Yesterday I replied to some arguments against capitalism leveled at me by a persistent Twitter critic. I was just getting started. Here are some juicier ones.
(4) Another of her tweets read, "Our main enemies: Corporatocracy, American Empire…."
Supporters of the free market agree with her here, so I do not understand what she could be thinking. Meanwhile, her Twitter avatar includes the logo for Obama 2012. This is cognitive dissonance of an unfortunately very common kind. She believes herself to be an opponent of "corporatocracy" and the "American Empire," while lending support to a candidate and a political party that have done as much as anyone else in this country to bring those very things about.
As Anthony Gregory noted in a recent
essay (one of the best I have read in a long time, I might add), Obama
shoveled money toward corporate America, banks and car manufacturers. He championed the bailouts of the same Wall Street firms his very partisans blamed for the financial collapse. He picked the CEO of General Electric to oversee the unemployment problem. He appointed corporate state regulars for every major role in financial central planning. After guaranteeing a new era of transparency, he conducted all his regulatory business behind a shroud of unprecedented secrecy. He planned his health care scheme, the crown jewel of his domestic agenda, in league with the pharmaceutical and insurance industries.
As for foreign policy, my critic evidently thinks the American empire, which is the product of a thoroughly bipartisan foreign policy extending over sixty years, is the exclusive creation of wicked Republicans. To the contrary, as Andrew Bacevich shows in his new book Washington Rules, the foreign-policy differences between people like Hillary Clinton and John McCain are essentially trivial. Hillary was a major supporter of the Iraq war, as were the New York Times, the Washington Post, and pretty much all the major U.S. newspapers. My critic's own heroes are just as responsible for the morally and economically disastrous American empire project as anyone else.
Again Gregory:
[Obama] continued the war in Iraq, even extending Bush’s schedule with a goal of staying longer than the last administration planned. He tripled the U.S. presence in Afghanistan then took over two years to announce the eventual drawdown to bring it back to only double the Bush presence. He widened the war in Pakistan, launching drone attacks at a dizzying pace. He started a war on false pretenses with Libya, shifting the goal posts and doing it all without Congressional approval. He bombed Yemen and lied about it.
He enthusiastically signed on to warrantless wiretapping, renditioning, the Patriot Act, prison abuse, detention without trial, violations of habeas corpus, and disgustingly invasive airport security measures. He deported immigrants more than Bush did. He increased funding for the drug war in Mexico. He invoked the Espionage Act more than all previous presidents combined, tortured a whistleblower, and claimed the right to unilaterally kill any U.S. citizen on Earth without even a nod from Congress or a shrug from the courts.
By supporting Obama instead of taking a principled stand against the system, my critic lends aid and comfort to the very "corporatocracy" and "American empire" she claims to oppose.
(5) "Another problem with the idea of the free market is that humans make decisions based upon the short term rather than the long term."
Assuming this dubious psychological generalization to be true, why would it not apply equally well to the political class itself? Why would it not apply equally to the voters who will elect the political class? No one ever answers this question.
And since the unfunded liabilities of the major transfer programs are greater than twice the GDP of the entire world, I think my suspicions are vindicated.
Here her criticism of the market misses the idea of capital value. Does she go 80,000 miles between oil changes? I’ll assume not. But if it is some kind of psychological law that "humans make decisions based upon the short term rather than the long run," then why doesn’t she? She can save money today, in the short term, by neglecting the maintenance of her car and therefore its performance in the long run. Who cares about the car’s condition two years from now? That’s the long term! Human beings, she says, don’t care about that.
When you own a car, you own the rights to the flow of services it can render over the course of its useful life. That alone gives you ample incentive to think about the long term. The longer a durable good’s useful life is, the more services it can render its owner. Therefore, property owners have an interest in taking actions that will increase the lifespan of the good in question.
Do governments operate under such incentives? Of course not. As Hans-Hermann Hoppe has frequently pointed out, the caretakers who operate the machinery of state in a democratic system do not own the resources they employ. Unlike private owners, they have no economic incentive to preserve the capital value of the country. It does not matter to them how long its capital stock lasts, how much debt it accumulates, or how many of its citizens it conscripts and leads to slaughter. These are all long-term questions. Their effects will be felt long after the politicians in question are retired.
