A new BBC poll finds that only 11 percent of people questioned around the world – and 29,000 people were asked their opinions – think that free-market capitalism is a good thing. The rest believe in more government regulation. Only a small percentage of the world’s population believes that capitalism works well and that more regulation will reduce efficiency.

One-quarter of those asked said that capitalism is “fatally flawed.” In France, 43 percent believe this. In Mexico, it is 38 percent. A majority believes that government should rob the rich to give money to poor countries. In only one country, Turkey, did a majority say that less government is better.

It gets even worse. While most Europeans and Americans think it was a good thing for the Soviet Union to disintegrate, people in India, Indonesia, Ukraine, Pakistan, Russia, and Egypt mostly think it was a bad thing. Yes, you read that right: millions freed from socialist slavery: bad thing.

That news must lift the heart of every would-be despot the world over. And it comes as something of a shock twenty years after the collapse of socialism in Russia and Eastern Europe revealed what this system had created: backward societies with citizens who lived short and miserable lives. Then there is the China case, a country rescued from bloody barbarism under communism and transformed into a modern and prosperous country by capitalism.

What can we learn? Far from not having learned anything, people have largely forgotten the experience and have developed a love for the ancient fairytale that all things can be fixed through collectivism and central planning.

As to those who would despair at this poll, consider that it might have been much worse were it not for the efforts of a relative handful of intellectuals who have fought against socialist theory for more than a century. It might have been 99% in support of socialist tyranny. So there is no sense in saying that these intellectual efforts are wasted.

Ideas also have a life of their own. They can lie in waiting for decades or centuries and then one day, the whole of history turns on a dime. Especially these days, no effort goes to waste. Publications and essays, or any form of education, is immortalized, ready for the taking by a desperate world.

As for the opinion poll, we have no idea just how intensely these views are held or even what they mean. What, for example, is capitalism? Do people even know? Michael Moore doesn’t know, else he wouldn’t be calling bailouts for elite, Fed-connected financial firms a form of capitalism. Many other people reduce the term capitalism to: “the system of economics in the U.S.” It is no more complicated than that. This is despite the reality that the U.S. has a comprehensive planning apparatus in place that is directly responsible for all our current economic troubles.

Now, let’s take this further. Among the people around the world who do not like the U.S. empire, many believe they don’t like capitalism either. If the U.S. economy drags the world down into recession, that is a prime example of capitalism’s failure. Even more preposterous, if you didn’t like George W. Bush, his ways and his cronies, and Obama is something of a relief, then you don’t like capitalism and you do like socialism.

Another point of view misunderstands the idea of capitalism itself. It is not about creating economic structures that benefit capital at the expense of labor or culture or religion. It is about a system that protects the rights of everyone and serves the common good. Capitalism is just the name that happened to be identified with this system. If you want to call freedom a banana, fine. What matters is not words but ideas.

I do know that none of these messed-up definitions of capitalism follow. You know this too. But for the world at large, serious ideological analytics are not the animating force of daily life. Many people attach themselves to vague slogans.

Further, as Rothbard has forcefully argued, free-market capitalism serves no more than a symbolic purpose for the Republican Party and for conservatives. Economic liberty is the utopia that they keep promising to bring us, pending the higher priority of blowing up foreign peoples, jailing political dissidents, crushing the left wing on campus, and routing the Democrats.

Once all of this is done, they say, then they will get to the instituting of a free-market economic system. Of course, that day never arrives, and it is not supposed to. Capitalism serves the Republicans the way Communism served Stalin: a symbolic distraction to keep you hoping, voting, and coughing up money.

All of which leaves true capitalism – a product of the voluntary society and the sum total of all the exchanges and cooperative acts of people all over the world – with few actual intellectual defenders. They are growing, but the educational work we need to do is daunting, and we are facing the most powerful forces in the world.

There is nothing new in this. In the history of the world, freedom is the exception, not the rule. It must be fought for anew in every generation. Its enemies are everywhere, but the leading enemy is ignorance. For this reason, the main weapon we have at our disposal is education.

Education includes explaining that socialism is an unworkable idea. There is nothing better than Ludwig von Mises’s 1922 book Socialism, a comprehensive presentation of the fallacy of the socialist idea. Another essential work is The Black Book of Communism. Here we have a wake-up call that shows that the dream of socialism is actually a bloody nightmare.

Then there is the issue of the positive case for capitalism. One can do no better than Mises’s own Human Action, which is not likely to ever be surpassed as a treatise on the free economy. True, it is not for everyone. And that’s fine. There are many primers out there too.

The fashion for socialism and the opposition to capitalism should alarm every lover of freedom the world over. We have our jobs cut out for us, but with numbers this bad, it is not difficult to make a difference. Every blow you can land for free markets helps protect freedom from its enemies.

