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March 24, 2002

Capitalism's Paradox, the Fed
by Ed Bugos

In all ages, pioneers of new ways of thinking and acting could work only because private property made contempt of the majority's ways possible - Mises in Liberty and Property

Why is it that socialism retains followers and even credibility in spite of the historical evidence that its disregard for the economics of market systems is, at root, the main downfall of every socialist system of organization?

For all of our own inquiry into the topic of the conflict between left and right, I have found the best explanations within the insights offered by the forefathers of the US Constitution, particularly as they regard the morality of mankind. They should know. After all, they had designed an entire document whose legally bound principles were intended to enable every American to thwart those forces of human nature, which could undermine their individual freedoms through an over concentration of power in government, which by the way, "is" typically controlled by the few.

Yes, I know, government is supposed to be "We" the people. But is it? I don't think so. Not today. Incidentally, Microsoft's Word (word processor) can't understand the We, and instead, recommends using "Us."

What I'm getting at though is power. For all the talk that emanates from Mr. O'Neill's mouth in favor of policies that do not favor the few it is ironic how much power the Treasury and Fed have, both economic and political. The Congress has been rendered without power because the Fed isn't really considered constitutional in the first place, and they know it. But they know that if they did anything about it, financial ruin would encroach quickly. The Fed has a metaphorical gun to our heads in that we have no choice but to accept its legitimacy, and thus power.

It's About the Power, Stupid!
We found that in the end, rather than the beginning, communism was about power. So it is with most socialist systems, above all, in the end. Many writers have well documented the conflicts arising between individual and the State over the course of history. The chief conflict being about liberty. This was so apparent to Benjamin Franklin (one of the forefathers) that in his "Papers" several years prior to 1792 he said:

"Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety."

What a toughie, heh?

The conflict was so vivid to Ayn Rand, who was brought up in Communist Russia, she wrote several books to enlighten the rest of us about the fact that in the end, it always comes down to a matter of life and death. As far as I could tell, she truly believed it ultimately did. Though we are talking about a timeline, not an immediate instance. We're also talking about the progression of economic systems specifically.

There's a reason the US Constitution has such devout fans. There is probably more truth in that one document than there is in any economics or history book we offer to our children. And I think I'm being nice.

But this is not about the educational system or the Constitution, though at root, that document is in no small way about preserving the liberty of the individual "from the State."

It is important to note that prior to the advent of capitalism in the 18th century, socialism didn't actually exist because freedom was not defined the same way it is now.

It has been documented by many economic historians that the rise of capitalism was concurrent with the rise of individual liberty. The pre capitalist era did not see it as a fundamental right of the individual to have freedom. The writers of the day wrote of freedom for the noble classes. Everyone else was just people with not even the right to vote. Their perception of freedom was entirely different.

It wasn't until a new class of entrepreneur sprang to power out of the factory strata that broad suffrage was awarded. This birth of individual freedom was one of the by products of the Industrial Revolution, I (too) contend, and thus one of its coups.

But having only been recently awarded this liberty after thousands of years of near to full slavery we are probably not cognizant of all its enemies. Most socialists or Statists by definition see a future where all the nation's resources can be shared, or divided up, equally or not, with varying caveats and according to a grand design.

What is taken for granted is the notion that liberty is a fundamental "human" right, which it isn't.

Indeed, the only example of individual freedom exists as a social contract between men (and women today). It isn't as if there is something in nature that guarantees this right inalienable.

Ludwig von Mises, an economic scientist, or Praxeologist by his words, said in his essay on Liberty and Property:

"Romantic philosophy labored under the illusion that in the early ages of history the individual was free and that the course of historical evolution deprived him of his primordial liberty. As Jean Jacques Rousseau saw it, nature accorded men freedom and society enslaved him. In fact, primeval man was at the mercy of every fellow who was stronger and therefore could snatch away from him the scarce means of subsistence. There is in nature nothing to which the name of liberty could be given. The concept of freedom always refers to social relations between men..."

"As regards the social apparatus of repression and coercion, the government, there cannot be any question of freedom. Government is essentially the negation of liberty" - Section V, On Liberty and Property, 1958.

Who's the Primary Actor anyway?
We could argue, and in fact have argued, that individual freedom is only required to the extent that the system of production is capitalism. It is only under this system, which works according to free market principles, where it is compulsory the individual have the power to choose what is good for him or her.

Otherwise markets don't function, as they are capable of. The freedom of individuals to do as they please empowers the market mechanism. Although Adam Smith never really expounded on the sovereignty of the consumer in a free market system, Ludwig von Mises did, and he did it almost 200 years later. Therefore, we see it as an advance in capitalist, market, or economic theory (note to Larry Kudlow).

