Tuesday, October 4, 2011

Is Capitalism Evil? Part 3

Several common economic fallacies are constantly broadcast around the world. The goals of these fallacies are to denigrate, defeat and destroy capitalism. I mentioned four of these fallacies in the first post. In this post, I will be discussing the following fallacy:

2. Capitalism is inefficient and socialism is efficient

Another Marxist myth is that socialism is superior to capitalism, that it leads to a better society and that it is more efficient economically. Nothing could be further from the truth. In fact, the idea that socialism is efficient in any respect is a total fabrication.

Early arguments for systems such as socialism and communism were that a benevolent dictator, one man with the charisma to inspire people, could better control an economy since he would be the sole source of decisions. This one man, it was thought, could do a better job at setting the direction of a society by decree, than could a society ruled by the "indecision" of millions of people each with conflicting interests. All of these people, the irrational and the rational, could never create a cohesive society, they said (as if "cohesion" was somehow better than "affluent"). Only one man could do this.

Needless to say, when you argue that one man should rule, you must also argue that all others should obey. And when that one man turns out to be a monster like Hitler or Stalin, well, the efficiency of socialism must be questioned. Yet, whether the master is a dictator, President Obama or a host of bureaucrats does not matter. The truth is that each individual is a better judge of what is in his best interest and no other man can effectively decide for him what he should do and whom he should obey. Freedom really does work.

Many people (in the Obama administration) make the mistake of thinking that a bureaucratic dictatorship will create beneficial results. They expect that the economy will be stronger if profits are taken away from the capitalists and given to the workers. The fact that communism, socialism and fascism, all systems based on government rule, have killed millions of innocent people proves the point that these "isms" are not as civilized or efficient as capitalism. The question is why do today’s socialists think that the brutality of past socialist systems cannot be repeated? They ignore the fact that such brutality is an outgrowth of a principle they hold as strongly as the brutal monsters of the past. This principle is the belief that the citizen is the property of the state. There is no such thing as a benign socialism when this principle guides all socialist governments.

In spite of this, they continue to believe that taxing the rich and installing socialism will create a better, more affluent society. They believe that everything sacrificed by the productive capitalists represents a gain to society. It is as if they had created the sacrificed goods themselves. In their ignorance, they count both the sacrifice and the gift as two separate benefits that add new value to society. But in truth a sacrifice represents only re-distributed production, nothing new is created; no new wealth, not twice as much but nothing as much.

So when socialists see that nothing results from their policies, they look around for someone to blame and punish. Taking property from the capitalists, disenfranchising the capitalists, jailing them and making life impossible for them is a moral act, they think; so scapegoating them for the failures of socialism is easy to do. The result: more of nothing but beyond this, it creates a society in conflict (2) where the rich must fear the poor and all groups seek to loot each other. What they have failed to understand is that profits are an incentive for production and that without them, you get nothing.

The economist John Maynard Keynes provided the economic argument for sacrifice when he countenanced that government should print money in order to “stimulate” the economy. Keynes held that this “new” money would bring about increased economic activity and create prosperity. What Keynes and his followers ignored is that printed money dilutes the value of older money and steals value from those who hold that money. The increase of dollars in circulation, in a non-gold standard economy, should be based loosely on the increase in the Gross Domestic Product – so when you print money in quantities that far exceed the growth of GDP, more dollars are chasing the same level of product. The result is that prices must rise.

Keynes myopically assumed that economic activity was based upon the demand for labor and saw economic “stimulus” programs as a way of increasing economic activity and stimulating employment. Unfortunately, a Keynesian system (socialism), controlled by the altruistic decisions of economic masters, because it is constantly diluting the value of money and labor, makes it difficult for business people to gauge real value. This means they cannot set prices efficiently and this creates massive losses, over-production in some cases and under-production in others. This is because pricing decisions in a coercive economy are not based upon the price that people are willing to pay (self-interest) but upon the price that the masters decide is in the public interest (altruism). Losses develop all around and unwanted products flood the market without enough buyers while wanted products are in short supply with too many buyers.