Regards,
Llewellyn H. Rockwell, Jr.

November 13, 2009

Editor’s Note: This article orginally appeared as “The Triumph of Socialism” on LewRockwell.com. To view the original article, please click here.

The Triumph of Socialism, the Misunderstanding of Capitalism was originally featured on Whiskey and Gunpowder

Our views are different, but not extraterrestrial. Once upon a time, not so long ago, they were even respectable. The gist of our message two weeks ago was that debt is dangerous. It feels good at first. But give a society too much debt – either in its private sector or the public sphere – and someone’s going to get killed. That’s why the present situation is such a delight to serious economists; it offers more data points. We get to see how much straw the feds can add before the poor camel’s back breaks.

What’s the best way to get through a debt crisis? Straight through was our advice last week. For at least a thousand years, the business cycle went round and round without help from central bankers or economists. It is only since these geniuses have been on the case that really serious problems have arisen. The Panic of 1920 – in which the US government did nothing but cut taxes and spending – was quickly forgotten. The Panic of 1929, on the other hand, was followed by massive rigging and jiving by the authorities. It took 20 years and a world war to overcome; today it is still remembered today as the Great Depression.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely -but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode. The economy had been kissed hard; millions of houses had been built, bought and sold. Now, owners couldn’t pay for them. All of sudden, the counterfeit money began to shrivel up. Lenders, investors, and householders all began to de-leverage; paying down the debts as fast as they could, defaulting on those they couldn’t.

Rather than come to the obvious conclusion, that they should never have meddled with the economy in the first place, the feds began rescue operations on a breathtaking scale. The British government increased spending to 140% of revenues. America now runs a stimulus program nearly equivalent, in economic impact, to WWII. Not since 1945 have the two pages of its ledgers – debits and credits – told such different stories, with almost $2 of spending for ever $1 in tax receipts. Britain will add almost 50% to its government debt in the next three years. David Stockman expects the publicly held US national debt to almost double in the next five years.

Even at those levels, many economists think the government should do more. Nobel Prize winner, Paul Krugman is one. Richard Koo is another. They’ve warned that the US (and by extension much of the rest of the world) could suffer a Lost Decade, like Japan, if the government slacks off before consumers have finished de-leveraging. At least they understand what is going on. Too bad they missed the point of it. The problem is too much debt, not too little spending. Leveraging up the public sector doesn’t help. Even government debts must be paid – if not by the borrower, then by the lender. The feds are smooching more ardently than any debt lover in history; next, we get to see who dies…or at least who defaults.

Regards,
Bill Bonner

November 4, 2009

Editor’s Note: The above article originally appeared in The Daily Reckoning as “The Kiss of Debt.”

Debt Is Dangerous, Especially of the Government Kind was originally featured on Whiskey and Gunpowder

On Wednesday, the day before the G-20 opened, I drove through the Oakland section of town, home to the University of Pittsburgh and Carnegie Mellon University. There were squads of state troopers on every block. It was just a long, gray line of troopers, with their distinctive “Smokey Bear” hats. Along some blocks, there were more troopers than college kids. Nothing to see here, folks. Just move along. Oakland was safe.

The other good news was that if you were out driving on the Pennsylvania Turnpike, there were few troopers on road duty. You could go pedal to the metal. As in, you could finally figure out how fast that Buick Fireball 3800, Series II, L-67, supercharged, V-6, 220-horsepower engine could take you. Not that I know anything about anybody doing something like that. Nope.

Down with Plate Glass… Ummm… I Mean Capitalism!

On Thursday afternoon, a few protesters tried to march through a Pittsburgh warehouse district toward the downtown convention center. But they were met by platoons of police in “tactical” dress — ninja armor, riot helmets and long batons.

From what I saw, on Thursday, there were more police than protesters. I think there were more news reporters than protesters, as well. Still, in the name of anti-globalism, a few windows got smashed here and there. Down with capitalism and plate glass, and all that.

The cops revved up and used a new device (new to me, anyhow) called a sound cannon. It shoots a directional sound wave that’s noisy as hell and very disorienting. Worked as advertised. First time it’s ever been used in the U.S., I’ve been told. Probably won’t be the last, if you know what I mean.

Not to be overly judgmental, but the protesters were pathetic. Really, I’ve seen protests, and these guys were amateurs. Thursday’s protest activities, for example, included the young waifs tossing rocks at such noted Pittsburgh corporate criminals as Lu Lu’s Noodles and Pamela’s Diner. Also, a few sticks and stones went through the glass of that notorious oppressor of the poor, Boston Market. “Down with chicken! Down with chicken salad!”

Dudes, is that your best shot? Really. Whatever happened to, “The people, united, will never be defeated”? Put your ball cap on straight, pull your trousers up, and PROTEST like you MEAN it!

