Capitalism Vs. Socialism

Capitalism Vs. Socialism

March 8, 2009


One of the conclusions of the 20th century, perhaps, is that socialism doesn’t work — or, at least the “workers’ paradise” versions attempted (supposedly) by the Soviet Union or Cuba.

However, it is easy to forget why these things were attempted in the first place. They were attempted because: one of the conclusions of the 19th century was that capitalism doesn’t work.

This has been troubling me recently. I have been a sort of doctor of capitalist economies. This is much easier that being a real doctor, because typically the diagnosis is pretty easy and the prescription — low taxes, stable money — is almost always the same. (Despite that, however, good economic doctors are extremely rare, and for some reason it takes at least as much training to be effective as it does for a medical doctor.) I am pretty good with the sorts of problems related to this, but that leaves a whole set of other problems to be considered.

During the 19th century, Britain and, especially, the United States were exemplars of the effectiveness of capitalism, especially the low tax/stable money/low regulation variety. And what happened?

First, there really was an enormous increase in economic output, combined with radical advances in technology. This provided the backing of a large and effective military, which in turn allowed each to establish enormous empires — the British by sea, and the U.S. over continental North America and (more quietly) in a great many other places from Costa Rica to the Philippines. So it was too for the capitalist Roman empire. This tended to expand capitalism further, because areas would either be colonized, or had to become capitalist themselves to avoid colonization.

This is regarded as “success” by many, but the British Empire did little to benefit the great majority of British people. Mostly, it made things worse off, because a) it introduced large new pools of labor for competition, and b) directed capital investment towards the colonies rather than domestically, and c) they had to pay for the military by which this was accomplished. The capital outflows from Britain in the late 19th century were quite dramatic, and were accompanied by complaints from local working classes much as has been the case with “outsourcing” recently. The end result was a smaller, wealthier wealthy class, and a larger, poorer mass of working class.

What resulted was a system not much different than the aristocrat/peasant system of Europe, although it was based on industry rather than agriculture. Arguably, it was a lot worse for many people. The aristocrat/peasant relationships had a certain social contract, which included the expectation that one would do a certain amount of work and receive a certain amount of minimum benefit. Much of this went out the window in the decades of early industrial capitalism. There were a few wealthy people, and a great mass of workers who were not very well off. At least there was some mobility: a person from any background could conceivably enter the wealthy classes. However, despite the intense efforts of a great many people to enter the wealthy class, the size of this class never grew. Percentage-wise, perhaps 40%-70% of the people had it very tough, while only 1%-3% ever achieved the level where they could boast to the less-well-off that “anyone could do it.” Anyone, but not everyone or even 5% of everyone.

This video, the final episode in Kenneth Clarke’s marvelous series Civilization (BBC, 1969) is a decent summary of the 19th century. It’s a full hour long, but well worth sitting back and enjoying in its entirety:

Civilization 13: Heroic Materialism

I suppose about this time, certain people are already grabbing their wallet as the justifications for higher taxes are carefully stacked up. These battles have been going on for well over a hundred years now, and I am familiar with all the angles on either side.

For me, the most indicative statistic of this system was the simple number of hours worked per year in the 19th century:

We see that people worked 50% or even 100% more than in other time periods. It was a total anomaly. Was it just because people liked working more? Or, was it a new and virulent form of exploitation and oppression, as everyone at the time said it was? This created a great interest in resolving these problems, which began in about the middle of the 19th century and continued up to about the middle of the 20th. At the very least, we see that hours worked trended downward again in the 20th century.

Developments during that period included: the abolition of slavery; introduction of universal primary and secondary education; outlawing child labor; introduction of various welfare programs including food, shelter; public health, sanitation and workplace safety requirements; and eventually unemployment insurance, medical care and a public pension (Social Security); acceptance of unionization (and other means) to reduce work hours and raise wages. Roosevelt’s New Deal was not really an economic program, I argue, but the acceptance by the government of some of these principles and goals which had been around by a hundred years by that point. By the 1950s or 1960s, a reasonably good compromise was reached in the more successful countries — or, at least, the best compromise that has yet been accomplished. Since 1970 or so, there has been a slow tendency toward the worst aspects of both 19th century capitalism (economic exploitation) and the 20th century communist states (big, pushy, useless, thieving government).

