Marx, Engels, Communist Manifesto, Capitalists, Bourgeoisie, Proletariat, Private Property, Soviet Union, Iron Curtain and East Berlin

Posted by PITHOCRATES - May 1st, 2012

History 101

Nationalism, Socialism and Communism forced a more Fair, Just and Equitable Society onto the People

Karl Marx and Friedrich Engels published the Communist Manifesto in 1848.  Launching a war against capitalism.  And private property.  Intellectuals and those in academia loved this stuff.  And labor leaders.  Because it was a path to power.  Especially for those who could not create wealth.  Unlike the great wealth producers.  Like the industrialists.  The entrepreneurs.  Small business owners.  The productive middle class.  That is, the capitalists.  Who work hard and achieve success.  By using their talent and ability to create wealth.  Moving up the economic ladder.  Creating income inequality.  The ultimate sin of capitalism.  According to Marx and Engels.  Intellectuals.  Academia.  And labor leaders.

In the Communist Manifesto Marx and Engels single out the accumulation of private property as the source of all our problems.  The capitalists, the bourgeoisie, have an insatiable appetite for private property.  They just can’t get enough of it.  And therefore oppress their workers, the proletariat, to maximize their property.  By paying them less and less to maximize their profits.  So they can use those profits to buy more and more property.  Which keeps the proletariat in perpetual and abject poverty.  And concentrates all the wealth into the few hands of the bourgeoisie.  And the only way to correct this great inequity was through a worker’s revolution.  Where the proletariat rises up and takes the private property of the bourgeoisie and gives it to the state.  So it belongs to everyone.  Especially to those who did not create it.  A very popular idea among those mired in perpetual and abject poverty.  Who are easily swayed to support this more fair, just and equitable distribution of other people’s wealth.

These progressive views enthralled Europe.  Especially after the Industrial Revolution created some appalling conditions for workers.  And they took this opportunity to put them into practice.  It was the 19th century that gave us the ‘fair’ political systems of nationalism, socialism and communism.  That began the process of transferring wealth from the capitalists to the anti-capitalists.  Precipitating the economic decline of Europe.  Making America the new economic superpower.  Which still maintained the principles of free market capitalism throughout the 19th century.  Until the anti-capitalistic teachings of Marx and Engels took hold in the progressive government of Woodward Wilson.  Bringing back the federal income tax Abraham Lincoln used to pay for the Civil War.  But unlike Lincoln Wilson had no intention of repealing it.  The federal income tax was here to stay.  As progressives began building that more fair, just and equitable society.

The Soviet Union Depended on the West for Food because their Forced Collectivized Farms couldn’t Feed their People

But the equitable movement in America was not as intense as it was in Europe.  Or Russia.  Which was taking the teachings of Marx and Engels to their logical end.  They had a worker’s revolution.  They became communist.  And forced that more fair, just and equitable society on their people.  Whether they wanted it or not.  And those who objected they systematically killed.  Or exiled to a Siberian gulag.  For Joseph Stalin’s rise to power was brutal.  As was the Soviet Union.  Even making a deal with Adolf Hitler to split Poland after the Nazi-Soviet invasion of Poland that launched World War II.  Then Hitler double-crossed their Soviet ally and attacked the Soviet Union.  And the Nazis nearly overran them.  The Nazis were in Leningrad (present day St. Petersburg).  At the gates of Moscow.  And in Stalin’s city.  Stalingrad.  The Soviets were unable to resist the Nazi onslaught.  The only thing that saved them was material aid from the capitalist West.  The Soviet T-34 tank (the best in the war).  And, of course, the millions of Soviet people the Soviet generals could throw into the Nazi killing machine to wear the Nazis down.

No one suffered like the Soviet people did during World War II.  The US and the UK each lost about a half million people.  A terrible loss.  The Soviets, though, lost about 25 million people.  A number that just numbs the mind.  This was the second Russian invasion that had brought an enemy to the gates of Moscow.  The first were the French a century earlier under Napoleon.  There wasn’t going to be a third.  Wherever their armies were at the end of World War II they pretty much stayed.  Turning Eastern Europe into a communist bloc.  And to make the Soviet Union a mightier nation they embarked on a rapid industrialization program.  To make it a modern power like those great nations in the West.  But unlike them they were going to do it the ‘smart’ way.  With their command economy.  Where their brilliant state planners would marshal their resources and do what the free market economies did in the west.  Only instead of taking about a century their Industrial Revolution would take only 5 years.

