capitalism

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Is Marxism Coming Back?

It is true that as the financial and economic crises roll on, as more and more disasters accumulate, as more people are thrown into unemployment and suffering that more and more of us will question the fundamentals of our economic system. It is inevitable that many will be drawn to some of the criticisms of capitalism, including Marxism.

The Guardian today published a salutary overview of this revival:

In his introduction to a new edition of The Communist Manifesto, Professor Eric Hobsbawm suggests that Marx was right to argue that the “contradictions of a market system based on no other nexus between man and man than naked self-interest, than callous ‘cash payment’, a system of exploitation and of ‘endless accumulation’ can never be overcome: that at some point in a series of transformations and restructurings the development of this essentially destabilising system will lead to a state of affairs that can no longer be described as capitalism”.

That is post-capitalist society as dreamed of by Marxists. But what would it be like? “It is extremely unlikely that such a ‘post-capitalist society’ would respond to the traditional models of socialism and still less to the ‘really existing’ socialisms of the Soviet era,” argues Hobsbawm, adding that it will, however, necessarily involve a shift from private appropriation to social management on a global scale. “What forms it might take and how far it would embody the humanist values of Marx’s and Engels’s communism, would depend on the political action through which this change came about.”

Marxism is a strange thing; it provides a clean and straightforward narrative of history, one that irons out detail and complication. It provides a simplistic “us versus them” narrative of the present. And it provides a relatively utopian narrative of the future; that the working classes united will overthrow capitalism and establish a state run by and for the working classes.

Trouble is, history is vastly more complicated than the teleological narrative provided by dialectical materialism. The economic and social reality of the present is vastly more complicated than Marx’s linear and binary classifications. And the future that Marx predicted never came to fruit; his 19th Century ideas turned into a 20th Century reality of mass starvation, failed central planning experiments, and millions of deaths.

Certainly, the system we have today is unsustainable. The state-supported financial institutions, and the corporations that have grown up around them do not live because of their own genius, their own productivity or innovation. They exist on state largesse — money printing, subsidies, limited liability, favourable regulation, barriers to entry. Every blowup and scandal — from the LIBOR-rigging, to the London Whale, to the bungled trades that destroyed MF Global — illustrates the incompetence and failure that that dependency has allowed to flourish.

The chief problem that Marxists face is their misidentification of the present economic system as free market capitalism. How can we meaningfully call a system where the price of money is controlled by the state a free market? How can we meaningfully call a system where financial institutions are routinely bailed out a free market? How can we meaningfully call a system where upwards of 40% of GDP is spent by the state a free market? How can we call a system where the market trades the possibility of state intervention rather than underlying fundamentals a free market?

Today we do not have a market economy; we have a corporate economy.

As Saifedean Ammous and Edmund Phelps note:

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

The system of corporatism we have today has far more akin with Marxism and “social management” than Marxists might like to admit. Both corporatism and Marxism are forms of central economic control; the only difference is that under Marxism, the allocation of capital is controlled by the state bureaucracy-technocracy, while under corporatism the allocation of capital is undertaken by the state apparatus in concert with large financial and corporate interests. The corporations accumulate power from the legal protections afforded to them by the state (limited liability, corporate subsidies, bailouts), and politicians can win re-election showered by corporate money.

The fundamental choice that we face today is between economic freedom and central economic planning. The first offers individuals, nations and the world a complex, multi-dimensional allocation of resources, labour and capital undertaken as the sum of human preferences expressed voluntarily through the market mechanism. The second offers allocation of resources, labour and capital by the elite — bureaucrats, technocrats and special interests. The first is not without corruption and fallout, but its various imperfect incarnations have created boundless prosperity, productivity and growth. Incarnations of the second have led to the deaths by starvation of millions first in Soviet Russia, then in Maoist China.

Marxists like to pretend that the bureaucratic-technocratic allocation of capital, labour and resources is somehow more democratic, and somehow more attuned to the interests of society than the market. But what can be more democratic and expressive than a market system that allows each and every individual to allocate his or her capital, labour, resources and productivity based on his or her own internal preferences? And what can be less democratic than the organisation of society and the allocation of capital undertaken through the mechanisms of distant bureaucracy and forced planning? What is less democratic than telling the broad population that rather than living their lives according to their own will, their own traditions and their own economic interests that they should instead follow the inclinations and orders of a distant bureaucratic-technocratic elite?

I’m not sure that Marxists have ever understood capitalism; Das Kapital is a mammoth work concentrating on many facets of 19th Century industrial and economic development, but it tends to focus in on obscure minutiae without ever really considering the coherent whole. If Marxists had ever come close to grasping the broader mechanisms of capitalism — and if they truly cared about democracy — they would have been far less likely to promulgate a system based on dictatorial central planning.