To be fair to the protesters, someone managed to score a hit on an A-list target by tossing a brick through the window of a BMW dealership. And we all know how BMW has wrecked the hopes of mankind, right? Right-on, right? Power to the people, right?

Black Masks and F-15s

That Friday, the G-20 world leaders gathered around a VERY large circular table. They all read from written scripts, except for President Obama, who used a teleprompter. Then they all issued a communiqué. More on that below.

There was rumbling jet noise all day, as Air Force F-15 Eagles flew combat air patrol overhead. They were guarding the earthly bigwigs from wayward airliners piloted by any hardened ideologue who may have smuggled a pair of nail clippers or an oversized tube of toothpaste past the TSA screeners at Boston Logan, or Newark Intl.

One Eagle driver surely earned his flight pay and a commendation, if not an air medal, by dropping flares near a Cessna 152 that was following Interstate 79 west of Pittsburgh. Turns out that the little prop-job broke airspace restrictions and wound up getting escorted to Wheeling, W.V., for a visit with the nice people from the Secret Service. I can hear him now. “Hey, it’s IFR flying. As in the expression, ‘I follow roads.’”

As the air war raged overhead, back on the asphalt, the Friday protesters staged another march. Many wore black jeans, black sweatshirts, black face masks, black gloves, dark glasses, and even dark hard hats. I know it’s not right to label people, but it seemed to be more than a mere group of youths out on a frolic while collectively making a fashion statement.

As these men in black (and women, to be sure) marched through the Bloomfield section of town — Pittsburgh’s Little Italy — something happened that was right out of a movie script. Local home and business owners appeared at their front doors, holding baseball bats and garden shovels. The message was clear. Toss a brick, and you’ll get your arm broken, or maybe lose a few teeth. Forget the sound cannon. That’s one way for a city to keep its disobedience at the “civil” level.

Friday Night Lights

By Friday night, after the G-20 was officially over, the protesters were ready to party. So they went to Oakland and tried to trash the place. Too bad for these revelers, but there were still a couple thousand cops walking the beat. There were cop cars all over, with lights winking and blinking. The festival culminated in a protester roundup on the lawn in front of Pitt’s iconic — and, in this case, ironically named — Cathedral of Learning.

According to the Pittsburgh Police, there were 190 arrests related to G-20 over three days. The number pales to insignificance compared with other world venues for similar meetings. Then again, in how many other cities will homeowners break out the baseball bats and garden shovels to keep the protesters in line?

Pittsburgh locals accounted for 91 of the arrestees, with 99 from out of town. It appears, in the aftermath, that a number of those busted were innocent nonprotesters who came out to take a look and got caught up in various police sweeps. This included a few members of the news media, and even a Pitt videographer who was recording the protests for the university’s insurance carrier.

The G-20 Results — a Communiqué!

So what did the G-20 accomplish, besides spending $35 million in the Pittsburgh area on hotel rooms, food and other support? (Plus another $20 million budgeted for security — see above.)

Well, there was a communiqué. Whew. Close call. Had me worried for a time. OK, it was a darn good communiqué! All’s well that ends well. It was worth the hassle. Or so they say.

In the G-20 communiqué, the U.S. said that it would take the lead in phasing out subsidies for fossil fuels. The rest of the world said, essentially, “Yeah. Right. Go ahead. Do it. Whatever that means.” What does it mean, by the way? It’s not entirely clear. I think that “phasing out subsidies” is a smoke screen (whoops, bad metaphor) for raising taxes on oil companies.

As sure as the sun rises in the east, you can count on the current U.S. political class to raise taxes on oil companies. There’s a political class in the U.S. that just HATES oil companies. Must be something in the water, so to speak. The rest of the world doesn’t care. “Go ahead, U.S.,” they say. “Tax your oil companies into the dirt.” That just makes it easier for other up-and-comers to compete and profit (which is why those up-and-comers are in the OI portfolio and why my subscribers to Outstanding Investments will benefit).

Everybody at the G-20 also agreed that the International Monetary Fund (IMF) would set up a fund to help with development in poor countries of the world. How noble, right? But wait a minute. Did anybody tell the protesters? There they were, marching through Lawrenceville to help the poor countries of the world, and in the process getting their eardrums busted by a sound cannon. All the while, the G-20 was coming up with a program to help the poor. Hey guys, listen up! (Whoops. You’re deaf. Sorry. My bad.)

Next question, though, is where will the IMF get the funds to set up this development fund? There were some vague references to something about selling IMF gold. That’s right. Get rid of that barbarous relic. Who needs gold anymore, anyhow? Sell the gold. Raise cash to lend to the poor nations for development.