The agent that was supposedly to resolve these 19th century problems was the Big Government. In the communist states, they got about as big as they could get. Elsewhere, they got a lot bigger, but not quite so large. About 40% of the U.S. economy is now government-related, up from perhaps 5% in 1900. The socialist types still seem to believe that there is some “income redistribution” involved. I see almost none. The Federal government is mostly involved in funding the military, outright theft, political payback (“pork”), corporate subsidy, and the debt incurred from the military, theft, pork and corporate subsidy of the past. By “outright theft” I refer to information that I have heard from insiders that about 25% of the Federal budget is channeled directly into secret government, black ops, and private accounts, without even passing through some sort of boondoggle. Note that numerous trillions in Defense Department spending alone seems to have disappeared without a trace, and it seems like nobody wants to investigate that either. The only meaningful “income redistribution” is Social Security and Medicare, both of which have run surpluses since inception (and thus can’t be blamed for the debt). You need to be over 65 to get any benefit from either of those. All the income is being “redistributed” to old people, a small fraction of the population. Which doesn’t seem to me like what the early socialists had in mind. Maybe it is just another form of theft, or a Ponzi scheme, or a healthcare industry payoff. Most welfare, and government services that people actually benefit from, takes place at the state or municipal level. It would be fun to see an estimate of how much of GDP goes into things that actually benefit people under the age of 65. By this I mean municipal services (education, police, fire, roads mostly) and basic safety-net welfare. I bet it is less than 10% — or it should be, if state and local employees were paid a sensible wage.

This big government has been accompanied by higher taxes, which have a negative effect at all levels. The early socialists thought that higher taxes on high incomes/wealth was something like a moral good. It might be something like that if it actually funded something useful. But, I don’t see what is so morally wonderful about funding the military/theft/pork/subsidy/waste. And, it really is true that lower taxes would also help produce the kind of capital-rich economy that has helped produce broad improvements in the past.

On balance, the socialist ideal is a better ideal, in my opinion, than the capitalist one. We could imagine, for example, a Native American tribe living in the Pacific Northwest. Probably there were some hunters of amazing skill and talent. And, probably there were some hunters who were chronically incompetent, and apparently incapable of improving. The great hunters would easily catch much more than they could eat. The hapless ones would regularly come up empty-handed. The great hunters would give the bad hunters some of their surplus. Why not? They enjoy hunting anyway, and it is easy to get more. If there was some sort of communal project, all would pitch in together to help each other out. Together, they found that they had more than enough resources to easily fulfill the requirements of living, and spent the rest of their ample free time enjoying themselves. The great hunters would have the most beautiful wives, and the bad hunters would be the butt of many jokes. But, besides that, they all lived at more-or-less the same level as equals and enjoyed a life of freedom and abundance.

This really does exist, whether in the Native American example or perhaps the communities of the Amish. However, it only seems to exist at the tribal level. Even then it is not guaranteed, as one could find many tribal peoples who are quite violent and unpleasant.

The failures of 19th century Capitalism and 20th century Socialism (Communism) are largely the same failures, it appears to me. Both became systems by which a few power-hungry people could exercise control over the masses, and concentrate wealth. “The masses,” for their part, participated in this process as well, as they seem uncomfortable without an overlord to define their environment, and actively seek one out if there isn’t one nearby. The first thing the French did, after chopping off the heads of their aristocrats and ending the old system of control, was to promote Napoleon to Emperor, and then rampage and pillage Europe all the way to Moscow. The advantage of the Capitalist system, as Adam Smith said, was that the process of accumulating power and wealth at least had some positive side effects. Instead of achieving glory in the manner of Genghis Khan or the legions of Rome, rampaging over the Eurasian continent and pillaging everything in sight, the successful capitalist produces some sort of good or service, and peacefully too. That’s the Capitalist ideal, anyway. In practice, it seems that many very wealthy actually just steal it, and the recent banking payoffs are a good example of that. I have documented various forms of economic rampaging and pillage of many places worldwide, which is not so much different from the Roman or Mongolian type except that people don’t necessarily die. There is much written about this process, for anyone that cares to look:

Naomi Klein: Shock Doctrine

John Perkins: Confessions of an Economic Hit Man

It appears, then, that whatever system may exist becomes inevitably corrupted by this dark energy of power and control. The socialist ideal is not that complicated or difficult. It’s as easy as making a cake. But you can’t make a cake with sand, and that is all it appears that we have to work with here. Thus far, I would say that Capitalism, as Adam Smith argued, is about the best we can do with what we have. Adam Smith’s ideal (published in 1776, exactly at the start of the Industrial Revolution), was one of independent small businesses and farmers. It became the Jefferson ideal as well. Super-large enterprises did not exist in those days. I think they had in mind something like a European version of the Native American example, of independent units operating without much of a central government or other centralized power. The outcome of this experiment was quite a bit different. So, we do need to find some sort of hybrid or tempered system.