Nonetheless, as the financial system and the financial oligarchy continue to blunder from crisis to crisis, more and more people will surely become entangled in the seductive narratives of Marxism. More and more people may come to blame markets and freedom for the problems of corporatism and statism. This is deeply ironic — the Marxist tendency toward central planning and control exerts a far greater influence on the policymakers of today than the Hayekian or Smithian tendency toward decentralisation and economic freedom.

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Corporatism and Income Inequality

In a tremendous, and essential article for Project Syndicate, Nobel laureate Edmund Phelps, and regular reader Saifedean Ammous team up to obliterate the view that the West is at present a capitalist system, and that the problems of the West are problems of capitalism:

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

I too have spent a whole lot of energy and time lambasting our present system of corporatism.

The trouble is, the advocates of the status quo, and everything that means — government intervention in markets, central planning of the economy, the welfare-warfare state, bailouts, huge deficits, surveillance (for the purposes of taxation) and so forth — do not see themselves as corporatists, so much as they see themselves as go-gooders who want to “manage” the economy to a better place. They oppose the free market because they believe they know better than the market. They believe that our system today is a form of “constrained” capitalism which averts its worse excesses. Most significantly, they believe that the problems with the present system — income inequality and corporate power — are problems of capitalism, and that freer markets would make these problems worse.

As Ammous and Phelps suggest, they are blaming “capitalism” for the problems of corporatism.

There is strong evidence against doing so.

The growth in corporate power and income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies:


This new money was not exactly distributed evenly:


A lot of that money seems like it ended up in corporate profits:


A shrinking share has gone to wage labour:


It is this stuff — the decrease in real wages, the growth in corporate profits, the growth in CEO pay, the growth in the wealth of the top 1% — that has inspired and informed movements like Occupy Wall Street. Sadly, such movements have largely avoided confronting the reality that this monstrous outgrowth of corporatism has developed in a heavily-regulated, socially-engineered, managerialist and interventionist economy, and not in a capitalist economy or in a free market, as so many occupiers claim.

It is completely inaccurate to paint these figures as problems of capitalism.

As I wrote earlier this week:

This psychological trend can be summed up as the idea that the first recourse for social and economic problems is more government action. Too much inequality? Regulate against it. Too little innovation? Legislate for it. Too little demand? Stimulate it. Too much bad government? Elect a better one, who will do more of the things we “love”, and less of those we “hate”.

The idea, in the simplest terms, is that changes to society should come from the great overhanging monolith, and not from the little individuals on the ground. No, we are just fish swimming in an ocean of dialectical chaos. We are just flecks of paint on the great canvas of humanity. No, let us not agitate or gravitate. Instead, we must “co-ordinate” and “unite” under the aegis of government; the blind painter.

The climax of this bizarre psychological trend was the election of Barack H. Obama. After all the misdeeds of Bush and Cheney, he would be the one to restore government to its “proper” role: “helping the people”, “creating a better America”, “investing in tomorrow”, etc, etc, etc, blah, blah, blah.

This is a licence for more central planning, more interventionism and more government largesse. There are two problems here:

  1. Regulatory Capture: As David Rothkopf has argued: “Geography, pedigree, networking and luck unite a superclass of 6000 individuals that possess unparalleled power over world affairs.” Obama’s top contributors are the same old people. Obama appointed more ex-Wall Street figures to his administration than anyone before him. Ultimately, the people chosen as central planners have a track record of enacting policies that enrich themselves more than everybody else. The people lining up at Davos calling for a new system, i.e. more government, are the same elite who have ruined the old one. As Jonathan Weill writes: “It’s becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain.”
  2. Unintended, and Unexpected Consequences: Central planners are often pretty bad at the job. Bernanke and Yellen failed to predict the end of the housing bubble (that their predecessor Alan Greenspan helped create) with terrible consequences. Tim Geithner lashed that there was “no chance of a downgrade” right before S&P downgraded US Treasuries. Angela Merkel demands austerity from a frail and ailing Greek economy suffering from a severe contraction that is only worsened by austerity. The Iraq and Afghani wars created more terrorists than they killed, and added a multi-trillion dollar shackle of debt to the American government. America’s deindustrialisation (in the name of cheaper Chinese goods) has created huge unemployment in America, as well as making the American economy ever more dependent on the fragile flow of trade for components and energy. History is dominated by black swans — and the history of  central planning is dominated by unintended consequences. We just don’t understand reality well enough to centrally plan it.

After many decades of central planning and interventionism we are left with monstrous income inequality and corporate power.

Is it not fair to conclude that the two are intrinsically connected?

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Capitalism Explained For Angela Merkel

Europe’s new Führer (yes — I just went there) doesn’t seem to understand what capitalism is, or how markets work.

Stern-faced Teutonic Austerity

From Felix Salmon:

Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?

Salmon is correct, but there is a bigger issue at play here — this kind of nonsensical rubbish is exactly what has turned first Japan, and now America into zombie economies.

