Filed Under: Capitalism, Economy, Featured, Fiscal Policy, Government, Government Spending, Markets
In 1920, as socialist parties held power in Germany, Austria, Hungary, and Russia, it appeared that the world following World War I would be a world built by socialist planning. Ludwig von Mises, the Austrian economist, thought that a socialist world simply wouldn’t do, and put pen to paper to explain why. The result was Mises’ first published article, “Economic Calculation in the Socialist Commonwealth.”
Mises’ premise was really quite simple; in a socialist economy, things that are used to produce other things are controlled by the state, which means that investment in production goods no longer involves price comparisons. In a socialist system, the planners decide that more tractors should be built, and order factories to build them.
Socialist administrators can determine what is needed to build a tractor, but what they can’t determine is if they should produce a tractor. There might be a far more urgent need for tanker trucks to haul gasoline, but because the order is placed by the state, to a manufacturing process owned by the state, for enterprises also owned by the state, there is essentially no exchange; just the state shifting its own resources as it commands.
Because there is no exchange, there are no prices, and because there are no prices, there is no market information about what should actually be produced with the resources available. This is how socialist economies end up with shiny, new harvesting equipment sitting on the edge of a rotting field – the equipment is there, but there is no fuel to run it. Meanwhile, a few hundred miles away, there is a factory buzzing with the activity of processing steel for more combine harvesters. Socialist economies, therefore, are irrational.
Ludwig didn’t limit himself to fencing with socialist utopianism, though. Mises pointed out what was necessary for an economy to be rational; that is to say, function properly. Three fundamental conditions had to be met in order for an economy to prosper: Economic liberty, private property, and stable currency.
It didn’t take Bolshevik collectivization to move an economy into dysfunction, either. Any departure from the three conditions throws a wrench into everything. In the United States, we are facing severe curtailment of all three.
Frankly, everything the government does seems aimed at destroying all three of Mises’ tenets of economic prosperity. We have seen inflationary monetary policy used to inflate a stock market bubble in the late 1990’s; a housing bubble in the early 2000’s; and keep afloat the largest deficit spending spree in the history of organized human society.
Getting a job now entails a forced, mandatory kickback of a surprising portion of your wages to a state-run social insurance scheme. I am still waiting for someone to explain to me why it is in my best interest, at the age of 28, to shell out several thousand dollars a year for social security. Even the most rabid of state apologists would probably have to concede that I would be better off if I could use that cash to pay off debt immediately, buy dividend-paying stocks, or throw it into a home brewery. The necessity of the tax is to support the current system – everybody knows it, and few politicians even bother with the “securing your future” rhetoric.
Then there are the bailouts, which, by definition, is the government using resources to keep certain businesses operating. During the credit crunch, when even profitable businesses couldn’t get credit for anything at all, the government decided to borrow hundreds of billions of dollars to bail out insolvent banks.
Later this was extended to the automotive industry. In a time when the average American was too poor to buy a new car, the government decided to buy General Motors, and then bribe Americans into scrapping their old cars.
Since 1990, the United States has run up a collective trade deficit of about seven trillion dollars; that means we consumed seven trillion dollars worth of good in excess of the things we produced, either for direct consumption or export. This means we still have seven trillion dollars-worth of foreign-made goods for which we have not yet paid the tab. China and Japan each have well over one trillion of our dollars in reserve, and that is how it happened.
We got away with it by having a purely fiat currency that the rest of the world trusted more than their own fiat currencies. This allowed us to buy foreign goods by printing money. For evidence of this, in 1995 the trade gap was 100 billion dollars; by 2005 it was over 700 billion dollars. In the interim, interest rates were slashed repeatedly be the Fed. Low interest rates encourage borrowing and spending; and discourage savings and investment – things required to fund industrial output.
If we had a sound currency, private property, and economic liberty, the underlying market forces would be emphasizing exports, which is ultimately how you pay for imports; countries that can’t sucker foreigners into holding their currency as a reserve have to export first, and import later. The United States, with the “world reserve currency,” got to do it the other way around.
With the economy in serious strain, with high unemployment, money being in short supply, massive trade deficits, and government debt, the economic planners of our own socialist commonwealth decided that it was time to stimulate demand for stuff. The president and the congress spent borrowed money on stimulus, a car company, and a healthcare boondoggle. It has been decided by the planners – spending makes us rich, and easy monetary policy will lead the way.
As for private property, the Kelo decision put that to rest. Government now has the Supreme Court’s permission to decide that land should be taken from its owners, and given to new owners who will – at least we were told – use the land in a more profitable way…. Because apparently we are to assume that local councils can accuratley calculate which is the better use.
It isn’t exactly a Five Year Plan, but it isn’t free market capitalism, either.
About the Author
Mr. Waechter is an attorney and a recent graduate of Drake University.
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