles to prove when he was out of the city.  Showing in multiple ways that he was, in fact, living in Florida.   With receipts.  Phone bills.  Etc.  They put the onus on him.  Said he owed the tax unless he could prove otherwise.

Then came the subprime mortgage crisis that gave us the worst recession since the Great DepressionWall Street income fell.  As did New York City and New York state tax receipts.  People moved out of the city.  Out of the state.  Worked out of their homes.  Some did no work in the state but still kept a vacation home on Long Island.  Desperate for money and unable to keep these people from escaping the state, the taxing authority went after their income.  Said if they spent any time in the state they owed income taxes for the entire year.  Even if you only vacationed for two weeks on Long Island.  While paying the taxes in the state you actually live and work in.  This was worse than taxation without representation.  It was double taxation.  In addition to taxation without representation.

New York City is generous with their social benefits.  Call it socialism-light.  It’s not all out socialism.  But it still suffers from the same fatal flaw.  It doesn’t work well if the people can escape this socialist utopia.  Especially the ones paying the taxes.  As is happening in the social democracies in Europe.  And anywhere where there is high taxation without a secured border.  To prevent the taxpayers (i.e., best and brightest) from escaping.  Like the Soviets did to keep their best and brightest from escaping.  As did the East Germans.  The Czechoslovakians.  The Romanians.  And the Cubans.

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FUNDAMENTAL TRUTH #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 9th, 2010

Capitalism vs. Socialism

Socialism as a political/economic theory is pretty involved.  With an involved history.  And if you’re suffering insomnia one night I recommend reading some of it with a glass of warm milk.  Should put you right to sleep.

Let me simplify it a bit.  To begin with, by ‘socialism’ I mean any form of collectivism (socialism, communism, fascism, statism, social democracy, etc.).  They’re all similar.  Just variations on a theme.  And they all suffer the same defects.  Three of which I summarize here:

  • Public (instead of private) ownership of the means of production, distribution, and exchange
  • Put the common good before individual wants or desires
  • Equality of outcomes

That’s not everything.  But it’s the 3 big reasons why socialism fails.  Basically, socialism is the opposite of capitalism.  In fact, socialism was created to defeat capitalism.  The East-West rivalry during the Cold War was the final showdown between the two systems.  And we know how that turned out.  (In case you don’t, capitalism won).

Public (instead of private) ownership of the means of production, distribution, and exchange

Mikhail Gorbachev asked the great Margaret Thatcher how she fed her people.  Her reply stunned him.  She did nothing.  The Soviet Union was struggling to feed her people with their socialist command economy.  And they couldn’t do it.  They who had great tracts of some of the most fertile farmland in the world.  And yet they still had to import grain from their arch nemesis.  The United States.  To keep famine at bay.  The free markets of capitalism didn’t have to struggle to feed her people, though.  The United States had food to spare.  And even though Great Britain is an island nation that had to import much of her food, there were no famine fears in Great Britain.  The socialist just couldn’t understand how that was possible.

One of the problems with socialism is that it ignores market forces.  And perverts the economic decision making process.  In a free market, market forces maximize the use of scarce resources that have alternative uses.  The market does this through the laws of supply and demand.  And prices.  Things high in demand but low in supply have high prices.  This ensures there is enough of that supply available for those who really need it.  Anyone who pushed a car to the gas pump during the gas shortages in the 1970s understands this.  When the Nixon administration kept prices artificially low, everyone bought and used gas until the supply ran out.  If we had let prices rise to their true market price, those who didn’t absolutely need gas would have cut back on their purchases, leaving gas available to those who really needed it and were willing to pay a high price for it.

When the state takes over the economy, politicians make economic decisions for political reasons.  They ignore the ‘invisible hand’ of the market place.  In the Soviet Union, the state boasted about its industrial output and filled stores with tractor parts no one wanted to buy.  Meanwhile, people stood in line for hours in hopes of buying soap or toilet paper.  And no matter how hard they tried they just couldn’t increase the yield of some of the world’s most fertile farmland.

Put the common good before individual wants or desires

Doing what’s best for the common good sounds noble.  And easy to do.  We all agree our children should be safe.  And should have enough to eat.  And that our schools should serve them breakfast each morning.  And teach them about contraception.  Well, okay, it’s not that easy to do.  Because different people want different things.  And different people think different things are better for the common good.

This is the problem of putting the common good before our individual wants or desires.  Few can agree on what the common good is.  We know our own wants and desires.  But we have no idea what other people want or desire.  Unless we ask them.  But does that even help in determining the common good?  Get a group of your friends and family together.  Make it at least 10 people.  Now get the ten of you to agree on a movie to see.  You know what will happen?  First of all, you’ll waste a lot of time saying, “I don’t care.  What do you want to see?”  Then people will start suggesting movies.  And for every one suggested, someone will vote it down.  This will go on until you finally arrive at a movie that no one wants to see.  But because it’s the movie everyone hates the least, everyone’s willing to settle for it.

Now imagine that little exercise with a thousand people.  The agreeing process will be even more difficult.  In fact, it may be impossible.  It is very unlikely that one thousand people will agree to anything.  And if they try they will waste an enormous amount of time in the process.  No.  Someone will have to decide for the group.  Someone will have to weigh everyone’s opinion and decide what is best for the common good. No matter how many people disagree with this one person’s decision.  F.A. Hayek wrote a book about this.  The Road to Serfdom.  He said socialism ends in dictatorship.  Because there’s no efficient means to determine what’s best for the common good.  He predicted this would happen in Germany with their creeping state socialism.  And Adolf Hitler proved him right.

Equality of Outcomes

If a business has a good year, they tend to be more generous at the holidays.  Let’s say a business owner wants to give out some Christmas bonuses to thank her employees for all their hard work.  She goes to her accountant.  Asks what’s the maximum she can give out without giving herself any cash-flow problems at the beginning of the new year (taxes, insurance, etc.).  The accountant crunches some numbers and says $50,000.  If she has 15 employees, that’s about $3,300 each.  Which should make for a pretty Merry Christmas.  Now, let’s say she has 125 employees.  That works out to a $400 bonus per employee.   Which won’t be quite as merry.

The lesson learned?  The more people included in the getting of something, the less each one gets.  And so it is with socialism.  The only way to get equality in outcomes is to give everyone less.  Sure, we can afford to give Congress people a Cadillac health insurance plan.  But we could never afford to give the same coverage to everyone.  To be able to give coverage to all the people, each person will have to get less.

And they will continue to get less.  As costs go up, it is difficult to maintain the same level of government benefits.  Eventually, they’ll have to raise taxes to cover the higher costs.  And when they can’t raise taxes anymore, they’ll have to reduce the amount of benefits.  Or, in other words, they’ll have to ration benefits.  A bureaucrat will have to decide who should get what.  Which could easily turn health care into politics.  A political opponent needs an expensive cancer treatment?  So sorry.  We’ve already reached our quota this year.  Try again next year.

Socialism is Slavery

What it comes down to is this; socialism really fails for one reason.  It goes against human nature.  It only works when we sacrifice our wants and desires so that others may have their wants and desires.  It’s not trying to keep up with the Jones.  It’s helping the Jones get ahead of you.  It’s living your life to serve others.  And there’s another word for that.  Slavery.  Hence the title of Hayek’s book.  The Road to Serfdom.  For socialism to work, the state must become a dictatorship.  And we must become its slaves.  But few willingly volunteer for servitude.  So, given the choice, we will ultimately choose to make socialism fail.

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