Showing that Europe is a “safe place to invest” effectively means rigging the market to eliminate sovereign default, or any kind of behaviour that threatens “systemic stability”. Of course, as the last few years have shown, the system is too interconnected for large entities fail. The reactionary perspective on this is to bail out everything again and again and again. The realistic perspective is that no such system is sustainable. Worse, no such system allows for any kind of capitalism.

Capitalism means both successes and failures. It is a fundamentally experimental system, with a continuous feedback mechanism — the market, and ultimately profit and loss. Ideas that work are rewarded with financial success, and ideas that don’t are punished with failure. With capitalism, systems, ideas and firms that fail to produce what the market wants fail. They go bankrupt. Their assets, and their debt is liquidated.

When that mechanism is suspended by a government or central bank that thinks it knows best — and that a system that is too interconnected to fail is worth saving at any cost — the result is almost always stagnation. This is for a number of reasons — most obviously that bailouts sustain crippling debt levels, and are paid for through contractionary austerity, which is what Salmon was getting at. But it is larger than just that.

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts have tried to turn nature on its head — bailed out bankers and institutions have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

The darkest side to this zombification is that it takes resources from the productive, the young, the creative, and the needy and channels them to the zombies. Vast sums spent on rescue packages to keep the zombie system alive might have been available to increase the intellectual capabilities of the youth, or to support basic research and development, or to build better physical infrastructure, or to create new and innovative companies and products.

Zombification kills competition, too: when companies fail, it leaves a gap in the market that has to be filled, either by an expanding competitor, or by a new business. With failures now being kept on life-support, gaps in the market are fewer.

Japan has experienced twenty hellish years of zombification, all because they suspended capitalism in favour of systemic stability and creditors getting their pound of flesh. America did virtually the same thing, and the result has been three years of stagnation. Now — if Merkel gets here way — Europe will face the same thing.

Without experimental capitalism societies stagnate. That is the lesson policy makers — especially Europe’s new Führer — need to learn.

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Yglesias Recognises the Death of Capitalism

I have written about it extensively, but it seems like some other commentators — even ones ensconced inside the establishment — are finally getting the point about 2008.

Responding to Bloomberg’s revelation that the Fed shot off trillions of secret zero-interest loans to Too-Big-to-Fail banks, Yglesia concludes:

The government didn’t actually lose any money on these deals. There was no loss of funds or transfer of real economic resources. But as Bloomberg writes “details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.” Capitalism is supposed to have an evolutionary dynamic. Firms with sound business strategies survive and expand. Firms with unsound business strategies shrink and go bust. Consequently, over time the average quality of business strategies is improving. This evolution toward better firms over time is one of the key pillars of our prosperity. If ill-managed firms nonetheless survive, the system is broken in a fundamental way.

Yglesias and others still put a whole lot of value into “saving the system”, though, which is a shame because that is the problem. It’s not just ill-managed firms, it’s a fundamentally broken system. And as MF Global’s failure (not to mention present gross derivatives exposure levels) proves, you can’t mend the system by saving it. You have to replace it with something better, which is exactly what hasn’t happened.

The logical corollary of this is that the government (i.e. We the People) did lose on this — we lost the right to a capitalist economy based on creative destruction, good firms succeeding, and bad firms failing. We lost the right to see the debt liquidated, and ultimately we lost (or delayed) new organic growth.

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Zombie Economics

Occupy Wall Street seem to oppose banker bailouts because bailouts are unfair. Bankers — by and large the most privileged class in society — got at the last count over $14 trillion of interest free money from central banks and governments to keep on doing the same thing — getting rich from speculation, on the backs of workers and the productive economy. The rest of society — teachers, nurses, factory workers, entrepreneurs, the unemployed, etc — have to “share the pain” of unemployment, austerity and a depressed economy.

This is particularly unfair, because it is the bankers and speculators who caused the crisis in the first place. But there is a much deeper economic reason to oppose bailouts than simple unfairness. Bailing out failed and failing financial institutions creates a zombie economy. Why?

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts have tried to turn nature on its head — bailed out bankers have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

So it should be no surprise that financial institutions have continued making exactly the same mistakes that created the crisis in 2008. That crisis was caused by excessive financial debt. Wall Street banks do not just play with their own equity — they borrow huge sums of money, too. This debt is known as leverage — and many Wall Street banks in 2008 had forty or fifty times as much leverage as they had equity. The problem with leverage is that while successful bets can very quickly lead to massive profits, bad bets can very quickly lead to insolvency — a bank that leverages itself 50:1 only has to incur a 2% loss on its portfolio to have lost every penny they started with. Lehman Brothers was leveraged 30:1.

