Thursday, October 30, 2008

What’s So Bad About Socialism?

Barack Obama is offended that John McCain called him a socialist, as if the term were some kind of epithet. What’s so bad about socialism that politicians don’t want to be characterized as being in favor of it? Isn’t socialism about caring for the disadvantaged and being your brother’s keeper?

The conventional definition of socialism is in economic terms. It is an economic system in which the state controls and administers the means of production and distribution with a view to creating an egalitarian society. (Wikipedia) It is to be distinguished from capitalism. According to Wikipedia, “Capitalism is the economic system in which the means of production are distributed to openly competing profit-seeking private persons and where investments, distribution, income, production and pricing of goods and services are predominantly determined through the operation of a market economy in which anyone can participate in supply and demand and form contracts with each other, rather than by central economic planning.” The difference, then, is that in a socialist system the state controls the economy theoretically to produce an egalitarian society (in which those with the ability to produce support those who produce less) and in a capitalist system the state has no control and individuals are left free to pursue their own interests – state control versus freedom, and the goal of egalitarianism versus allowing the risks and rewards attendant to individual differences. In other words, socialists would force the more productive and affluent individuals (through taxation and regulation) to support those who are less productive and affluent. Capitalists would allow both the productive and the less productive to support themselves from their own efforts, abilities and conditions.

When controlling the activities of the state, the voters need to consider what kind of government they want – not only for their short term benefit (e.g., a government that allows me to vote money out of my neighbor’s pocket into my own) but also for their long term benefit (e.g., a government that does not inhibit achievement or reward dependency). And they also need to consider the morality of their choice. The Christian ethic preaches that one should be his brother’s keeper. Does that mean you should choose to be your brother’s keeper, or does it mean that you should coerce (tax and force) your neighbor to be his brother’s keeper?

In a recent article on the credit crisis in The New Individualist magazine, Eugene C. Holloway discussed moral hazard and the morality of the welfare state:
Alexis de Tocqueville warned that democracy would last only until Congress learned how to bribe the people with their own money. In the promises of the political candidates of the two major political parties, we see that this practice has now become ingrained. Beginning early in the history of the Republic, but exploding into the welfare state launched in response to the last great world financial crisis (also spawned by the Federal Reserve’s mismanagement), the federal government has pursued policies intended to relieve people of their personal responsibility to exercise due care, and has tried to eliminate reality’s harsh incentives, which train people to raise themselves from poverty. Not only has this not worked as intended and created a moral hazard among the beneficiaries; it has also preempted charity, good will, and benevolence. It has substituted inflation, taxation, bureaucratic control, government mandates, and political power for the work of voluntary organizations, cooperative associations, and philanthropists, causing people to resent being forced to become their brothers’ keeper. Where coercion is substituted for the freedom to choose, the morality of benevolence, charity, and good will is rendered irrelevant.

The ultimate moral hazard is the growing expectation that it is the role of government to bail people out of every sort of misfortune, stupidity, and vice—which, in logic, does nothing but encourage the growth of misfortune, stupidity, and vice. Correspondingly, it diminishes the role of virtue, morality, and benevolence in our culture.
Socialism would substitute government coercion for individual virtue, morality and benevolence. History has shown that it does not work. It is the tool of demagogues, power seekers and tyrants. And that is why Mr. Obama, who is more a socialist than Mr. McCain, protests being labeled a socialist.

Consider the definitions and judge for yourself who is a socialist. In fact, you can find few politicians who are not. Control is their stock in trade. Leaving people alone is not what they do.

Wednesday, October 15, 2008

Blame Capitalism?

When the bailout of Bear Stearns took place, Hank Paulson, Secretary of the Treasury, pointedly stated that he was aware of the problem of "moral hazard," the notion that bailouts just encourage risky behavior with other people's money. And he warned the market that no one was "too big to fail." He implied that he just might let someone fail to demonstrate that the Administration was not creating a moral hazard. To prove his point, Lehman Brothers was allowed to go under when that problem could have been handled just like Bear Stearns, notwithstanding Chairman Bernanke's statements to the contrary.