Now the next part is a little tricky. Who’s going to buy the gold? That decision wasn’t exactly spelled out in the precise wording of the communiqué. But rumors are that the Chinese agreed to bite the bullet and take that barbarous gold off the hands of the IMF. Whew! Had me worried.

Calling for Mogambo Guru

The G-20 communiqué also delved into the current world recession, and the global policy response. Here’s some of the exact wording:

“We cannot rest until the global economy is restored to full health, and hardworking families the world over can find decent jobs.

“We pledge today to sustain our strong policy response until a durable recovery is secured. We will act to ensure that when growth returns, jobs do too. We will avoid any premature withdrawal of stimulus. At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility.”

Let’s dissect this. The G-20 gang are not going to “rest.” Not until “the global economy is restored to full health.” I think we’re going to have some very tired G-20 people on our hands. If they’re really not going to rest, I want to know if there’s enough NoDoz in the whole world to support this commitment.

Then, they’re going to “sustain” their “strong policy response” until a “durable recovery” occurs. Meanwhile, they’ll keep the “stimulus” flowing. (Stimulus? Have you seen it? I must’ve missed it.) And do it all while “maintaining our commitment to fiscal responsibility.”

Wow. They’re going to spend stimulus money, but do it with fiscal responsibility. OK, if you say so, boss.

Then again, where’s Mogambo Guru when you need him? This communiqué overflows with total cognitive dissonance. It’s incoherent. It babbles. It flies in the face of reality. It was obviously written by a committee, pulling 3-by-5 cards out of a hat, and on the cards were written every feel-good political bromide known to modern man.

This communiqué is an embarrassment. It makes it look like the police used the sound cannon on the people who wrote it. It’s as if the drafters were blinded by the flares from the F-15. For this kind of pabulum, the owners of Lu Lu’s Noodles had to get their windows broken?

Since I can’t find the Mogambo Guru, I’ll just quote him. “We’re all freaking doomed. Buy gold. And if you can’t buy gold, buy silver. Or oil.”

Until we meet again,
Byron King

October 7, 2009

G-20, Protesters, Sound, Fury was originally featured on Whiskey and Gunpowder

So just when did the collision of Western Civilization with the iceberg take place? This is not as easy as easy to answer as it is to ask but I will point to 1968 as possibly one of the most pertinent and defining moments. It was the point in time at which the over-indulged baby boomers were coming of age.  That this youth was so pampered arose partly from the fact that their parents had witnessed the depression and wanted their children not to suffer any such deprivations.  It seems in retrospect that they may have gone to the other extreme.

It is quite natural that young people revolt against something and in this case, propelled unconsciously or otherwise by the Frankfurter School of thought, at that time very much the dominant Zeitgeist, found themselves revolting against the so called traditional values of all the generations which had preceded them.  That is, they revolted against Western Civilization per se. Many of us recall only too well the slogan of the era “Fee fi fo, Western Civ has to go”, a slogan which could be heard accompanying demonstrations on the streets etc, thus enabling an era of moral relativity to be ushered in. Faint protests from disenfranchised traditionalists were brushed off summarily and abandoned to their drowning fate accompanied mostly by ridicule in addition.

Now that we have an international economic crisis, it may well be relevant to look at history in this respect. Moral decline has always been followed by economic decline.  In this case, moral relativity has crept into the financial markets, thus rendering their demise inevitable. Capitalism doesn’t function without very strict adherence to a code of ethics which is based on those much derided traditional values.

But there is a certain irony which may arise from the possibility of the sinking of the ship of Western Civilization. It is perhaps not impossible to compare the actions of that very astute father on the Titanic, with those members of Western Civilization who have indeed noticed that   the ship may have struck an iceberg and have acted accordingly to at least salvage something by so doing. As the father of the last, recently deceased passenger on the Titanic nearly one hundred years ago, they have become aware of the collision and have tried to take appropriate counter steps. One such step could be the abandonment of fiat paper money in favor of tangible assets and finances in the form of gold and silver or other such measures.

The ultimate irony may well be though that those who were completely submerged in the mores of the sixties and so proud of the ability of man’s reason alone to control his political and economic destiny could well be doomed to go under with the sinking ship and those who were ridiculed may just have a chance of survival (be it financial, physical or psychological)

Finally, the last irony of all may well be that were any of the thinkers of the Frankfurter School able to see how Western Civilization has become engulfed in a deluge of decadence, hubris, pride and a tsunami of DEBT and thus probably on its way under. Although they were all ardent Marxists, one wonders whether they, well known lovers of Western Culture in general and music in particular (Theodor Adorno), would also not feel a tinge of sadness, chiming in thereby with many of us who do not otherwise share their Weltanschauung.

Regards,
Elizabeth Brinsden

June 8, 2009

Western Civilization and the Titanic was originally featured on Whiskey and Gunpowder

And now, it’s broke. And even politicians think they know how to run an auto company. Just read the papers. “Obama insists on changes,” says one headline.