With no industrialists, entrepreneurs, small business owners or a middle class it fell upon the state planners to industrialize the Soviet Union.  As well as feed the Soviet people.  Well, they industrialized the Soviet Union.  But never brought it up to par with the industrialized West.  Worse, they couldn’t feed their people.  Despite having some of the most fertile farmland in all of Europe in the Ukraine.  The Soviet Union depended on the West for food.  Because their forced collectivized farms didn’t work like Marx and Engels said they would.  And they didn’t work in China, either.  Where another brutal communist dictator, Mao Zedong, killed tens of millions of his people by starving them to death.  By forcing a more fair, just and equitable society onto the Chinese.

Time Froze behind the Iron Curtain and People Lived pretty much Forever in the 1940s

At the end of World War II, like at the end of World War I, no one wanted to think about war anymore.  Winston Churchill, though, did.  For he saw what the Soviet Union was doing.  And saw the spread of their communism as a threat to Western Civilization.  He gave a speech at Westminster College in Fulton, Missouri, in 1946.  And said, “From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe.”  There was now an Eastern Europe.  An East Germany.  And an East Berlin.  All behind the Iron Curtain.  All in the Soviet sphere.  All communist.  Where they all suffered under a more fair, just and equitable society.  Whether they wanted it or not.  And they clearly did not.  For the Soviets had to build a wall in Berlin to prevent those in East Berlin from escaping to West Berlin.

The intellectuals, academia and labor leaders loved Joseph Stalin and the Soviet Union.  They thought communism was the enlightened future.  Probably because they didn’t have to live in it.  But what is surprising is that a lot of college students have this affection with communism.  To this day they still wear t-shirts emblazed with the beret-wearing Che Guevara.   Who helped Fidel Castro bring that more fair, just and equitable society to the Cubans.  Who have been trying to escape it ever since by practically swimming to Florida and free market capitalism.  But the college students and their professors still yearn for a Soviet-style economy in the United States.  And condemn capitalism as they sit in coffee bars sipping their lattes.  Enjoying social media on their smartphones.  Wearing the latest fashions.  Enjoying the latest movies.  The newest music.  And dream of that more just society.  Where they redistribute wealth fairly and equitably.  And the rich pay their fair share.  Just like in East Berlin.  Where life was fair.  But it was nowhere as enjoyable as in the unfair West.

Time froze behind the Iron Curtain.  When West Berlin enjoyed the best Western Civilization had to offer in music, fashion, food, entertainment, etc., East Berlin didn’t.  For they were frozen in the 1940s.  Western music was decadent.  So instead of rock and pop music you listened to classical music.  Instead of the latest Hollywood movies you went to the ballet.  You didn’t watch Western television.  Read Western books.  Or newspapers.  No.  You only saw things approved by state censors.  And that were patriotic.  Why?  To prevent their people from seeing how much better life was on the other side of the Iron Curtain.  Where they enjoyed the latest and the best of everything.  Whereas inside the Iron Curtain you went to the black market for any real luxuries.  Like a pair of blue jeans.  Which they didn’t sell in East Berlin.  Because they were decadent.  Why, they wouldn’t even sell a t-shirt with a communist icon on it.  Because you just didn’t wear something like that in the 1940s.  But college kids will attack capitalism.  And support the fairness of socialism and communism.  Even though the things they enjoy come from free market capitalism.  And are simply not available in the communist command economy.  Because the accumulation of private property is the greatest sin of capitalism.  And not allowed under communism.

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Carnegie, Rockefeller, Morgan, Interstate Commerce Act, Sherman Antitrust Act, Sherman Silver Purchase Act, Federal Reserve, Nixon and Reagan

Posted by PITHOCRATES - January 31st, 2012

History 101

Government Induced Inflation caused the Panic of 1893 and caused the Worst Depression until the Great Depression

Britain kicked off the Industrial Revolution.  Then handed off the baton to the United States in the latter half of the 19th century.  As American industry roared.  Great industrialists modernize America.  And the world.  Andrew Carnegie made steel inexpensive and plentiful.  He built railroad track and bridges.  And the steel-skeleton buildings of U.S. cities.  Including the skyscrapers.  John D. Rockefeller saved the whales.  By producing less expensive kerosene to burn in lamps instead of the more expensive whale oil.  He refined oil and brought it to market cheaper and more efficiently than anyone else.  Fueling industrial activity and expansion.  J.P. Morgan developed and financed railroads.  Made them more efficient.  Profitable.  And moved goods and people more efficiently than ever before.  Raising the standard of living to heights never seen before. 