It was clear to him that a key feature of the Industrial Revolution was that economic sovereignty shifted from producer to consumer. It was quickly found that as market systems adjusted to consumer tastes and preferences rather than producer preferences, wealth and enchantment spread through the land, so to speak.

In all socialist systems, it is really the producer or government that holds sovereignty, and in so doing socialists reject the laws of the markets that have ruined one tyrant after another, as well as take for granted their own freedom as individuals within a union.

Under any system where the consumer isn't sovereign his or her liberty is in danger of repossession, if you will. It isn't necessary, and in fact, could be a threat. Guess what? Just because the consumer has money and can buy things doesn't mean he's got sovereignty. Indeed, according to Jude Wanniski, one of the authors of Supply-Side economic doctrine, which turned out to be Reagan's economic platform, it is the producer that is sovereign, at least in his economic model. Is there any wonder that governments are fans of his? And all of this focus on the consumer today while policymakers are busy operating under the Supply Side umbrella is very thick in irony.

The Paradox
I don't know if we can say this objectively, but I find that socialists are by and large uninformed of the conflict between individual and State, ignorant of their clear rejection of Say's Law (a basic economic principle of supply/demand), and other market & economic realities, but especially of the political history of power, if not their own desire for it.

That's right, greed is not isolated to capitalists. Indeed, that would be like endorsing poly-logism among different races or ethnic backgrounds. Greed is a human trait. Some would say a right.

But socialists argue that greed is propagated in a free market system, as if it couldn't exist otherwise. They associate capitalism with money as if money isn't necessary otherwise. Finally, some may even claim that capitalists are glorified fascists. Even worse, some may think we're Republicans.

It's enough to make one dizzy from all of the head shaking. We watch today as the global media frame (unbridled) capitalism, for the rise in global poverty that has inspired often-violent protests against the World Bank and IMF.

Their aim is right, I believe, but their understanding of the situation is so poor that it unnerves me to watch the violence people will resort to without fully understanding the state of affairs.

The irony is that these are socialist institutions as is any central bank. They all claim to exist as safety nets, but are in reality simply the instruments of wealth transfer, or power. The history of central banking in the United States is controversial for this very reason. They oppose the libertarian principles of the Constitution, and their legal stature is in question to this day.

Here's a well-known quote whose subject, or maybe even author, most people might scoff at today, but which might only prove we are right about the Republic's diminution.

"Mankind soon learns to make interested uses of every right and power, which they possess, or may assume. The public money and public liberty... will soon be discovered to be sources of wealth and dominion to those who hold them; distinguished, too, by this tempting circumstance, that they are the instrument, as well as the object of acquisition." - Thomas Jefferson (Notes on Virginia, 1784)

We could easily argue that the rise of socialism, in its rawest form, was a rejection of the Industrial Revolution and the coming on of capitalism in the first place, and those seeking to retain their established power advanced it. If anyone disagrees we need only refer them to the fact that Marx himself came from nobility, which elitist class represented the dying institution of his day, and that his and Engel's thesis on Communism arrived 70 years after the dawn of the Industrial Revolution in 1848, when capitalism's tentacles had already spread through Europe.

Socialism is about power, and those institutions erected in its name are instruments of power, not instruments of capitalism. Having said that, Capitalism does not reject governments. It only requires that the individual have reasonable means to object to the government's will. This is the reason for a sound system of private property rights - to preserve the consumer's (not producer's) sovereignty.

Thus anything that undermines that sovereignty must be an abuse of power. As benign as that may seem at times, it probably is always a matter of life and death in the end.

Everybody loves the Fed today. But that's because it still isn't clear what it has done to their money, economy, and liberty. We've only seen the sunny side of the hill so far. But like Greenspan said to a Senator as the Fed's Humphrey Hawkins mandate expired in 1999, all of the roads from the top of a mountain lead down. So far he's made it an easy (no pun intended) ride down.

We may look at the world today and conclude that with the fall of the Berlin wall in Germany and the Soviet Union in Russia, capitalism has been victorious finally. But it hasn't. The rejection of capitalism is alive and well today, and it is underwritten by the largest, most powerful, and richest central planning establishment in the history of the world, which most people paradoxically see today as the instrument of capitalism.

That misperception may very well be the downfall of capitalism, and thus by extension, freedom, at least as we know it today. When politicians talk of a new world order, maybe now you'll know what they mean. It's about power not freedom.

Or maybe we're making a big deal of nothing.

Sincerely,
Edmond J. Bugos
GoldenBar.com

Edmond J. Bugos is the founder and editor of the Goldenbar Report - calling markets accurately since 2000.

The GoldenBar Report is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright © 2000-2008 Edmond J. Bugos

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