God is a Capitalist

Thursday, December 10, 2015

US in rut like old German socialism

Mainstream economists and the Federal Reserve are trapped in a rut, condemned to repeating the mantra that monetary policy can save us even though it hasn’t for seven years. Germany after World War I faced a similar situation and the US should heed the lessons.

Socialist ideas swept through Germany like the swine flu in the last half of the 19th century. Otto von Bismarck, the Kaiser’s prime minister, devoted his career to fighting socialists while preserving the monarch by co-opting socialist policies. He promoted unions, nationalized railroads, mines and other large industries. State regulation of industry exploded. He provided social security, healthcare and unemployment benefits. By WWI socialists could not point to a single policy of theirs that Bismarck had not already deployed. Socialists dominated parliament but they weren’t happy because the Kaiser ruled and they didn't.

That changed with the revolution after WWI that gave the German socialist parliament control of the nation. Socialists were jubilant. Now they could demonstrate to the world the superior nature of true socialism. The only problem was that Bismarck had already implemented all of their ideas. They had nothing new to offer. Ludwig Mises described their quandary in his book Omnipotent Government:
Now real socialization had to start. But what did socialization mean? It was, said the Marxians, neither the kind of thing represented by the nationalization of state railroads, state mines, and so on, nor the war socialism of Zwangswirtschaft. But what else could it be? Marxians of all groups had to admit that they did not know. For more than fifty years they had advocated socialization as the focal point of their party program. Now that they had seized power they must start to execute their program. Now they had to socialize. But at once it became apparent that they did not know what socialization meant. It was really rather awkward.
Fortunately the socialist leaders remembered that there is a class of men whose business it is to know everything—the omniscient professors... The socialization committee deliberated many years, splitting hairs, distilling oversophisticated definitions, drafting spurious plans, and selling very bad economics. [Joseph Schumpeter, the great Harvard economist, sat on that committee.] Its minutes and reports, collected in shelves of thick volumes, rest in the libraries for the edification of future generations. They are a token of the intellectual decay brought about by Marxism and etatism. But they failed to answer the question of what else socialization could mean besides nationalization (Verstaatlichung) or planning (Zwangswirtscha ft).[1]
Neither socialists nor the top economists in the nation could think of ways of making Germany more socialist than it had become under Bismarck. The situation today in the US is similar. Bernie Sanders, the proud socialist running for the Democrat nomination thinks only parental leave and free education separates the US from full blown socialism.

By the time socialists assumed power in Germany a century the economy was collapsing. Unions had raised wages and the state had increased taxes to the point that Germany’s manufactured goods could not compete in the international marketplace because of their high costs. Germany needed to sell manufactured goods in order to pay for imported food because Germany could feed its people with the limited agriculture it had.

Competition at home had kept prices too low for businesses to make a profit and many had failed. Bismarck’s solution, implementing the plans of socialists, was to create cartels of large businesses that would set domestic prices at levels high enough to keep them in business and subsidize exports, selling to foreigners below their costs. The US suffers from a similar situation with pharmaceuticals, but for different reasons. Americans pay twice as much for medicine because we have to subsidize the other socialist countries that force drug makers to sell the products at very low prices.

The standard of living of the average German had been declining for decades due to socialist policies as inflation wiped out higher wages granted to workers without greater productivity. The people were unhappy with the situation, so socialists blamed economic disasters on capitalism, even though Germany had not enjoyed free markets for over fifty years. As the economy declined, so did tax revenue and the state found it unable to pay workers their wages. So it began to borrow from the central bank, which cheerfully complied by creating vast amounts of new money out of thin air. The result was the famous hyperinflation of the early 1920s.

Mises emphasizes in his book that all of the economic policies of the National Socialists had been in place for half a century before Hitler came to power. Economically, the Nazis changed very little. In spite of this history, many people in the UK thought of Germany as a capitalist nation. The absurdity of it forced Hayek to write his most popular book, Road to Serfdom, to explain to the British and Americans that Germany had been socialist under Bismarck and that socialism naturally leads to Nazism if followed to its logical conclusion.

The US implemented the fascist version of socialism under FDR, an admirer of Mussolini, minus the dictatorship. The state created cartels that controlled most business for decades and set prices for all transportation, energy and banking until Jimmy Carter rolled back controls on oil prices. Ronald Reagan got rid of price controls on transportation and banking and most journalists think the US had shed FDR's fascism. But state control and cartelization of business continued as new federal regulations inflated the Federal Register by over 75,000 pages each year since 1970. 

We have implemented socialism as much as is possible while retaining a democracy, yet people are still convinced the US is the leader of the capitalist free market world. The economy is crumbling around us while standards of living fall and inequality rising. Socialists have run out of ideas. Top economists and the Fed can think of nothing but printing more money. It's deja vu all over again!

[1] Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, (Auburn: Ludwig von Mises Institute, (1944) 2010), p. 204-205

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