The industrial economy was surging along.  And all of this without a central bank.  Credit was available.  So much so that it unleashed unprecedented economic growth.  That would have kept on going had government not stopped it.  With the Interstate Commerce Act in 1887 and the Sherman Antitrust Act of 1890.  Used by competitors who could not compete against the economy of scales of Carnegie, Rockefeller and Morgan and sell at their low prices.  So they used their friends in government to raise prices so they didn’t have to be as competitive and efficient as Carnegie, Rockefeller and Morgan.  This legislation restrained the great industrialists.  Which began the era of complying with great regulatory compliance costs.  And expending great effort to get around those great regulatory compliance costs.

Also during the late 19th century there was a silver boom.  This dumped so much silver on the market that miners soon were spending more in mining it than they were selling it for.  Also, farmers were using the latest in technology to mechanize their farms.  They put more land under cultivation and increased farm yields.  So much so that prices fell.  They fell so far that farmers were struggling to pay their debts.  So the silver miners used their friends in government to solve the problems of both miners and farmers.  The government passed the Sherman Silver Purchase Act which increased the amount of silver the government purchased.  Issuing new treasury notes.  Redeemable in both gold and silver.  The idea was to create inflation to raise prices and help those farmers.  By allowing them to repay old debt easier with a depreciated currency.  And how did that work?  Investors took those new bank notes and exchanged them for gold.  And caused a run on U.S. gold reserves that nearly destroyed the banking system.  Plunging the nation in crisis.  The Panic of 1893.  The worst depression until the Great Depression.

Richard Nixon Decoupled the Dollar from Gold and the Keynesians Cheered 

J.P. Morgan stepped in and loaned the government gold to stabilize the banking system.  He would do it again in the Panic of 1907.  The great industrialists created unprecedented economic activity during the latter half of the 19th century.  Only to see poor government policies bring on the worst depression until the Great Depression.  A crisis one of the great industrialists, J.P. Morgan, rescued the country from.  But great capitalists like Morgan wouldn’t always be there to save the country.  Especially the way new legislation was attacking them.  So the U.S. created a central bank.  The Federal Reserve System.  Which was in place and ready to respond to the banking crisis following the stock market crash of 1929.  And did such a horrible job that they gave us the worst depression since the Panic of 1893.  The Great Depression.  Where we saw the greatest bank failures in U.S. history.  Failures the Federal Reserve was specifically set up to prevent.

The 1930s was a lost decade thanks to even more bad government policy.  FDR’s New Deal programs did nothing to end the Great Depression.  Only capitalism did.  And a new bunch of great industrialists.  Who were allowed to tool up and make their factories hum again.  Without having to deal with costly regulatory compliance.  Thanks to Adolf Hitler.  And the war he started.  World War II.  The urgency of the times repealed governmental nonsense.  And the industrialists responded.  Building the planes, tanks and trucks that defeated Hitler.  The Arsenal of Democracy.  And following the war with the world’s industrial centers devastated by war, these industrialists rebuilt the devastated countries.  The fifties boomed thanks to a booming export economy.  But it wouldn’t last.  Eventually those war-torn countries rebuilt themselves.  And LBJ would become president.

The Sixties saw a surge in government spending.  The U.S. space program was trying to put a man on the moon.  The Vietnam War escalated.  And LBJ introduced us to massive new government spending.  The Great Society.  The war to end poverty.  And racial injustice.  It failed.  At least, based on ever more federal spending and legislation to end poverty and racial injustice.  But that government spending was good.  At least the Keynesians thought so.  Richard Nixon, too.  Because he was inflating the currency to keep that spending going.  But the U.S. dollar was pegged to gold.  And this devaluation of the dollar was causing another run on U.S. gold reserves.  But Nixon responded like a true Keynesian.  And broke free from the shackles of gold.  By decoupling the dollar from gold.  And the Keynesians cheered.  Because the government could now use the full power of monetary policy to make recessions and unemployment a thing of the past.

Activist, Interventionist Government have brought Great Economic Booms to Collapse 

The Seventies was a decade of pure Keynesian economics.  It was also the decade that gave us double digit interest rates.  And double digit inflation rates.  It was the decade that gave us the misery index (the inflation rate plus the unemployment rate).  And stagflation.  The combination of a high inflation rate you normally only saw in boom times coupled with a high unemployment rate you only saw during recessionary times.  Something that just doesn’t happen.  But it did.  Thanks to Keynesian economics.  And bad monetary policy.