Following 2008, many on Wall Street promised they had learned their lesson, and that the days of excessive leverage and risk-taking with borrowed money were over. But, in October 2011, another Wall Street bank was taken down by bad bets financed by excessive leverage: MF Global. Their leverage ratio? 40:1.

So why was the banking system bailed out in the first place? Defenders of the bailouts have correctly pointed out that not bailing out certain banks would have caused the entire system to collapse. This is because the global financial system is an interconnected web of debt. Institutions owe huge sums of money to one another. If a particularly interconnected bank disappears from the system, and cannot repay its creditors, the creditors themselves become threatened with insolvency. If a bank is leveraged 10:1 on assets of $10 billion, then its creditors may incur losses of up to $90 billion. Without state intervention, a single massive bankruptcy can quickly snowball into systemic destruction.

Ultimately, the system is extremely fragile, and prone to collapse. Government life-support has given Wall Street failures the resources to continue their dangerous and risky business practices which caused the last crisis. Effectively, Wall Street and the international financial system has become a government-funded zombie — unable to sustain itself in times of crisis through its own means, and dependent on suckling the taxpayer’s teat.

The darkest side to this zombification is that it takes resources from the productive, the young, the creative, and the needy and channels them to the zombies. Vast sums spent on rescue packages to keep the zombie system alive might have been available to increase the intellectual capabilities of the youth, or to support basic research and development, or to build better physical infrastructure, or to create new and innovative companies and products.

Zombification kills competition, too: when companies fail, it leaves a gap in the market that has to be filled, either by an expanding competitor, or by a new business. With failures now being kept on life-support, gaps in the market are fewer.

The system needs to change.

As Professor George Selgin of the University of Georgia put it:

Our governments chose to keep bad banks going and that is why quantitative easing has proven a failure. Quantitative easing failed because almost all the new money the government created has gone to shore up the balance sheets of irresponsible bankers. Now those banks sit on piles of idle cash while other businesses starve or cannot get started for want of credit.

It’s the same scenario that Japan has experienced for twenty years. They experienced a housing and stock market crash in 1990, bailed out their banking system, and growth never really recovered:

Ever since then, unemployment has been elevated:

That is the fate that Britain, Europe and America face by going down the Japanese zombification route: weak growth and elevated unemployment over a prolonged period of time. They face having the life sucked out of them by the zombie banks and corporations, and the burden of an every-growing public debt to finance more and more bailouts:


Instead of bailouts, we need to allow failed banks and corporations to fail and liquidate so that new businesses can take their place. Nature works best through experimentation. Saving zombie banks and zombie corporations kills experimentation, by rewarding failure, and preventing bad ideas from failing. If bad ideas and schemes cannot fail, it is impossible for good ideas and schemes to truly succeed.

The role of the government should be to provide a level playing field for experimentalism (and enough of a safety net for when experiments go wrong) — not pick winners. If experiments go badly, that is no bad thing: it just means that another idea, or system, or structure needs to be tested. People should be free to go bankrupt and start all over again with a different mindset and a different idea.

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No Capitalism on Wall Street

Herman Cain doesn’t understand the #OccupyWallStreet protests.

From ThinkProgress:

CAIN: I don’t have facts to back this up, but I happen to believe that these demonstrations are planned and orchestrated to distract from the failed policies of the Obama administration. Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself! It is not someone’s fault if they succeeded, it is someone’s fault if they failed.

Really? Wall Street is succeeding? You could have fooled me. The reality is that Wall Street’s largesse since 2008 has been underwritten by government. That’s why it’s so bizarre that Obama and Bernanke — two “system-saving” bailout architects have acknowledged sympathy for the protestors. Some of the protestors might be angry with the present system, and they may call that system capitalism, but there is no way that that is a fair description. As I wrote last month:

If government doesn’t allow banks that made bad decisions to be punished by the market, then the bailed-out zombie banks can rumble on for years, parasitising the taxpayer in the name of ever-greater bonuses for management, while failing to lend money, create new employment, or help the economy grow.

The global financial system isn’t working because there are fundamental structural problems with the global economy. These include over-leverage, the agency problem, trade deficits, failed economic planning, massive debt acquisition, Western over-reliance on foreign oil and goods, military overspending, systemic corruption, fragility and so forth. Stabilising the global financial system merely perpetuates these problems. The market shows that it needs to fail — preferably in a controlled way so that real people don’t get hurt — so that we can return to experimental capitalism, where good ideas prosper, and bad ideas don’t.

Bernanke’s organisation — the private Federal Reserve — pays a 6% dividend to member banks. That’s a staggering risk-free return on investment. Is it any wonder that banks won’t lend to small businesses or common people when the chosen few can just make easy money through having their funds sit at the Federal Reserve?

So no — Herman Cain is wrong. Protestors shouldn’t be blaming themselves for their “failure”. They should blame a system of government and monetary policy that gives money and favours to its friends. Call it crony capitalism, or corporatism or simply call it corruption.