“The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson in humility, which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving that makes him not only a tyrant over his fellows, but that may well make him the destroyer of a civilization that no brain has designed, but that has grown from the free efforts of millions of individuals.” ⁽²⁾

Hayek opposed any attempt to engineer — that is, centrally to plan and to coordinate — the structure of society. He believed that such engineering actually destroyed, rather than created, society, which was the result of human action but not of human design. Alongside the Austrian economist Ludwig von Mises, Hayek provided what are arguably the best critiques of the “constructivist” theories and policies that have grown in popularity during the 20th century.

Both Hayek and Mises had witnessed the devastation of classical liberalism, which had been brought on by two world wars, but most particularly by World War I. Wartime governments had clamped a centralized control over the private sector in order to ensure a continuing flow of armaments and the other goods deemed necessary for victory. Governments had inflated their money supplies to pay for massive military buildups. And war had strangled the flow of free trade that classical liberals considered to be a prerequisite to peace, prosperity and freedom. In short, both Hayek and Mises had watched 19th-century classical liberalism being replaced by 20th-century statism.

If war is the health of the state, as the American individualist Randolph Bourne declared it to be, then Hayek and Mises witnessed the impact of an obvious corollary: namely, that war is the death of individual liberty. And social engineering was a key mechanism through which that freedom had been destroyed. Indeed, one of Mises’ earliest works, Nation, State and Economy (1919), analyzed the disastrous consequences of the central planning ushered in by World War I.

But Hayek and Mises did not merely oppose social engineering on utilitarian grounds. Independently, they each evolved complex and sophisticated systems of social theory to explain how the institutions of society naturally evolved. They maintained that the institutions of a healthy society were the collective and unintended results of human action. Even complex social phenomena — such as religion, language or money — were the unintended consequences of individual interactions. For example, no committee or central authority decided to invent human speech, let alone to design a language as specific as English. Acting solely to achieve their own ends, individuals began making sounds in order to facilitate getting what they wanted from other people. Thus, speech was the result of human action but not of human design, and it naturally evolved into language. The evolution may not have proceeded with scientific efficiency, but it was efficient enough to permit the development of civilization. The efficiency of government programs suffer by comparison.

Yet constructivists argued that an unplanned society is wasteful and chaotic. With sufficient knowledge, a perfectly efficient society could be engineered. There would be no more surpluses nor scarcities. Stock markets would not crash, and currencies would not fluctuate. Perhaps society could even be designed so that its members walked in unison toward desirable social goals, just as they had marched together toward victory in wartime.

Hayek bluntly stated that the knowledge constructivists sought was unattainable. It was not possible to plan the dynamics of tomorrow based on how people acted yesterday. It was impossible because people were unpredictable. Human beings were fundamentally different from the physical objects examined by the hard sciences. A scientist could learn everything he needed to know about the behavior of an object, and his knowledge would not necessarily change over time. But human beings acted on psychological factors and motivations that were hidden, often even from themselves. Society did not consist of objects that could be neatly categorized and made to obey the laws of science. Society consisted of erratic and unpredictable individuals.

Mises made a similar point in regard to monetary theory. He demonstrated that even the seemingly objective tool of monetary calculation — the sort of calculation people use informally to assess such personal economic factors as whether to ask for a raise — was ineffective for broader social planning. At best, monetary calculation provided a historical record of what the price of bread, for example, had been in the past. This information could create an anticipation of what the price of bread might be tomorrow, but it could predict nothing. A bread shortage might make the price skyrocket. Moreover, using yesterday to engineer tomorrow went against a fundamental tenet of human action: the principle of inevitable change.

In Human Action: A Treatise on Economics, Mises commented, “Human action originates change. As far as there is human action, there is no stability, but ceaseless alteration…The prices of the market are historical facts expressive of a state of affairs that prevailed at a definite instant of the irreversible historical process….In the imaginary — and of course, unrealizable — state of rigidity and stability, there are no changes to be measured. In the actual world of permanent change, there are no fixed points…”(224)

From Nation, State and Economy through to his magnum opus Human Action (1949), Mises eloquently argues against the possibility of acquiring enough knowledge to engineer society. Equally, in Hayek’s earliest work, The Sensory Order: An Inquiry Into the Foundations of Theoretical Psychology (1952), to his far more popular The Road to Serfdom (1944), he integrates such diverse fields as epistemology and economics to form a social theory that denied any validity to central planning.⁽³⁾

Throughout the work of these theorists, two closely related concepts emerge again and again: 1) methodological individualism and 2) spontaneous order. These concepts are key to understanding why Hayek and Mises so adamantly rejected social engineering.