Normally, the politicos should hold their tongues…and let an industry’s owners run their businesses. Alas, as of a few days ago, the politicians ARE the owners.

Here’s a question:

When the government takes a majority stake in the auto business you know you are:

A) In a bad dream
B) In a bad way
C) In a bad country
D) In France

Correct answer: well, we we’re not in France. But as for the rest, it could be any of them…or all of the above.

Here’s an easier question. Who will the U.S. government put on the board of directors of General Motors?

A) A political hack
B) An industry hack
C) A far-sighted maverick who will shake up the business and put it on the road to growth and prosperity

If you answered “C” – you are from another planet. There is a reason neither governments, nor workers should own businesses. In the following, roundabout way, we explain why…

Thirty-two banks have shut down so far this year in the United States. Little, mismanaged banks go broke. But big, mismanaged banks get federal money. With these subsidies and bailouts, the big banks get larger…and live to foul-up another day.

Poor Warren Buffett seemed a little discouraged at his annual shareholders’ fest in Omaha. He must be nearing the end of his career. And consumers just aren’t buying as much furniture, cola, and candy as they used to, he told the faithful. Berkshire Hathaway’s profits were 10% below those of last year.

Swine flu seems to be disappearing from the front pages. Has it gone the way of Y2K and terrorism? Has another great disaster been averted? Might be too early to tell…

Oh you doomers and gloomers, cheer up! There’s always some other disaster waiting for a headline. How about this? The Seattle Times looks at Las Vegas and sees what it calls “the next global crisis.” After 10 years of drought, Las Vegas is running out of water.

The city fathers are thinking of all sorts of solutions – except, of course, for the obvious and effective one. They’re planning on huge pipelines…hundreds of miles long…and sucking water out of aquifers millions of years old. But, according to the paper, Las Vegas charges only about a tenth as much for its water as Atlanta does. The simple solution is to let free enterprise provide water…so that it could be priced correctly.

Colleague Chris Mayer has been following the water crisis story since the introduction of his newsletter, Mayer’s Special Situations, in 2006.

“Water is not just a problem in Las Vegas. The lack of sources for fresh water is a problem facing much of the American West, though the problem is particularly acute there and in the state of Nevada generally. Nevada is the most arid state in the union,” says Chris.

“The tight water supply has implications all over the West. In Arizona, you can’t build a residential development unless you find a ‘designated assured water supply’ that can sustain that development for 100 years. I could go on and on about this kind of thing. Suffice it to say, the American West faces a water crisis.”

Maybe the increase in water prices would discourage people from planting Georgia-style grass lawns in the Nevada desert. Or maybe it would discourage people from moving to Las Vegas in the first place. But that’s the thing with capitalism; it doesn’t take people where they want to go…it takes them where they ought to be. That’s also why people hate free enterprise so much. Where they ought to be is, often, where they least want to go. In the present example, people think they have a right to water – practically for free. They think there’s a ‘water clause’ in the Constitution that says government is supposed to provide them as much water as they want at a price they can afford.

Most things work better when they are run by private enterprises. Too bad. Free enterprise is out of style. The days of privatizing are over. Now, everyone wants the government to take charge.

What a turnaround from a few years ago – when people thought they could solve practically every problem by privatizing it. And then, the voters would buy shares in the newly privatized companies…and we’d all get rich!

“For water, the really bad stuff hasn’t happened – yet,” says Chris. “As investors, it’s a good place to be for a long time.”

Chris’ ‘blue gold’ plays in the Mayer’s Special Situations portfolio have done well. And as he said, this is a play for the long-term investor. To learn about his water plays, and the rest of the MSS portfolio, see here. MSS Chaffee Royalty

The proletariat began buying stocks in the ’80s. The ’shareholder nation’ was a dream of Maggie Thatcher and Ronald Reagan: Everyman a Capitalist.

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds…or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers – who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn’t mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich…and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the ’80s, realized how it worked, he was outraged; ‘they make money in their sleep,’ he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. “Buy stocks,” thundered Wall Street.

And so…the little guys piled in….and stocks soared.

“Buy and Hold,” the pros told them. “Stocks for the Long Run,” wrote professors of finance.

Of course, some people wanted to make money faster. So ‘day trading’ became popular in the late ’90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the ’80s and ’90s, too, people began to believe that you could motivate workers by giving them “a piece of the upside.” And the workers, too, believed they might get rich if they had a stake in their employer’s company. Especially in the financial sector, ‘results-based compensation’ caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened…well, that would be the owners problem, wouldn’t it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners – including the new capitalists – wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits – so they could exercise their stock options and pay themselves big bonuses. They were all ‘capitalists’ – but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high…he’d want to move to a lower-cost production center. And if the managers asked for too much – he’d fire them and get new ones.

