Three articles came across my desk yesterday – and I noted them with a blog on the first concerning Trump/Obama. Today my “second of three” looks at a comment by Martin Sanbu of the Financial Times, titled “From Lenin to Lehman – the big lies“. Let me restate the lies Mr. Sandbu explains.
Communism promoted two lies:
- A society organized by communism would lead to widespread equality trough collective purpose.
- Central planning would lead to a more efficient economic system
These two lies came crashing down as we all know. We are all human, and despite our best efforts, when you put some of our number in charge of others, they tend to pay themselves for the pleasure. Absolute power corrupts absolutely. The second lie took a while longer to fail but some economists nailed it. We are all enterprising and creative individuals that seek to improve – that is a natural tendency. Communism flew in the face of this and ignored a basic human need. It also created a massive information problem. The economy is so big that no amount of method or information can be gathered and analyses centrally. There are more efficient systems to help organize resource allocation.
So far, so good. Now let’s look at the authors’ lies of capitalism.
- The market values of financial and other assets accurately reflect the economic value they represent
- The future will always offer more opportunities for a better life than the past
Mr Sandbu has tried to make an argument in order to write a column. His arguments are manufactured and simple, probably because he assumes you would not understand the realty. Let’s look at them.
The first lie is explained with the argument that prices measuring wealth that people thought they had did not in fact exist. This a massive misunderstanding of the price mechanism and what happened in the financial crisis. First, weath is always and everywhere a relative measure. As such we need something to compare one to another – price fits the bill nicely. Howeve, justbecause the price of assets go up does not mean you are more wealthy. Yes, press articles told us that as house prices went up we could therefore monetize the increase in value. But that extra cash is not wealth – since we incurred a debt (increase in debt).
The second problem is that prices were not set efficiently. There were several failures in the system that meant risk was not correctly priced into the asset price. This is not a failure of price per se. It was in part a failure of living and cheating individuals (that didnt go to jail) and incompetence by others. If we had more transparency (and accountability) in the pricing systems that worked together, more folks would have seen the risks sooner and the bubble might have been nipped in the bud.
The second lie is totally made up. The author argues that we are now poorer than we were before the crisis and that our future prospects are negative such that the young are now dissalusioned. This is fallacy. This is not a failure of capitalism. We do not live in a free market. We live in a massively over regulated and over taxed econonmy. Never before has the US government taken so much tax and spent so much (e.g. Debt) on social transfers. The number of rules we have to follow has never been higher. The number of rule-making bodies writing those rules, and rule-making bodies managing the rule-making bodies, has never been higher. Over 51% of Americans receive a social transfer of some kind from the governance (see A Nation of Takers).
If the central bank had raised interest rates sooner private industry would have returned to normal investment practices. If the central bank had collapsed its balance sheets sooner, private funds would not have been crowded out and instead redirected to stock buy-backs and uncompetitive M&A, which has now created yet another stock-market bubble. We need a good dose of natural, healthy, honest hard work that is rewarded and encouraged. We need to stop talking about how we are all owed a debt by the government and they should give is all that we need. We need to take responsibility for our own success.
The author concludes that we now need a mix – of communism and capitalism to get out of the mess we are in. He is mistaken. We exist today in a mixed model. Socialist has been creeping up on us for years – and this is the analogy to communism. No, we are not let by Leninist’s or Trotskyist’s but we are led by socialist policies that align with the lies of communism above. We need more honest work, and honest pay, in a freer economy. We do need regulation – but we need less so we can see where the real wood for the trees lays.