Methodological Individualism

In Human Action, Mises offers a description of what he called “The Principle of Methodological Individualism”:

“First we must realize that all actions are performed by individuals… If we scrutinize the meaning of the various actions performed by individuals, we must necessarily learn everything about the actions of the collective whole. For a social collective has no existence and reality outside of the individual members’ actions” (42).

Mises claims that collective wholes — such as “the family” or “society” — are nothing more than the sum of the individual members who comprise them. Such wholes are useful abstractions that people use to describe the interactions of a group of people who operate toward each other within a specific context. For example, the individuals who comprise a family interact with each other within a specific context: The context and sum of these individual interactions are what constitute the abstraction “family.”

In reducing group functioning to its most basic element — the acts of individuals — Mises does not deny the importance of collective wholes. Quite the contrary. Mises explains, “Methodological individualism, far from contesting the significance of such collective wholes, considers it as one of its main tasks to describe and to analyze their becoming and their disappearing, their changing structures and their operation. And it chooses the only method fitted to solve this problem satisfactorily” (42).

In other words, methodological individualism was a powerful analytical tool that could be used to discover the principles along which a group of people interacted with each other in specific contexts. It was the best method by which to understand society.

Mises’ stress upon methodological individualism did not arise in a vacuum, but in response to the theory of social holism that had become popular in the early 20th century. Social holists claimed that collective wholes had an existence that was far more than the sum of their individual parts.

These social holists drew parallels between the fields of biology and sociology. They argued that just as higher-level principles of explanation were needed to describe a complex biological organism than were used to explain the molecules that comprise it, so too with human society. New principles and characteristics emerged within a society that were entirely different from those that applied to individuals. In other words, there were rules that applied only to collective wholes, not to individual members. Further, these emergent rules functioned along scientific lines and responded to methods such as monetary calculation.

With the rise of Marxism, those who favored methodological individualism were often accused of “atomism or reductionism. Marxists went so far as to assert that it was the individual, and not society, who was the true abstraction. In its extreme form, these social holists even denied that the individual existed without society. As Mises observed, “The notion of an individual, say the critics, is an empty abstraction. Real man is necessarily always a member of a social whole” (41).

Karl Marx argued this point by using a sort of Robinson Crusoe example. Marx contended that an individual who had been born and immediately abandoned on a desert island, thus growing up in total isolation, would not be a human being. The crux of his argument was that human beings are social organisms — social constructs, if you will — who cannot be lifted from their defining context and remain human beings. The adult Robinson Crusoe who had been shipwrecked on a desert island was clearly a human being, but his humanity resulted from a prior history of socialization. Language, thought, art…all that made Crusoe human had resulted from his life in community. Reversing Misesian logic, Marx claimed that the collective whole called “society” created its individual members who could be understood only by examining the rules of that overriding society. Marx went an extra step farther and tried to extend the principles and methodology of the hard sciences to society. He tried to apply scientific methods of predictability and control to social institutions.

Classical liberals countered that a person who had been raised in utter isolation would still be a human being with human characteristics. For example, he would have a scale of preferences and he would act to achieve the highest one first. True, without social interaction, major potentialities within the person’s humanity would never develop or be expressed. For example, there would have no reason to develop language skills and no possibility of becoming a parent. Were the isolated individual to be rescued and placed within society, however, his unexpressed potentials might well emerge. But whatever characteristics developed would emerge from his own inherent potential as a human being and they would be the result of the individual interactions he experienced. The characteristics would not emerge because a collective whole called “society” defined them into existence.

This methodological approach worked in analyzing even extremely complex collective wholes, such as ‘the state.’ Everything the state did or was could be reduced to individual actions. As Mises explained, “The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman’s action an action of the state.”(42) Individuals who look at the hangman see the state in action only because they have created an abstraction known as the state to provide a context for his action. Equally, people never truly see or hear a group conversation. All they see or hear are individuals speaking, and we label the sum of their exchange as ‘a group conversation’.

