The New ‘Conservatism’ Is Leading Us To Socialism

Source: AP Photo/Andrew Harnik

President Trump’s trade war with the rest of the world has energized new conservatives and inflated their egos. They see the future in an economy directed by Washington, D.C. And like their socialist counterparts, they must trash the science of economics in order to promote their goals.

Oren Cass’ article “Hayek’s Broken Promise” is the latest example. Cass, a senior fellow at the Manhattan Institute for Policy Research, claims that Hayek promised a trade balance if we allowed the market to work. Because the US has experienced decades of imports larger than exports, Cass concludes that Hayek broke his promise. But Cass only advertises his ignorance of economics and Hayek by publishing such claims.

The Irony Of Socialists Comparing Trump To Hitler

Source: AP Photo/Patrick Semansky

Socialists’ reflex reaction to the election of a Republican president has always been to compare him to Hitler and their treatment of President Trump follows the script. In their minds, he must be the American Hitler because, they claim, he is a racist; he is a capitalist; and he dictates policy instead of consulting socialist experts in federal agencies. Socialists miss the irony in their comparing Trump to Hitler because of their ignorance of history.

The closest the US has come to an American Hitler was President Roosevelt and the left in his day understood it. The evidence comes from their reaction to FA Hayek’s most famous book, The Road to Serfdom. The book came out in 1944 before Roosevelt’s death and socialists in the US saw it as an attack on his policies of central planning so they attacked Hayek for writing it. Several publishers rejected it. But it sold 230,000 copies and a Reader’s Digest version sold 600,000.

Continue at Townhall Finance. 

Climate change is socialist groupthink

Public relations research tells us there are two types of people in the world: one relies on an authority figure to tell him what to do and the other decides for himself by gathering evidence and using reason. If you’re someone who can think for himself, you have probably wondered why climate science is such a mess. Why do they torture the temperature data to get it to look like a hockey stick in graphs? Why do they ignore or slander critics instead of answering their concerns when they offer good evidence?

A short period existed when climate science was real science and not socialist ideology. Back in the 1980s when the science was in its infancy, scientists openly debated the evidence. A startling experiment in that decade proved CO2 to be an excellent fertilizer for trees and plants.

Christopher Booker thinks the reason climate scientists act like ideologues is because of “groupthink,” referring to the book with that title by Yale psychologist Irving Janis:

Janis’s first rule is that a group of people come to share a particular way of looking at the world which may seem hugely important to them but which turns out not to have been based on looking properly at all the evidence. It is therefore just a shared, untested belief.”

Rule two is that, because they have shut their minds to any evidence which might contradict their belief, they like to insist that it is supported by a “consensus.” The one thing those caught up in groupthink cannot tolerate is that anyone should question it. 

This leads on to the third rule, which is that they cannot properly debate the matter with those who disagree with their belief. Anyone holding a contrary view must simply be ignored, ridiculed, and dismissed as not worth listening to.

Booker describes the behavior of most climate scientists well, but doesn't answer how they fell into the groupthink trap? The answer lies with the collapse of socialism in the late 1980s. Socialism’s main selling point from its fabrication by Saint-Simon in the early decades of the 19th century had always been economic. Socialism would make everyone equally rich as it ended the waste inherent in the anarchy of markets.

The world suffered through 120 years of experimentation with socialism launched by the welfare state of Germany in 1870 through the Russian Revolution and creation of the Soviet Union, the annexation of Eastern Europe, and the victory of Mao in China. China abandoned pure socialism after Mao’s death. Then the Berlin Wall fell; Poland rebelled and the USSR disintegrated, all because socialism had impoverished those nations to the point that they couldn’t feed their own people. Socialism lost the economic debate that had burned through the 20th century.

Reasonable people divorced socialism, but most socialists had never been reasonable. They are aflame with envy. Robert Heilbroner wept ink for twelve pages over the death of his utopia in “The Triumph of Capitalism,” which appeared in the January 23, 1989 issue of The New Yorker magazine. He began with, “Less than seventy-five years after it officially began, the contest between capitalism and socialism is over; capitalism has won.” He concluded with this:

And finally, what of socialism?...I do not think that the triumph of capitalism means its assured long and happy life or that the defeat of socialism means its ignominious exit from history. The collapse of central planning shows that at this moment socialism has no plausible economic framework, but the word has always meant more than a system of economic organization. At its core, it has stood for a commitment to social goals that have seemed incompatible with, or at least unattainable under, capitalism – above all, the moral, not just the material elevation of humankind...the vision has retained its inspirational potential, just as that of Christianity has survived countless autos-de-fe and vicious persecutions.”