But neither the working stiffs nor the suits shared the owners’ interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries…GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn’t allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century – suppressing earnings in the short term in order to make the company stronger later on – its bonus- seeking, option-driven managers wouldn’t permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you’re wondering what that means in today’s world, you’re not alone. We’re wondering too.

Regards,
Bill Bonner

May 7, 2009

How Unions and Governments Destroy Businesses was originally featured on Whiskey and Gunpowder

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

- Karl Marx, 1867, Das Kapital

That quote is almost assuredly bogus. We haven’t tormented ourselves by re-reading sections of Das Kapital. Once in college was enough. This quote, though, has been making the rounds on the Internet, as if Marx and his minions somehow knew all this was coming.

Whether the analysis is accurate is a separate question from whether Marx ever wrote it. German is a torturous language to read in translation, full of compound sentences and words. And it’s highly unlikely, writing in the late 19th century, that Marx would have referred to the working class buying houses and technology. The horseless carriage hadn’t even been invented yet, much less the iPod, the BlueRay, or the George Foreman grill.

Nope. This is a clever bit of revisionism by some unemployed Marxist student or tenured professor trying to discredit the free market while rehabilitating the Marxist playbook. Marx did indeed say capitalism would eventually evolve into socialism and finally communism. He claimed it was riddled by contradictions which made the system inherently unstable.

But his theory was evolutionary, based on his views of human nature and a rational “homo economicus.” Like Adam Smith, Marx was a materialist who defined wealth in terms of physical goods. Thus, his view of human nature is rather material too, which explains his atheism.

In any event, the Austrians (especially Rothbard) would point out that the boom-bust feature of capitalist economies is not inherent in the system, but is actually a product of the government’s manipulation of interest rates. This changes the price of money and causes risk-taking entrepreneurs to miscalculate the underlying demand for their production.

Thus, you get a massive, credit-induced production bubble, global in scale with resources devoted to supplying a fictional demand. It happened with residential real estate in the U.S. and Europe. It’s happened with commercial real estate in China. And it probably happened all along the commodity supply chain, as raw material demand increased for the production of finished goods made in China for Americans who bought on credit.

That isn’t to say you wouldn’t have normal cycles of growth and recession in an economy with natural interest rates. But in an economy with natural interest rates, the cost of capital would go up during a recession. Bankers would get more prudent with their lending as the market place sorted out which lending resulted in productive new enterprise and which businesses failed.

The bad investments would be written down and eventually new demand for capital from entrepreneurs would resume. At least, that’s how the Austrians drew it up. Today, of course, we are engaged in the great global project of trying to prop up investments gone bad, whether they be in residential American real estate or the collateralised bonds based on that real estate that currently reside like dead weight on balance sheets all over the globe.

No amount of rearranging is going to improve the quality of those debts. But that won’t keep political busy bodies from trying—and wasting even more time and capital.

Stocks in the U.S. were up overnight. Here in Australia, the blind are following where the deaf boldly lead. But is anyone listening? Or is everyone too busy hoping?

What we’re talking about are Ben Bernanke’s comments. The news headlines read that he predicted the recession will end later this year and the American economy will recover in 2010. But that’s not exactly what he said.

Here exactly is what he said, “If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stabilityand only if that is the case, in my viewthere is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.”

If you wanted to put it another way, it might go like this: If our plan is successful to solve all the problems, then all the problems will have been successfully solved according to the plan.

How inspiring is that? Does it give you confidence that these guys have any idea what they’re doing?

What the system needs is more instability, not less. That is, prices and asset values need to fall to their real level to restore confidence. In this sense, a proper recession is the cure for uncertainty and instability.

Yes, we know this is in direct contradiction to what elected officials are telling you. But think for a moment of a man who’s done nothing but eat greasy and fatty foods for a year. He’s on his deathbed. His arteries are clogged with fat and cholesterol.

Now you couldn’t improve the man’s health by telling him to feel better about himself. “C’mon big fella. Buck up! Have another cheeseburger. With bacon. And avocado. This whole being morbidly obese and killing yourself thing is all in your head. You gotta get your mind right!”

You could tell him all that. But it would be bad medical advice. In the same way, our financial mal-practitioners have mis-diagnosed the economy. Confidence is not the problem. Bad credits and loans are the problem.
You restore confidence when you directly address the problem. Investors get out of cash and back into shares or property when they have demonstrable proof that the banks aren’t hiding/lying any longer.

Or, as Murray Rothbard puts it in America’s Great Depression, “The completion of liquidation removes the uncertainties of impending bankruptcy and ends the borrowers’ scramble for cash. A rapid unhampered fall in prices, both in general, and in particularly in goods of higher orders (adjusting to the mal-investments of the boom) will speedily end the realignment processes and remove expectations of further declines.”