Thus, Mises denied any concrete reality to abstractions such as ‘the state’ or ‘society’. He wrote, “It is illusory to believe that it is possible to visualize collective wholes… We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering…or any other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence. And this meaning is always the meaning of individuals…. [A] mental process makes us recognize social entities.”(43)

Methodological individualism had profound implications for social engineering theory. If collective wholes were a “mental process” within individuals rather than concrete entities with independent existence, then it made no sense to claim there were unique rules and characteristics that applied to the collectives and not to individuals. Methodological individualism removed the collective wholes from an objective realm ruled by scientific principles and returned it to the subjective realm of human judgment and preference. Instead of being able to design social institutions, such as banks, to run along scientific principles, social engineers were reduced to regulating individuals. They were engaged in planning how human beings would express their preferences in the future — a knowledge that individuals themselves rarely possessed.

And, yet, a question remains. Without planning, how can society improve? Part of the answer is to be found in the second concept running throughout the work of Hayek and Mises: that is, spontaneous order.

Spontaneous Order

During the eighteenth century, theorists like Adam Smith began to examine the impact that the unintended consequences of human action had upon society. These were the collective consequences that accrued as a result of people pursuing their own individual interests. For example, if twenty people walked the shortest distance across a field, a crude path through the field would be established. But forging the path would be an unintended consequence of each person’s conscious goal — to reach the other side quickly.

Smith came to believe that society and its institutions could be best understood by reference to such unintended consequences. Consider the price of yesterday’s bread. No one legislated what you were willing to pay for bread yesterday. That price point resulted from such unpredictable factors as how highly you prized bread twenty-four hours ago. The social institution of ‘price’, therefore, had been established spontaneously. It was also self-correcting. That is, the price spontaneously and rapidly fluctuated to reflect changing factors such as the availability of bread. And because such changes were unpredictable, only a spontaneous response — not a pre-planned one — could adequately respond.

No contemporary writer has explored the idea of spontaneous and self-correcting social institutions in greater depth than Hayek. In his essay “Principles of a Liberal Social Order”, Hayek tackled an objection he often encountered. He wrote, “Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence.” ⁽⁴⁾

For social holists, ‘order’ and ‘efficiency’ were concepts that seemed to be wedded together. Mises and Hayek agreed, but they used a different definition of ‘order’. For social holists, the word ‘order’ seemed to conjure up quasi-military visions of society marching shoulder-to-shoulder in unison toward a common goal. It was embodied by five-year plans which reduced the functioning of society to mathematical equations. By contrast, the order espoused by Mises and Hayek was a spontaneous one in which individuals pursued their own diverse interests without co-ordination by a central authority.

What does such an order look like? A classic example is the New York Stock Exchange that was created as a location at which stocks could be bought and sold Monday to Friday from 9 a.m. to 4 p.m. No overriding authority set prices, volume limits, etc. These were established by pockets of people who pursued their own preferences in a manner resembling chaos. In yelling out on the floor that he was willing to buy ABC stock at ‘X’ price, a trader intended to pursue nothing more than the preferences of his client. But an unintended consequence of his action — at least, when considered alongside other isolated pockets of co-ordination — was that an overall price for ABC stock became established.

Spontaneous order can resemble chaos. In Hayek’s words, it is the sort of order “whose justification in the particular instant may not be recognizable, and which will…often appear unintelligible and irrational.” ⁽⁵⁾ Ironically, this resemblance to chaos may be an aspect of why spontaneous order is efficient. After all, the shifting circumstances to which this sort of order responds have no logical or predictable order. Just as the trading floor of a stock exchange cannot be run according to Miss Manners’ rules of etiquette, so too does a dynamic society require institutions with fluidity.

Indeed, the main advantage of a decentralized system of decision making may well be its ability to adjust constantly and quickly to shifting circumstances. Where social engineering demands a stable future and a Godlike knowledge of the present, spontaneous order recognizes and embodies the inevitability of change and the inadequacy of human knowledge.

An individual knows as much as it is possible to know about his own preferences and future acts. The further you move away from the individual, the less reliable the data becomes. The less perfect the consequences.

Conclusion

There is a sense in which both Hayek and Mises based their arguments for individual liberty on human ignorance. Indeed, Hayek himself acknowledges that the need for freedom “rests chiefly on the recognition of the inevitable ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depends.” ⁽⁶⁾ Ironically, constructivists make much the same argument for their position: human beings are not naturally perfect, therefore society must be engineered and designed. From a point of common agreement — namely, the inadequacy of human knowledge — the two sides reach diametricaLly opposed conclusions.