Ronald Reagan was no Keynesian.  He was an Austrian school supply-sider.  He and his treasury secretary, Paul Volcker, attacked inflation.  The hard way.  The only way.  Through a painful recession.  They stopped depreciating the dollar.  And after killing the inflation monster they lowered interest rates.  Cut tax rates.  And made the business climate business-friendly.  Capitalists took notice.  New entrepreneurs rose.  Innovated.  Created new technologies.  The Eighties was the decade of Silicon Valley.  And the electronics boom.  Powering new computers.  Electronic devices.  And software.  Businesses computerized and became more efficient.  Machine tools became computer-controlled.  The economy went high-tech.  Efficient.  And cool.  Music videos, CD players, VCRs, cable TV, satellite TV, cell phones, etc.  It was a brave new world.  Driven by technology.  And a business-friendly environment.  Where risk takers took risks.  And created great things.

History has shown that capitalists bring great things to market when government doesn’t get in the way.  With their punishing fiscal policies.  And inept monetary policies.  Activist, interventionist government have brought great economic booms to collapse.  Who meddle and turn robust economic activity into recessions.  And recessions into depressions.  The central bank being one of their greatest tools of destruction.  Because policy is too often driven by Big Government idealism.  And not the proven track record of capitalism.  As proven by the great industrialists.  And high-tech entrepreneurs.  Time and time again.

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LESSONS LEARNED #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - July 1st, 2010

ECONOMIES OF SCALE and vertical integration can do two things very well.  Make industrialists rich.  And make the things they sell cheap. 

The more you make, the less each thing you make costs.  Businesses have fixed costs.  Big one time investments in plant and equipment.  Businesses have to recover these costs.  Each thing they sell has a portion of these fixed costs added to its price.  The more they sell, the less they need to add to each unit sold.  This is economies of scale.  Think of bulk goods.  Warehouse clubs.  Places where you can buy large quantities of things at lower unit prices.  You may buy an ‘economy pack’ of 3 bottles of shampoo shrink-wrapped together.  The purchase price of a 3-pack will be greater than the price of a single bottle of shampoo at your convenient corner drug store.  But the unit cost of each of the bottles in the 3-pack will be less.  You save more over time by buying 3 bottles at a time.  Spending more, then, means spending less.  In time.

Few of us buy raw materials.  Few have a need for crude oil.  Iron ore.  Coal.  Limestone.  Manganese.  But they make the stuff we buy.  A lot of things have to happen before those raw materials make it to us in those things we buy.  It has to be mined or drilled/pumped.  Transported.  Processed.  Stored.  Transported again.  Processed again.  Stored again.  Transported again.  There are many different stages between extracting raw materials from the earth and incorporating them into a final product we consumers buy.  At every stage there are costs.  And inefficiencies.  Which add to costs.  By reducing these costs along the way, the component materials used at the final manufacturing stage cost less.  This reduces the selling price of the final product.  This is what vertical integration does.  It puts everything from the extraction of raw materials to the incorporation of those processed materials into the final product for sale under control of the final user.  It brings in a high level of quality, cost containment and reduction of inefficiencies into the entire process resulting in a high quality, mass produced, inexpensive product.

Not everyone can do these things.  You have to live and breathe the industry you’re in.  You have to understand it intimately.  An industrialist at the top of his game can do this.  A politician can’t.  States trying to take control of their economy have failed.  Every time they’ve tried.  Why?  Politicians are ‘intellectuals’.  They’ve never run a business.  They only thought about it.  And, somehow, that gives them the moral authority to tamper in something they are simply unqualified to do.  And when they meddle, they destroy.  Purposely.  Or through unintended consequences.  In the process, though, they enrich themselves.  And their cronies.

ANDREW CARNEGIE WAS a brilliant entrepreneur.  After working for a railroad, he saw the future.  Railroads.  And he would build its rails.  And its bridges.  With his Keystone Bridge Company.  Which used steel and iron.  So he built his Union Mills.  Which needed pig iron.  So he built his Lucy blast furnace.  Which consumed raw material (iron, coke, limestone).  So he secured his own sources of raw materials. 

His Lucy blast furnace set world records, nearly doubling the weekly output of his steel competitors.  No one made more steel than Carnegie.  For less.  In about 20 years, he brought the price down for steel rails from $160/ton to $17/ton.  And got rich in the process.

Economies of scale.  Vertical integration.  And innovation.  Carnegie hired the best people he could find and used the latest technology.  Always improving.  Always cutting costs.  Always making steel more plentiful.  And cheaper.  His steel built a nation.  Dominated the industry.  And destroyed the competition.  Of course, that drew the attention of the government.  And they tried to break up the steel giant because it was unfair to the competition.  Who couldn’t sell steel as cheap as he could.