(6) "This [alleged psychological law according to which people act only with very short time horizons] enables shrewd individuals or groups to manipulate markets and exploit individuals for their own gain. The invisible hand Smith described is either too slow or becomes too entangled to effectively make corrections to the market in sufficient time to prevent real, long term, harm for occurring. Consequently free-market corrections can produce enormous misery for the many while they take their sweet time to correct the market."
I do not understand this passage. Evidently individuals or groups "manipulate markets" and "exploit individuals," though no examples or definitions of these terms are provided. This anti-social behavior apparently causes the entire market economy to suffer, such that a wrenching recovery process is necessary. These recoveries take too long, and cause further suffering.
Assuming for the sake of argument that these market manipulations, which are never defined or illustrated, really are the cause of recessions – and with the relevant terms not defined and a causal mechanism not even hinted at, I think I am ascribing more dignity to this position than it deserves – we are left to wonder why the economy is not in a state of permanent recession. Aren’t greedy manipulators everywhere? If so, why does greed manifest itself only in cyclical patterns, rather than constantly?
Nowhere in my critic’s brief is the Federal Reserve System even mentioned. (That is revealing but unfortunately rather typical: an alleged opponent of "corporatocracy" cannot bring herself to mention the institution that backstops some of the fattest of American cats.) She is not even curious enough to wonder what supporters of the free market – whom she imagines as little men with white mustaches, running about with sacks of money with dollar signs on them – might think causes economic downturns.
Our position actually involves a full-fledged theory, not merely a vague pointing of fingers at economic malefactors. In our theory, the central bank – the very institution our critic neglects as if it had absolutely nothing to do with the condition of the economy – interferes with credit markets to push interest rates to below-market levels, thereby setting the stage for a series of consequences that produces first an artificial boom and then an inevitable bust. I explain it in greater detail in my 2009 book (and New York Times bestseller) Meltdown.
The boom-bust cycle, according to the Austrian School of economics, is caused not by the market economy per se but by this intervention into the market. The bust, in turn, is brief or prolonged depending on the response by government.
“The lower interest rates stimulate investment in long-term projects, which are more interest-rate sensitive than shorter-term ones. (Compare the monthly interest paid on a thirty-year mortgage with the interest paid on a two-year mortgage — a tiny drop in interest rates will have a substantial impact on the former but a negligible impact on the latter.) Additional investment in, say, research and development (R&D), which can take many years to bear fruit, will suddenly seem profitable, whereas it would not have been profitable without the lower financing costs brought about by the lower interest rates.
We describe R&D as belonging to a "higher-order" stage of production than a retail establishment selling hats, for example, since the hats are immediately available to consumers while the commercial results of R&D will not be available for a relatively long time. The closer a stage of production is to the finished consumer good to which it contributes, the lower a stage we describe it as occupying.
On the free market, interest rates coordinate production across time. They ensure that the production structure is configured in a way that conforms to consumer preferences. If consumers want more of existing goods right now, the lower-orde...r stages of production expand. If, on the other hand, they are willing to postpone consumption in the present, interest rates encourage entrepreneurs to use this opportunity to devote factors of production to projects not geared toward satisfying immediate consumer wants, but which, once they come to fruition, will yield a greater supply of consumer goods in the future.
Had the lower interest rates in our example been the result of voluntary saving by the public instead of central-bank intervention, the relative decrease in consumption spending that is a correlate of such saving would have released resources for use in the higher-order stages of production. In other words, in the case of genuine saving, demand for consumer goods undergoes a relative decline; people are saving more and spending less than they used to.
Consumer-goods industries, in turn, undergo a relative contraction in response to the decrease in demand for consumer goods. Factors of production that these industries once used — trucking services, for instance — are now released for use in more remote stages of the structure of production. Likewise for labor, steel, and other nonspecific inputs.