A key difference lies in their methodological approach to the phenomenon of society. Constructivists believed that society has an existence and functions along rules that are independent of the individuals who comprise it: therefore, individuals should be co-ordinated so as to ensure the common social good. Hayek and Mises believed that society is an abstraction that expresses nothing more than the sum of the complex interactions of individuals. Since only individuals act, they insist that individuals remain free to do so.

Regards,

Wendy McElroy

Article Notes:

(1) In 1974, Hayek received the Nobel Prize in Economic Science. He was 75 years old at the time.

(2) as quoted in Literature of Liberty Volume V. No.4, Winter 1982, p.3. This issue includes a brilliant bibliographic essay titled “F.A. Hayek and the Rebirth of Classical Liberalism” by professor John Gray.

(3) Although The Sensory Order was published in 1952, it sprang directly from a paper he had written as a student in 1919-1920.

(4) in Studies in Philosophy, Politics and Society, London: Routledge & Keegan Paul, 1960, p.167.

(5) “Individualism True and False” in Individualism and Economic Order, London: Routledge & Kegan Paul, 1948, p.23.

(6) The Constitution of Liberty, London: Routledge & Kegan Paul, 1960. p.29.

Human Ignorance and Social Engineering was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Okay, Mr. Vice President. Thanks for clearing that up for me. I see now that the executive office’s position on wealth is that it is not fair for some to have more wealth than others and the fair thing to do then is to redistribute what some people have to others even if it has to be done without their permission. Wow! Was my Kindergarten teacher Ms. Lund wrong. She taught us that that was called stealing. As you can probably imagine, I’m actually quite upset at her right now for not doing a better job of explaining this to us at age 5 since I see now that I have forgone countless opportunities since then to redistribute wealth my way.

Better late than never though; my neighbor has a smoking hot 1969 Mustang convertible that has been restored to near mint condition. I on the other hand drive a 2006 Ford Escort. I don’t know how my neighbor obtained such a cherry ride but as you said: redistribution of wealth is just being fair so I’m going to redistribute his car to my garage tonight after he goes to bed. I’d do it during the day but I don’t know if he’s read your article today or not, so he might get upset if he hasn’t. Better to just do what is fair and worry about the rest later. Honestly, I’ve wanted his car since the first day I saw it but was struggling with the morality of forcibly taking things that don’t belong to me, until I read your article that says it’s okay.

Your article has given me so many ideas: we are a single income household and most of my friends are two income households, so those guys are way wicked wealthier than me. I think I’ll go sit down with some of them and discuss how much money we have altogether and then suggest that we divide it up equally amongst us. If they insist on being unfair a**holes and not voluntarily redistributing their wealth to me and my family, then I’ll just quote you and take it without their permission. Unfortunately, some people in America are just selfish like that.

I can’t tell you what a profound impact this revelation is going to have on my life. Having just had an expensive surgical procedure and not having health insurance I was planning on paying for it out of my own pocket but now I see how un-fair that would be to me and my family when there are so many others in America with more money than us.

It would also seem that I am off the hook for my student loans now as well. I can simply keep putting them off until I die and let the government pay them off for me out of redistributed wealth.

This also changes my whole outlook on life and work. What a fool I’ve been for so long, taking personal responsibility for myself and busting my ass through school and my career in order to ensure that I’d always have the necessary marketable skills to earn a livelihood and provide for my family. When all along what I should have been doing is lobbying politicians like you to just do what is fair and give me more of other people’s money. It would seem all that college education didn’t make me very smart.

Also, I think this is a fantastic opportunity for you and your colleagues in Washington to prove to the electorate that you are a man of action. Considering the median household income in the U.S. last year was $67,000 and your annual income as vice president is almost $270,000 now is your chance to just do what is fair and redistribute three-quarters of your income to 3 other families so you 4 all make about the same income in 2010. What a great day for America. Could I also ask a favor: could you pass this letter along to the Clintons and John McCain for me? With their combined net worth of $100 million plus I think it would be beneficial to a number of American families for them to know how to make things in America more fair as well. I wish I could be there when those families get their money.

All kidding and sarcasm aside, all I can say in response to Mr. Biden’s comment is: I’m done. I am so done with this government. I am ashamed of this government. How ridiculous was that to say? How socially irresponsible? How socially destructive? How unconstitutional? How un-American? It ranks right up there with comments like: “Sarah Palin for president.” So it’s obvious that our vice-president advocates taking wealth from those that have it to “spare” — I guess Joey will be the one to decide what that means — and giving it to those that don’t have as much. I challenge anyone to try and convince me how that is in any reasonable way different from the communist manifesto: Karl Marx — “from each according to his ability, to each according to his need.”