JOHN D. ROCKEFELLER was a brilliant entrepreneur.  After trying the oil drilling business, he saw the future.  The refining business.  For America lit the night with kerosene.  And he would provide that kerosene.  At prices that a poor man could afford.  And he did.  And he saved the whales in the process (his cheap kerosene put the whale oil business out of business).

Like Carnegie, cutting costs and production efficiencies consumed him.  He built his own kilns and used his own timber for fuel.  He made his own barrels from his own timber.  He used his own horse-drawn carts, boats, rail cars and pipelines.  He bought up competitors.  He grew to dominate the industry.  By far the biggest shipper, he got better shipping rates than his competitors.  And he constantly innovated.  When others were dumping the gasoline byproduct from refining kerosene into the river (no internal combustion engine yet), he was using it for fuel.  He hired the best talent available to find a use for every byproduct from the refining process, giving us everything from industrial lubricants to petroleum jelly (i.e., Vaseline).

His company, Standard Oil, was close to being a monopoly.  When they controlled 90% of the market kerosene was never cheaper.  He brought the price down from $0.26/gallon to $0.08/gallon.  And that was an outrage.  We can’t allow any one company to control 90% of the market.  Sure, consumers were doing well, but the higher-cost competitors could not stay in business selling at those low prices.  So the government broke up Standard Oil via antitrust legislation (the Sherman Act).  To protect the country from monopolistic practices.  And cheap kerosene, apparently.

BILL GATES WAS a brilliant entrepreneur in building Microsoft.  The personal computer (PC) was new.  You couldn’t do much with it in the early days unless you were pretty computer savvy.  But programs were available that made them great business tools (word processing and spreadsheet programs). 

IBM created the PC.  And they licensed it so others could make IBM-like machines.  IBM clones.  The PC industry chewed each other up.  But Gates did well.  Because all of these machines used his operating system (Microsoft’s Disk Operating System – DOS).  Apple developed the Macintosh (with a mouse and Graphical User Interface – GUI) but it was expensive.  Anyone who used one in college wanted to buy one.  Until they saw the price.  So they bought an IBM clone instead.  And when Gates came out with Windows, they were just as easy to use as the Macs.

Because of the higher volume of the IBM platform sold, Microsoft flourished.  Software was bundled.  New machines came preloaded with Windows.  And Internet Explorer.  And Windows Media Player.  You got a lot of bang for the buck going with a Windows-based PC.  And Windows dominated the market.  Consumers weren’t complaining.  Much.  Sure, there were things they did bitch about (glitches, drivers, viruses, etc.), but it sure wasn’t price.

Of course, Microsoft’s competitors were hurting.  They couldn’t sell their products if Microsoft was giving away a similar product free.  Because they were hurting their competitors, the government tried to break up the company with the Sherman Act. 

THE NORTHERN SECURITIES SUIT of 1902 found a holding company guilty of not yet committing a crime.  Teddy Roosevelt’s administration filed a Sherman antitrust suit against Northern Securities.  This was a holding company for Northern Pacific, Great Northern, and Chicago, Burlington, and Quincy Railroads.  What’s a holding company?  It replaced a trust.   Which large corporations created in response to government’s attacks on large corporations.

Small competitors feared large corporations.  They could not compete against their economies of scale and vertical integration.  The little guys couldn’t sell things as cheap as the big corporations could.  So the government intervened to protect the little guy.  So they could sell at higher prices.

But businesses grow.  All big corporations started out as little guys.  And the growing process doesn’t stop.  So the big corporations had to find other ways to grow.  They formed trusts.  Then the trust-busters busted up the trusts.  The next form was the holding company. 

The trust-busters said that the big corporations, trusts and holding companies were all trying to become monopolies.  And once they eliminated all competitors, they would raise their prices and gouge the consumers.  Northern Securities never did.  But they could.  So they were guilty.  Because they might commit a crime.  One day.

ALL BUSINESS OWNERS aren’t morally ethical and honest.  But the market is, albeit cruel.  Economies of scales will always put the little guy out of business.  Sad, yes, for the little guy.  But for every little guy put out of business, millions of consumers save money.  They can buy things for less.  Which means they have more money to buy more things.  New things.  Different things.  From new little guys who now have a chance with this new surplus of purchasing power.

But when politicians get involved, consumers lose.  When they help a competitor, they help them by keeping prices high.  To keep competition ‘fair’.  For the politically connected.

Consumers never complain about low prices.  Only competitors do.  Or their employees.  Those working on whaling ships didn’t like to see the low price of Rockefeller’s kerosene.  But the new refining industry (and its auxiliaries) created far more jobs than were lost on the whaling ships.  We call it progress.  And with it comes a better life for the many.  Even if it is at the expense of the few.

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