Helbroner soon regained his composure, dried his tears and nailed his 95 theses to the door of capitalism in his September 10, 1990 The New Yorker article, “After Communism.” Near the end he wrote,

For all these reasons, I am not very sanguine about the prospect that socialism will continue as an important form of economic organization now that Communism is finished...But the collapse of the planned economies has forced us to rethink the meaning of socialism. As a semireligious vision of a transformed humanity, it has been dealt devastating blows in the twentieth century...

There is, however, another way of looking at, or for, socialism. It is to conceive of it not in terms of the specific improvements we would like to embody but as the society that must emerge if humanity is to cope with the one transcendent challenge that faces it within a thinkable timespan. This is the ecological burden that economic growth is placing on the environment. The challenge has drawn its first blood in the epidemic rise in skin cancer that is a consequence of the depletion of the ozone layer. It threatens to open far deeper and more serious wounds as the atmosphere gradually forms its invisible panes of carbon dioxide and other gases...The ecological crisis toward which we are moving at a quickening pace has occasioned much scientific comment but surprisingly little economic attention. Yet if there is any single problem that will have to be faced by any socioeconomic order over the coming decades it is the problem of making our economic peace with the demands of the environment.

Whatever its other consequences, the closing window of environmental tolerance will impose an utterly new condition of caution and constraint on a civilization...It is perhaps, possible that some of the institutions of capitalism – markets, dual realms of power, even private ownership of some kinds of production – may be adapted to that new state of ecological vigilance, but, they must be monitored, regulated, and contained to such a degree that it would be difficult to call the final social order capitalism.

Heilbroner gave socialists their new marching orders: take over the environmental movement and use it to forge their socialist utopia. And they did. Climate change scientists embraced their new role as the vanguard of socialism and acted just as FA Hayek had predicted they would in Road to Serfdom fifty years earlier.

The Jekyll and Hyde nature of individualism and what is means for China

Nobel-prize winning economist Edmund Phelps ties economic growth to the spread of individualism in his forthcoming book. A November 3 Streetwise column by James Mackintosh, “What Martin Luther Says About Capitalism,” summarizes Phelps’ book:

The more individualistic a country is, the better it has used its labor and capital. ...even in recent years, countries with more individualistic cultures have more innovative economies. They demonstrate a link between countries that surveys show are more individualist and total factor productivity, a proxy for innovation measuring growth due to more-efficient use of labor and capital. Less-individualistic cultures, such as France, Spain and Japan, showed less innovation than the individualistic U.S. 

In God is a Capitalist I summarize the work of Geert Hofstede who trail blazed research on the connection between individualism and economic growth in the 1970s, Shalom Schwartz in the 1990s, and William Easterly in 2011. All found very strong correlations between individualism and economic growth.

Young people are socialist for a reason

Young people drove Bernie Sanders' campaign and near upset of the establishment Hillary Clinton in the latest election to the surprise of many.

An old saying goes, “If you’re not a socialist when you’re young you have no heart; if you’re still a socialist when you’re older you have no brain.”

Socialism comes naturally to humanity. Hayek thought that family life was partly to blame. Good moms and dads take care of the children, provide food and security, and distribute those equally among the children. Children get very upset when they think one sibling receives more of anything than the rest or enjoys special treatment.

Then we leave the safety of the home. venture into a more public sphere in school and we carry our family morality with us. We think school should function like a larger family with the teachers and principal substituting for mom and dad and it does that the most part. Eventually we get a job, but we still view the larger society and politics through the glasses of our family morality. The political elite, especially the President, becomes the “father” of the nation who should make certain that the benefits of his regime are evenly distributed and no one gets special treatment.

Hayek points out that the danger of such thinking lies in the fact that in the family we know everyone well. Even in larger groupings, such as school or a tribe, we are still familiar with most people and know their circumstances. But a nation is so large that citizens know only a tiny portion of the population and are dealing with strangers much of the time, especially in business. Transactions with strangers who don’t have your welfare in mind as mom and dad did require different rules of engagement. Treating family members as if they were strangers would destroy families just as using family values in dealing with strangers will destroy society.

Trump's strength is his weakness - businessman economics

President Trump is clearly a good businessman. His wealth proves it. And it was partly his success in business that encouraged many adults to vote for him. The logic seemed sound: if the problem with the US is the economy then surely a successful businessman can fix it. But the fact that he is a successful businessman is Mr. Trump’s weakness as well.

Mises used to say that businessmen are better at predicting the short run than are economists so economists should not try to compete with them in their area of comparative advantage. The job of the good economist is to force business people to look up once in a while and acknowledge the long run. They can spurn the long run and court the short run, but the long run always shows up and the longer she has been ignored the uglier she is. The field of economics was born out of that insight, Mises wrote:

In order to discover the immediate-the short-run-effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman. (Mises, Human Action, 649)

How over confidence destroys earnings

“The curious task of economics,"  wrote Nobel Prize winner in economics Friedrich Hayek "is to demonstrate to men how little they really know about what they imagine they can design."