I’m also tired of that lame old political rhetoric that there are “unfortunate” people in America who need help and it’s “American” to help those in need. If it’s so damn “American” then why aren’t American’s helping them voluntarily? Why must the government intervene and force Americans to do what they say is inherently “American”? I’ll tell you why: because the kind of help the government wants has nothing to do with being American. I think American’s are some of the most magnanimous people on the planet, but they also want the freedom to choose their own charitable endeavors. And with every dollar the government taxes us to “just do what is fair” is one more dollar that Americans don’t have to be charitable with. Furthermore, if the government doesn’t run a welfare state then they risk losing a large, dependent cross-section of voters come election time. Now we can’t have that now can we?

Certainly there are those in our society that have fallen upon hard times due to no fault of their own, but I say they are the minority of minorities. The majority of the “unfortunate” ones sat right next to me in public school and are in the economic situation that they are in due to the decisions they’ve made throughout the course of their lives. Some would call me an a**hole for expecting people to be responsible for their own lives and dealing with the consequences of their actions and in response I’d say that they are the a**holes for feeling entitled to the fruits of the hard work of others.

I can’t tell you how sad it is to me to realize how many socialists and borderline communist-thinking people there actually are in America in 2010. It’s only been 20 years since the fall of communism in Europe and people are talking here now as if it never happened. As if the volumes and volumes of historical evidence on socialism and communism don’t exist. As if a society of social programs, entitlements and redistribution of wealth from the haves to the have-nots is a just, moral and productive society.

The government blatantly and brazenly takes control of auto manufacturers, banks, insurance companies and now they want to control health care and millions of people don’t see anything wrong with that. So few are saying anything.

I don’t even recognize this country anymore, and I’m sure it doesn’t recognize me.

Regards,
Don Cooper
Whiskey & Gunpowder

October 4, 2010

Do You Recognize This Marxist Country? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“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. Visit Laissez Faire Books for the best selection of libertarian book titles.

Obama as Prime Mover will have to turn the chaos in America’s housing and mortgage market into harmonious order. Then He has to single-handedly leap a tall legacy of toxic assets in a single bound, freeing up banks to lend by buying all of their dodgy assets.

It’s a big ask. But if anyone can do it, He can. Especially when He’s got America’s credit rating to abuse!

Reordering the financial universe is not cheap. It takes a lot of energy and a lot of matter in the form of new U.S. dollars. Reuters reports that, “Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.”

How much is $4 trillion? “At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.”

Yes. You can imagine the world’s main owners of dollar-denominated reserve assets (China, Japan, the Petro states) would be intensely concerned about a $4 trillion increase in dollar denominated debt. But wait a tick…

It’s one thing to say you might need to float as much as $4 trillion in debt to fund your bad bank. It’s another thing to sell that debt? Who will buy it? Even these days, $4 trillion is a lot of capital to loan. Maybe that number has been floated to make a smaller number, say $2 trillion, look small by comparison.

Good news everyone! The Bad Bank is going to cost us half as much as we thought!

If the ‘big bang’ goes off this week, what will it mean for Planet U.S. Dollar? Or Planet Gold? Well, as our friend Steve Belmont in Chicago reported on Friday, gold is moving toward a day of reckoning after trading in a range for the last ten months. It will either break out much higher, Steve says, or buckle. We’ll be watching.

Did you notice the obnoxious change in political rhetoric this weekend? You knew Barrack Obama was going to give it to Wall Street, calling executives “shameful” for getting bonuses while their firms received TARP money. Remember, by the way, the TARP money was forced on some firms in an effort to boost confidence in the overall plan.

We normally try to keep a reserved, ironic, and sceptical air when reading the statements of politicians. Most of them are not worth taking seriously. But every once in a while, you get the scent of something so noxious and dangerous that you have to put aside humour and call it what is. Today is one of those days.

Now, the populist shame game is to be expected. That’s not a big deal. What’s more alarming is the bilge and claptrap spilling from Kevin Rudd’s gob and what it may mean for your ability to preserve and create wealth in the coming years.

In The Monthly, Rudd plants a Neo-Marxist flag in the ground of the current debate with the kind of jargon-laden elitist preening that makes academic critics of the free market (who’ve never spent a day in the business world creating value) so nauseating.