Another aspect of industrial capitalism (as opposed to various capitalistic systems that existed before 1800) is: first, while the production of material goods proceeds unchecked, it doesn’t seem to produce meaningful abundance. “Needs” seem to soar higher with the ability to produce. These aren’t just superfluous needs either, like this year’s popular handbag. Many American families struggle — even with two incomes — with the basics of living, including housing, transportation, medical care and education. Second: the more we produce, the crappier it is. Just look at a blender or wafflemaker from 1955 and the present, or the clothes people wore in 1955 (or 1890) compared to today. I find this particularly irksome. You can go into a museum and look at the creations of the Native Americans or other tribal peoples, and they are quite elegant, sophisticated and well-made. This is particularly true for the most important creation, the city itself, which is about as crappy as can be. And I’ve written plenty about that. Alongside this, we must consider the continuing environmental degradation. Besides some very basic improvements — clean water, sewage systems and regular trash pickup, electricity, some (but not all) medical advances, and maybe air travel — I don’t see any meaningful material improvement in American life in the last century. This is another aspect in which capitalism of today doesn’t seem to work. It empowers material production, but retards and ultimately destroys civilization.

With the Democrats in power, these issues are closer to the forefront, and I’ve been thinking about them more. They will probably hack and barf and make a mess of things, but not so much of a mess that they don’t make off with a big pile of loot for themselves. Such as it is at the end of empire. Clearly, I don’t have well-formulated solutions, but we might at least find some better answers than what we’ve had so far.

* * *

Catherine Austin Fitts on the Great Global Heist: Like I keep telling you, it’s the same thing over and over. Same players too.

Just like this latest “public/private partnership”. Do you think Turbo Timmy dreamed that up while sitting on the pot? I figure the way I would game that system would be — counterintuitively — to buy banks’ crap assets at the highest possible price. The “private” buyers would be the sellers in disguise. You could even buy them for more than they are marked on the books, which would, oddly enough, create an accounting profit for the banks. Then, of course, some years down the road, when nobody is looking or cares anymore, it would be revealed that they were near-worthless. The “private” buyers would lose a little, and the U.S. taxpayer would lose a lot.

* * *

Printing Money + Other People’s Money = Printing Other People’s Money!

This is so ridiculous it’s like reading the Onion. But it’s the BBC! This is like some sort of central banker CDO-squared. By the way, the BoE just got into the printing money — ahem, “quantitative easing” — game, with the announcement that it would deliver up to 150 billion pounds of that sweet, sweet helicopter medicide by buying up government and corporate debt in the open market

Ted Truman, formerly a senior official at the Federal Reserve and US Treasury, is pushing for a huge – $250bn – allocation of SDRs to respond to the crisis.

He says that about $17bn would flow to the poorest economies, and $80bn to other developing countries.

A traditional argument against such allocations is that the money would be unconditional – you couldn’t stop countries wasting the funds.

But Mr Truman thinks that’s a plus in a world where many countries need to act to stimulate their economies but don’t have the cash.

The other main objection is that it is inflationary: after all, it is the global equivalent to a central bank deciding to print money.

However, it would significantly increase developing countries’ access to international resources.

It would be cheap.

And it wouldn’t require the approval of the US Congress.

There’s something scary about the idea that printing $250 billion in currency “would be cheap.”

* * *

Eurozone breakup? I doubt it. There seems to be a notion that the euro — the currency — will “fracture” somehow. Do people expect the euro notes in their pockets to burst into confetti? The whole point of having a single currency, instead of a system of currency boards or something else which could indeed blow to pieces when it is inevitably mismanaged by incompetents, is that such problems are permanently solved. For a country to leave the eurozone, there has to be rather deliberate legislation involved, and presumably the introduction of a new currency unless they plan to go to barter. I think this would be the last thing the government of Portugal or Greece would want, especially in a crisis or semi-crisis. The euro itself could decline in value precipitously, but it won’t fracture.