Socialist planners think one-dimensionally. First, they don’t realize that their plans (in the forms of regulations and decrees) violate the individual rights of the people they are manipulating. They don’t realize that they are dictating to these people, many of whom would prefer not to have their lives interfered with. Secondly, they think they can make a decision, let’s say to keep prices low (because low prices are good) and that this decision will make things better for the people. But they don’t see the other dimension of the decision which involves the money losses to those who make the product. Once those losses are felt, and there is not enough money for more production, both buyer and producer lose. The planner, in his infinite one-dimensionality, refuses to blame his own decision for causing the problem and decides to put profiteers in jail for not being willing to sacrifice their profits to the collective. This is how Keynesian and progressive planners think even today under the leadership of President Obama. They have “no problem” taking more in taxes from the rich or providing bailouts for companies supposedly producing “socially necessary” goods – but they ignore the fact that the consequences of their policies are lost jobs and dead industries. They don’t realize that their problem is that they have “no problem” with themselves.

The perfect illustration of why progressives cannot create a better society through moral castigation and force is the principle known as the “broken window fallacy” explained by Bastiat in his 1850 essay “Ce qu'on voit et ce qu'on ne voit pas” (That Which Is Seen and That Which Is Unseen). This fallacy holds that the vandal who breaks a window is doing an economic good by making the shop owner pay a glazier to replace the window. According to Bastiat, there is no new economic activity in the act of fixing the window. The blatant truth is that a broken window destroys a perfectly good window that did not need replaced. The spending to replace the broken window merely displaces other spending activities that could have taken place. There is no economic benefit but an economic loss…the broken window.

The implication of the broken window fallacy is that government spending merely re-distributes money from one spending activity to another; but no net gain is created. The expenditure made on fixing the broken window has eliminated, for instance, an expenditure on a new pair of shoes for the shop owner. This principle is at work today in stimulus spending and explains why President Obama’s stimulus programs have created no new (net) jobs. The “seen” of the economic activity created by the government’s re-distribution has made impossible the “unseen” economic activity that would have taken place had the government merely left the money in the hands of the producer. When progressives promise new economic activity and new jobs from their stimulus spending they are ignoring the lost economic activity and the lost jobs experienced by those who have involuntarily contributed their money. The result: no net improvement.

The socialist system, because it is not based upon supply and demand (but upon altruistic “social justice”) is inefficient and doomed to fail…and it has failed repeatedly. This is a hard pill to swallow for a socialist who believes that men should do the ‘right’ thing and sacrifice for others. They ignore the fact that the socialist system is based upon doing the ‘wrong’ thing which is forcing people against their wills. Anti-capitalists and their policies have created a situation of loss, poverty and inefficiency by advocating government controls. The more spending the government does, the more massive are the losses.

Socialism and its advocacy should be feared because it has failed repeatedly and its advocates are anti-intellectual deceivers who would rather have power than do the right thing. When faced with the spectacle of capitalist growth and prosperity, the anti-capitalists are unable to see.

Why do Marxist critics claim that capitalism is inefficient? The most common argument given today is that profits represent a waste of money that could better be spent on “social justice”. Although few would explicitly make this point, it is implicit in all calls to bailout (nationalize) businesses. Presumably, the act of government bailing them out would enable the government to demand that profits be re-distributed back to the government, the unions or the people and that management salaries should be reduced. These “takeovers” of businesses are based upon the false premise that government can eliminate the inefficiencies of the business by subsidizing losses and directing productive decisions. In truth, this very method is the death-knell of the bailed out businesses because it relieves competitive requirements and destroys customer respect.

The idea that profits represent wasted resources could only be made by a collectivist mentality that by nature holds a dis-respect for human intelligence and individual rights. In fact, it takes efficiency of operations to create profits and the more efficient a company is, the higher its profits. To label profits as waste is to believe that those profits would continue to exist once the government began raising taxes. Profits are the pay checks of stockholders and owners of the company. As David Ricardo avers, “The farmer and manufacturer can no more live without profit than the labourer without wages. Their motive for accumulation will diminish with every diminution of profit, and will cease altogether when their profits are so low as not to afford them an adequate compensation for their trouble, and the risk which they must necessarily encounter in employing their capital productively.”(3)

(2) See my blog posts entitled “Society in Conflict”
(3) On the Principles of Economy and Taxation, David Ricardo, Google ebooks

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