Specifically, Rudd writes that, “The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.”

Why not proclaim, since he is apparently in the position to make such proclamations, that the experiment in paper money and the deliberate policy of inflation it implies is theft? It is bureaucratic lust for power and authority disguised as monetary policy? It’s also, at its heart, the belief that one or a few people in government know better than you how you should lead your life.

Leave it to Rudd and the resurgent global Left to use the present crisis as an occasion to expand their political ideology of government power and wealth confiscation. Despite the fall of the Berlin Wall in 1989, Marxism never really went away. It ensconced itself in Western universities and colleges, and in the careerism of the political class, which believes it is entitled to govern by virtue of its intellectual superiority and the moral justness of its anti-market position.

Their strategy, as always, is to control the rhetorical high ground by framing the discussion in populist terms and making an enemy of “greedy capitalists.” Don’t get us wrong. There are plenty of greedy capitalists to go around, or to go to jail. In fact, many more of them would be going out of business if the government would quit propping them up with taxpayer money. This generation of corporate executives shares plenty of blame for playing fast and loose with the corporations they were supposed to be stewards of. They over-levered, over-speculated, and over-paid themselves.

But Rudd is an ignoramus of the lowest order to say that current events somehow negate the last thirty years of globalisation, or three hundred years of economic growth and the division of labour. Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.

These results can only be the product of a system in which risk taking entrepreneurs have access to capital and savings, allocated through competitive markets where firms that deliver real value to consumers thrive and those that don’t fail. That system has worked for 300 years of Western history to create wealth, choice, and opportunity.

Shame on Kevin Rudd for calling that “market fundamentalism”, as if belief in the institutions that create wealth and liberty is akin to the same kind of religious fundamentalism that permits suicide bombing. If there is a more offensive use of rhetoric to equate two vastly different things, we haven’t seen it.

But the Neo-Marxists are back on the march. And they are probably coming for your wages and pension sometime soon. Make no mistake about it. 2009 is the year the Neo-Marxists have been waiting for.

It is their chance to undo all the perceived evils of Thatcher and Reagan. There would be plenty of those to undo, of course, not least the idea that deficit spending is morally permissible. But the real push by the Neo-Marxists is to use the present occasion to expand the scope and reach of government power into your private life, so they can tell you what to do, what to watch, what to eat, what car to drive, and ultimately, what to think or say.

This will be disguised as better more “parental” regulation to achieve more equality and social justice. But behind the false populist outrage and the elevated language of idealism, it’s just another push for government elites to expand their ability to compel you to live the life they think you should lead.

The simple regulatory response to all this is to reduce the amount of leverage available to financial players. Reduce margin lending in shares. Let bankers get back to making prudent loans in the housing market based on what a buyer can actually repay, rather than letting the government subsidise subprime lending because it’s politically desirable.

There are other sensible regulatory responses to the mess. But they will be discarded in favour of grandiose and over-reaching plans to redesign the entire world in some utopian image. A “big bang”? Really. Does that mean they’re going to blow things up and call it a “fix?”

What we’re getting at is that it’s going to be a tremendous challenge to withstand this push in the next few years, mostly because it will have so much popular support from people with no brains who believe in fine sounding speeches and appreciate getting tax rebates/credits/handouts from the government. The first battle in the war on wealth creation is wealth redistribution, whether you like it or not.

It would be more honest if the Left just came out and said something like, “The last ten years have been a huge wealth transfer from the middle class to Wall Street and from the developing world to the developed world. We’re going to try and reverse all that now because we know it’s our best shot in the last thirty years to get some back. So here we come! Open your wallet and shut your mouth!”

Neo-liberalism isn’t the culprit in all this. What does that word even mean? Isn’t Rudd using it because it sounds like Neo-Conservatism? And everyone knows that Neo-conservatism is evil, therefore Neo-Liberalism must be evil too!

The real evil of the last thirty years is the vast expansion of credit in the world that changed personal and corporate incentives. The plunge in the cost of capital-encouraged by governments and Central Banks-set of an orgy of bad risk taking, quietly condoned by regulators and politicians who all benefitted in some way from housing/commodity/trade booms.

But now the credit cycle has turned. The Credit Depression is upon us. And Comrades Rudd and Obama will try and use it for the next great push in the Neo-Marxist dream, one world government with one world currency. More on that tomorrow!

Regards,
Dan Denning

February 4, 2009

Marxism Marches On was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.