In other words, good economists are humble and that shows how few good economists live in the US.

Investors should be humble, too, and researchers have provided the proof. Two professors at the University of Maastrict published a paper at the beginning of this year on the question of “How Does Investor Confidence Lead to Trading?” The problem is not that initial successes spur investors to greater confidence.

Hence, we find evidence that our measure of investor confidence refers to a certain type of individual, as it is stable over time...Moreover, there is no evidence that any of the small fluctuations in investor confidence are driven by past returns, that is, that high returns lead investors to learn to be overconfident...That is, confident investors generally have lower returns (because of their higher turnover, see Section 5.1), but variation in those lower returns does not change their confidence.

In other words, the overly confident investor is always confident whether winning or losing. And men don’t have a monopoly on excessive confidence:

The View Through Copper Colored Glasses

If you own a sailboat you know that copper infused paint protects the hull of your boat from barnacles. Plumbers like copper because it kills bacteria. Copper may also be good for your portfolio. To understand why, we need to keep in mind the method the National Bureau of Economic Research uses to define recessions.

The NBER waits until after GDP falls for two consecutive quarters. The lowest quarter becomes the bottom or end of the recession. The next quarter is the beginning of the recovery. Then the NBER gnomes crawl backwards through the data to find the most recent peak of GDP growth. The quarter after marks the beginning of the recession. So we don’t officially learn that we are in a recession until the recovery starts, sometimes 18 months after the recession has begun.

Swedes help with timing

Anyone not a mainstream economist has recognized the awesome blindness of the profession to the approach of the latest financial crisis and its impotent policies afterwards. I recently finished a book published last year that not only explains why mainstream economics failed but promotes good economics, the Austrian kind, and provides another tool for telling the future.

Thomas Aubrey, the author of Profiting from Monetary Policy and founder of Credit Capital Advisory in the U.K., consults businesses on how credit creation affects global asset prices. Aubrey begins by detailing the devastation of the crisis on pension funds. Not only did many funds lose money in the crisis, but the low interest rate monetary policies intended to restore the economy have inflicted more damage and will lead to many failing in the future. Aubrey doesn’t mention the life insurance industry, but it and millions of retired people are suffering for the same reasons.

Ghost of Ricardo Haunts Europe and Japan

The ghost of David Ricardo must be sending chills up the spines of the economists of Europe and Japan. They may not understand what causes those chills because of the poverty of their education. The US may soon experience a similar visit. Here is how the Wall Street Journal put it in email newsletter:

Can the U.S. go it alone? All of a sudden, economic data from around the world is looking decidedly worrisome. China on Thursday showed stark, sudden slowdown in lending and home buying in July, while Europe’s second-quarter results confirmed everyone’s worst fears, with Germany registering a contraction for the quarter and the euro zone as a whole failing to grow. This comes after a very big slowdown in the same quarter for Japan, the world’s second-biggest economy.

The View from Vienna on Interest Rates and the Stock Market

Interest rates have some impact on the stock market because if investors can earn a better return in bonds than in the stock market and with less volatility they will sell stocks and invest in bonds. A large part of the recent record highs in the stock market reflect the Fed’s squashing of interest rates. The Fed wants to punish savers and reward debtors.

Interest rates have been falling since the early 1980’s to near zero today. According to the Financial Times columnist, Gavyn Davies, my main source for what central bankers are thinking, the International Monetary Fund identified three main reasons for the decline depending on the period:

1. In the 1980’s and 1990’s Fed inflationary policies caused the drop.
2. Since 2008, businesses have quit investing.
3. 2002 – 2007, the savings glut from emerging markets kept rates low.
4. Since 2000, portfolio shifted to bonds because of two stock market crashes.

Krugman advertises ignorance

ABCT Investing is based on the Austrian business cycle theory, so I become mildly concerned when others criticize the theory. I never become seriously concerned because I have learned over the years that most critics are unbelievably lazy. If they bother to read Mises or Hayek they do so through the lenses of mainstream econ and fail to understand what the authors are actually saying. 

The Social Democracy blog has posted a long diatribe against Ludwig von Mises, which I would normally ignore had Paul Krugman not advertised it. Krugman even gets wrong much of what the blog says, but the blog gets a few things wrong so here are my responses:

Natural rate of interest

The blog is right that the “natural rate” of interest doesn’t exist. Of course, neither does “equilibrium.” Both are theoretical constructs to help us think about economics. Wicksell defined the natural rate as the rate of interest in a barter economy. Interest would exist if we were forced to barter goods because interest is nothing but the opportunity cost of giving up the use of something for a period of time. Austrian economists picked up on the idea as a useful way to explain how interest under barter differs from interest using money. It’s a teaching devise. But if you don’t like it you can ignore it. It helps teach the ABCT, but has little importance to the working of the theory.

Mises and fascism