But instead of realigning with economic reality, our policy makers are acting as if it is possible to sustain all the bad investments made during the credit boom. They want to save homeowners, shareholders, bondholders, and pretty much anyone who stands to lose from the risks gone bad.

That is not possible. Someone has to pay for the bad bets made in subprime loans, Eastern Europe, or the developing world. That someone is probably a) the guy who took out the mortgage he can’t repay, b) the bank who made the loan to the guy who took out the mortgage he can’t repay, c) the investor who bought the bond sold by the bank who made the loan to the guy who took out the mortgage he can’t repay.

Evading responsibility for one’s actions doesn’t solve anything. Making other people pay for them doesn’t help much either. Of course we’re all going to pay for it one way or another, through more bailouts or the general contraction in credit and growth that has to come during the “realignment process.”

But those appear to be the two choices: allow failure, which allocates resources from the bad debts and losers to those who can produce real wealth. Or, try to “stabilise” any inherently unstable situation (perpetuating asset values after the credit spigot has been turned off).

Not that we’re absolving market institutions for getting us into the problem. The credit ratings agencies essentially sold investment grade ratings on issues they didn’t or couldn’t understand. AIG sold default insurance on CDOs to make an easy buck. It’s now become a black hole for taxpayer capital.

But that is fictitious financial capitalism at work, or at waste if you prefer. That kind of financial capitalism is dead, and good riddance. But don’t mistake that episode of mismanagement and theft for conclusive proof that “capitalism” has failed. That would be a big mistake.

But the commies are feeling their oats these days. Yes, the commies are back in the DR mailbox. They’re in the paper. They’re even on TV. We saw a report on them last night and how their explanation of the financial crisis validates what they’ve been saying all along.

Regards,
Dan Denning

February 26, 2009

Here Come the Commies: Marxism Goes on the Attack was originally featured on Whiskey and Gunpowder

At one level, Atlas Shrugged is a steamy soap opera fused into a page-turning political thriller. At nearly 1,200 pages, it has to be. But the epic account of capitalist heroes versus collectivist villains is merely the vehicle for Ms. Rand’s philosophical ideal: "man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute."

In addition to founding her own philosophical system, objectivism, Rand is honored as the modern fountainhead of laissez-faire capitalism, and as an impassioned, uncompromising, and unapologetic proponent of reason, liberty, individualism, and rational self-interest.

There is much to commend, and much to condemn, in Atlas Shrugged. Its object — to restore man to his rightful place in a free society — is wholesome. But its ethical basis — an inversion of the Christian values that predicate authentic capitalism — poisons its teachings.

Mixed Lessons from Rand’s Heroes

Rand articulates like no other writer the evils of totalitarianism, interventionism, corporate welfarism, and the socialist mindset. Atlas Shrugged describes in wretched detail how collective "we" thinking and middle-of-the-road interventionism leads a nation down a road to serfdom. No one has written more persuasively about property rights, honest money (a gold-backed dollar), and the right of an individual to safeguard his wealth and property from the agents of coercion ("taxation is theft"). And long before Gordon Gekko, icon of the movie Wall Street, she made greed seem good.

I applaud her effort to counter the negative image of big business as robber barons. Her entrepreneurs are high-minded, principled achievers who relish the competitive edge and have the creative genius to invent exciting new products, manage businesses efficiently, and produce great symphonies without cutting corners. Such actions are often highly risky and financially dangerous and are often met with derision at first. Rand rightly points out that these enterprising leaders are a major cause of economic progress. History is full of examples of "men who took first steps down new roads armed with nothing but their own vision." In the novel, protagonist Hank Reardon defends his philosophy before a court: "I refuse to apologize for my ability — I refuse to apologize for my success — I refuse to apologize for my money."

But there’s a dark side to Rand’s teachings. Her defense of greed and selfishness, her diatribes against religion and charitable sacrificing for others who are less fortunate, and her criticism of the Judeo-Christian virtues under the guise of rational Objectivism have tarnished her advocacy of unfettered capitalism. Still, Rand’s extreme canard is a brilliant invention that serves as an essential counterpoint in the battle of ideas.

The Atlas characters are exceptionally memorable. They are the unabashed "immovable movers" of the world who think of nothing but their own business and making money. "…I want to be prepared to claim the greatest virtue of them all — that I was a man who made money," says copper titan Francisco d’Anconia. But these men are regarded as ruthless, greedy, single-minded individualists. They are men (except for Dagny Taggart, who could be confused for a man) who always talk shop and give scant attention to their family. In fact, no children appear in Rand’s magnum opus.