The pundits are now all pointing out, perhaps correctly, that it is fallout from the failure of Lehman Brothers that has resulted in the present seizing of the banking system. And they are blaming Paulson's wooden allegiance to free market principles (i.e., Capitalism) that caused the Administration to turn it's back on Lehman Brothers.

Wait a minute, folks! This is not Capitalism. None of it. It's economic fascism.

In the context of our corporativist/fascist economy -- which was constructed over the past century by the populists, collectivists, welfare statists, pro-fascist bankers and self-dealing big government politicians -- the appropriate short-term action for Paulson to have taken in mid-September 2008 would have been to bail out Lehman Brothers, moral hazard or no. Moral hazard started long, long ago. And Paulson's misguided token action has backfired.

It will take decades, maybe longer, and much popular and political will to deconstruct the impediments to free markets, to allow people to rise or fall on their own abilities without exploiting their neighbors, and to return to limited government. I will not live to see it. Nor will my children, nor yours. But you can make sure that the ideal lives on and that at least the trends show a popular understanding of the moral and practical efficacy of Capitalism, still an Unknown Ideal.

Saturday, October 11, 2008

The "Leaders" are Clueless

The more and more the “leaders” of the country and the world assume that it is their role to decide how to “fix things,” the crazier and crazier it makes me. Plato was wrong. There is no man or group of men wise enough and knowledgeable enough to command an economy to work effectively. They should just get out of the way. Recovering from their past mistakes will be painful but short-lived and humanity will be better off in the long run.

Now George Reisman is a wise and knowledgeable man. He has written a huge tome entitled “Capitalism: A Treatise on Economics” and he understands how it all fits together. But he would be the first to laugh at you if you asked him to fix the economy. He has a blog on which he occasionally posts his comments. I invite you to read his August 30 entry, “Barack Obama and Sarah Palin on Taxing Oil Companies and Giving the Money to Others.”

The younger folks with a thirst for knowledge and understanding ought to read Reisman’s treatise and take his course on the Theory and Political Philosophy of Capitalism.

Thursday, October 9, 2008

How To Go On Vacation

In February (2008) after six months of watching the financial markets, I began to warn my family and friends about a coming downdraft in the markets. The decline in real estate and banks had already begun but I held my tongue until I knew I would feel guilty if I didn’t speak out and let them know that it was only a small precursor to what seemed inevitable.

After I began my warnings, I learned that I was going to need some major surgery – under the knife for 5 hours and out for 8. So I called my broker and said, “I really don’t need to be worried about this kind of market with surgery and recovery and the like going on. So put me into cash.” “You mean sell everything?” “Yup. Everything” “We’ll put it into our money market fund at 2.5%.” “No, I would feel better if we just put it into greenbacks. I don’t know how your money market fund makes its interest and I don’t have time to find out.” “OK, how about we just send you a check?” “Great! A check would work.” And so, my good friend at Lehman Brothers sent me a check, which I spread around to a few sound banks.

The surgery was successful. But about that time a brigade of geniuses armed with Band-Aids to apply to the jugular of the financial system, which was spurting and gushing its life’s blood in the streets, rushed on to the scene, like the Keystone Kops, eliminating any possibility that I would even think about investing in equities until the panic was over. So I just sat on it.

Possibly spooked by the surgery, my wonderful spouse was ready with an alternative to preoccupation with markets and the like. She took the opportunity of my semi-retirement from the corporate world of 12 hour days and truncated vacations to force me into weeks at the lake, extended tours, class reunions, weeks of visiting the children and grandchildren, and holidays at the relatives’. We are having a worry-free time but are scheduled to be home less than half of the remainder of the year. And I have committed that remaining time to my former employer and a few clients. How in the world will I find time to evaluate markets and companies in which to invest that cash?

Well, maybe it’s not so bad after all. The Dow closed today at 8,579.19, a nasty drop from February and 40% below last year’s all-time high. But yesterday, one of the financial newsletters suggested that a short term bottom is near, calling it a “dead bull bounce,” which I guess goes up a bit higher than a dead cat bounce. Short term bounces still don’t sound good. I guess I’ll keep my powder dry until January and have a Merry Christmas and a Happy New Year.