When the market's freely established structure of interest rates is tampered with, this coordinating function is disrupted. Increased investment in higher-order stages of production is undertaken at a time when demand for consumer goods has not slackened. The time structure of production is distorted such that it no longer corresponds to the time pattern of consumer demand. Consumers are demanding goods in the present at a time when investment in future production is being disproportionately undertaken.
Thus, when lower interest rates are the result of central bank policy rather than genuine saving, no letup in consumer demand has taken place. (If anything, the lower rates make people even more likely to spend than before.) In this case, resources have not been released for use in the higher-order stages. The economy instead finds itself in a tug-of-war over resources between the higher- and lower-order stages of production.
With resources unexpectedly scarce, the resulting rise in costs threatens the profitability of the higher-order projects. The central bank can artificially expand credit still further in order to bolster the higher-order stages' position in the tug of war, but it merely postpones the inevitable.
If the public's freely expressed pattern of saving and consumption will not support the diversion of resources to the higher-order stages, but, in fact, pulls those resources back to those firms dealing directly in finished consumer goods, ...then the central bank is in a war against reality. It will eventually have to decide whether, in order to validate all the higher-order expansion, it is prepared to expand credit at a galloping rate and risk destroying the currency altogether, or whether instead it must slow or abandon its expansion and let the economy adjust itself to real conditions.
It is important to notice that the problem is not a deficiency of consumption spending, as the popular view would have it. If anything, the trouble comes from too much consumption spending, and as a result too little channeling of funds to other kinds of spending — namely, the expansion of higher-order stages of production that cannot be profitably completed because the necessary resources are being pulled away precisely by the relatively (and unexpectedly) stronger demand for consumer goods. Stimulating consumption spending can only make things worse, by intensifying the strain on the already collapsing profitability of investment in higher-order stages.
Note also that the precipitating factor of the business cycle is not some phenomenon inherent in the free market. It is intervention into the market that brings about the cycle of unsustainable boom and inevitable bust. As business-cycle theorist Roger Garrison succinctly puts it, ‘Savings gets us genuine growth; credit expansion gets us boom and bust.’”
The first time government responded to a depression with a ceaseless program of intervention, namely the Great Depression, was also the first one to last so long. It was different in 1920-21
“The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.
Instead of "fiscal stimulus," Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.
The Federal Reserve's activity, moreover, was hardly noticeable. As one economic historian puts it, "Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction." By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.
It is instructive to compare the American response in this period to that of Japan. In 1920, the Japanese government introduced the fundamentals of a planned economy, with the aim of keeping prices artificially high. According to economist Benjamin Anderson,
‘The great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year's production, Japan lost seven years.’”
Again, suppose the situation were reversed. Suppose the depression of 1920-21, in which the federal government and the Federal Reserve did next to nothing, had persisted for a decade, but the Great Depression had lasted only a year or two after the New Deal programs were instituted. We would never hear the end of it: why, this proves the stupid free market can’t correct itself! We need our wise overlords!
But when the truth of the matter is exactly the opposite, we hear only crickets.
(7) "FREE MARKET ENCOURAGES the elimination of the weak."
Then why have population figures and life expectancy exploded under capitalism? Why do the poorest enjoy the greatest material advantages in those countries where the free market is least hampered by violent intervention?
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"It quickly became apparent that humans could be sold products with lower or even negative utility by appealing to the consumer on a deeper emotional level…. This discovery along with mass advertising enabled by mass communication effectively destroyed the free market observed by Adam Smith."
This is a bastardized version of John Kenneth Galbraith’s critique of the market. According to this argument, the market isn’t really free because advertising brainwashes consumers into buying whatever product a clever firm offers them. But as Murray Rothbard noted long ago, if this critique were correct we would have a hard time accounting for how much money firms devote to marketing research to try to ascertain whether consumer demand exists for the product they seek to develop. Why bother spending so much time and money figuring out what consumers want if a clever advertisement is enough to snooker them into buying almost anything?
All the advertising in the world couldn’t save New Coke or the Edsel, and once people can download music in mp3 format or watch streaming movies, no amount of celebrity endorsements is going to prop up Sam Goody’s or Blockbuster.
To be continued…