Her chief protagonist, John Galt, is an uncompromising superman. He is the proverbial Atlas who holds the world on his shoulders. He has invented a fantastic motor, yet is so frustrated with state authority that he withdraws his talents — hence the title, Atlas Shrugged — and spends the next dozen years working as a manual laborer for Taggart International.

Mr. Galt somehow succeeds in getting the world’s top capitalists to go on strike and, in many cases, strike back at an increasingly oppressive collectivist government. Rand’s plot violates a key tenet of business existence, which is to constantly work within the system to find ways to make money. Real-world entrepreneurs are compromisers and dealmakers, not true believers. They wouldn’t give a hoot for Galt.

Rand, of course, knows this. And that’s OK, because Atlas Shrugged is about philosophy, not business. In her world, there are two kinds of people: those who serve and satisfy themselves only and those who believe that they should strive to serve and satisfy others. She calls the latter "altruists."

Rand is truly revolutionary because she makes the first serious attempt to protest against altruism. She rejects the heart over the mind and faith beyond reason. Indeed, she denies the existence of any god or higher being, or any other authority over one’s own mind. For her, the highest form of happiness is fulfilling one’s own dreams, not someone else’s – or the public’s.

Galt crystallizes the Randian mott "I swear by my life and my love of it that I will never live for the sake of another man nor ask another man to live for mine." No sacrifice, no altruism, no feelings, just pure egotistical selfishness, which Rand declares to be supreme logic and reason.

This philosophy transcends politics and economics into romance. The novel’s sex scenes are narcissistic, mechanical, and violent. Are the lessons of her book any way to run a marriage, a family, a business, a charity, or a community?

To be sure, Rand makes a key point about altruism. A philosophy of sacrificing for others can lead to a political system that mandates sacrificing for others. That, Rand shows with frightening clarity, leads to a dysfunctional society of deadbeats and bleeding-heart do-gooders (Rand calls them "looters") who are corrupted by benefits and unearned income, and constantly tax the productive citizens to pay for their pet philanthropic missions. According to Rand, they are "anti-life."

But is the only alternative to embrace the opposite, Rand’s philosophy of extreme self-centeredness? Must we accept her materialist metaphysics in which, as Whittaker Chambers wrote in 1957, "Randian Man, like Marxian Man, is made the center of a godless world"?

No, there is another choice. If society is to survive and prosper, citizens must find a balance between the two extremes of self-interest and public interest.

Adam Smith, the founder of modern economics, may have found that Aristotelian mean in his "system of natural liberty." Mr. Smith and Rand agree on the universal benefits of a free, capitalistic society. But Smith rejects Rand’s vision of selfish independence. He asserts two driving forces behind man’s actions.

In The Theory of Moral Sentiments , he identifies the first as "sympathy" or "benevolence" toward others in society. In his later work, The Wealth of Nations , he focuses on the second — self-interest — which he defines as the right to pursue one’s own business. Both, he argues, are essential to achieve "universal opulence."

Smith’s self-interest never reaches the Randian selfishness that ignores the interest of others. In Smith’s mind, an individual’s goals cannot be fully achieved in business unless he appeals to the needs of others. This insight was beautifully stated two centuries later by free-market champion Ludwig von Mises. In his book, The Anti-Capitalist Mentality , he writes: "Wealth can be acquired only by serving the consumers."

Golden Rule Anchors True Capitalism

Smith’s theme echoes his Christian heritage, particularly the Golden rule, "Therefore all things whatsoever ye would that men should do to you, do ye even so to them" (Matt. 7:12). Perhaps a true capitalist spirit can best be summed up in the commandment, "Love thy neighbour as thyself" (Lev. 19:18; Matt. 22:39). Smith and Mr. von Mises would undoubtedly agree with this creed, but the heroes of Atlas Shrugged — and their creator — would agree with only half.

Today’s most successful libertarian CEOs, such as John Mackey of Whole Foods Markets and Charles Koch of Koch Industries, have adopted the authentic spirit of capitalism that is more in keeping with Smith than Rand.

Theirs is a "stakeholder" philosophy that works within the system to fulfill the needs of customers, employees, shareholders, the community, and themselves. Their balanced business model of self- interest and public interest shows how the marketplace can grow globally in harmony with the interests of workers, capitalists, and the community – and can even displace bad government.

The golden rule is the correct solution in business and life. But would we have recognized this Aristotelian mean without sampling Rand’s anthem, or for that matter, the other extreme of Marxism-Leninism? As Benjamin Franklin said, "By the collision of different sentiments, sparks of truth are struck out, and political light is obtained."

John Galt – it’s time to come home and go to work.

Regards – AEIOU
Mark Skousen

March 8, 2007

‘Atlas Shrugged’ – 50 Years Later was originally featured on Whiskey and Gunpowder