The Failure of Communism. . . And Capitalism?

           When communism failed TV's were plastered with the images of mullets and axes and hands reaching Coke cans through the spray paint and rusty rebar of the Berlin Wall. Twenty years later, capitalism’s failure has no carnival--unless you count the media clowns. 

Ridiculously flip-flopping between the word “recession” and “depression,” our journalists were in the dark. Economists with all their funny hats and bits of paper could not come to consensus either.

Richard Posner, a sober-minded judge, sidestepped the media and academia. His verdict was his title: The Failure of Capitalism. But people don’t want to see “capitalism fail,” they don’t want to entertain the idea. Feeling the judge’s barb, a journalist at The Freeman fought back against the juror. But maybe it is time to give up capitalism. . .

Let’s take a hard look at that word: Capitalism.

Ironically, the word has been defined by its bearded and carbuncled nemesis, Karl Marx. For Marx and for the rest of us by default and repetition, “Capitalism” means “a society where the means of production are owned privately.”

First off, the definition is less than ideal since it suggests a false dichotomy. The definition suggests that the means of production might be owned “publicly,” which sounds like the opposite of “privately.” Hence the seeming dichotomy of Captialism and Communism. Nevertheless, historical experiments have shown that ownership by the government is sorta “private” too—its still the exclusive disposal of something by someone.

Teachers, don’t think that one is dispensing “both sides” of the debate between capitalism and communism—there are no “both sides,” that’s the trick of a false dichotomy.

Marx’s definition can no longer be droned out without thinking, not if capitalism has failed. We can throw out Marx’s definition, forever and set ourselves on the road to finding a more useful and illuminating one.

The word capital (without its ‘ism’) simply means somewhat durable inanimate helpers. If you brush your teeth a tooth brush is ‘capital.’ If you are a toothbrush producer, the toothbrush-making machine is capital. A road is capital, because it helps you get to work every day. A jig that helps Boeing build airplanes is capital, because it can be used over and over again to build fuselages, mount engines, and set wings. Your house is capital, so is a factory or an office building.

Capital is durable or semi-durable tools that, every day, help people to help each other enjoy a higher quality of life.

Capitalism is a society that produces and distributes the benefits of these durable tools.

In a bizarre sense, historical communism and historical capitalism had the same national goal—to extend the enjoyment of industrial capital tools to the citizens of a nation. Even now, in the last gasps of the nation, it is modern healthcare that is being distributed.

Now that we know that capitalism is a society that produces and socializes the benefits of industrial tools, what does its common synonym, “a free market” mean?

The free market means a society in which inviolable actors strive towards diverse ends by way of private ownership and competitive contracts. A free market cannot truly be capitalist, since the actors are inviolable, and cannot be taxed or even their money inflated. A free market does not accommodate the subsidization of capitalizing, despite capital’s numerous social affordances. Hence, when libertarians disagree with the socialization of healthcare, they are acting as free marketers, and, according to the above rubric, supporters of socialized health care are acting as capitalists.

If capitalism and communism have the same goal: more productive tools and the social enjoyment of those tools, that is, more capital in general, could it be that the Cold War—the blistering anger, the rattling fear, the spying, the nuclear weapons, the 13 million dead Vietnamese—was a huge waste of time?

The post Cold War failure of capitalism might not really be all that bad, in itself, in fact the end of capitalism could be considered an enormous benchmark of human development. A society based on the production ex nihilo of whole cities full of capital tools is over in some parts of the world. We did it. Capitlization is roughly complete. But then if it is a good thing, why the economic slowdown?

The answer lies in the heaps of institutions created to advance capitalism while the development occurred which now hinder the market, nearly terminally. The Federal Reserve and central banks in general is the most detrimental. This entity creates US dollars out of thin air. Durring capitalization, the idea was to subsidize all the fixed costs of producing large capital infrastructures like factories, roads, dams, and skyscrapers. In the short run, the real advancements in the efficiency and speed of production that accompanied these developments generally outweighed the negative effects of creating a lot of money and confusing price signals all over the economy. And in the long run, we are all dead.

However, since capitalism ended around the time of the computer revolution in the 80’s, all that extra money flowing out of the spigot of the central bank just poured into wars, suburbs, and Wallstreet fads, none of which cause exponential productive gains the way the first interstate highway did, and therefore cannot socially “pay back” the negative effects of the money creation leading to a concentration of wealth in the hands of the rich and the powerful.

In the end, the central bank makes Wallstreet like a huge blind giant, flailing its capital powers around like a tree stump; it makes the government hold a bunch of useless death-capital (bombs, tanks, etc), the consumer hold a surfeit of suburban-capital (McMasions and gas guzzlers); and tells producers to make more suburban and death capital, or to service these bankrupt social anatomies.

In this way, the central bank involves the majority as a vested interest in the market NOT clearing. If the market cleared, the investments of the majority would be wroth less than they expected, and people on the margin would forfeit some part of their stuff: houses, businesses, cars, etc, and governments might go bankrupt. So everyone holds their breath and employment goes down, and prices go up.

On the other hand, wherever in the world capitalization is in full swing, like China, the exact same mechanisms of central banking and national spending on capital projects are causing a big party. The subsidized or nationalized capital investments are producing exponential increases in the ability to produce goods and defraying the costs of creating money in the first and the government throwing it around like a cowboy.

Judge Posner is right to say it is the failure of capitalism, but in a way he does not suspect. The end of capitalism could be a boon if we can sweep away the outdated bureaucracies that gum up the market's ability to help people help each other.

If I had to guess, post capitalism will not come fully online without a revolution of the minority over the majority—a revolution of flexible costs against fixed costs; a revolution of savers vs. debtors; a revolution of the future against the past. If I had to draw battle plans today, I would put solvent companies and consumers on one side and insolvent ones on the other. Unfortunately, the US military is an insolvent consumer.

Of Keyens, Money, and Spaceships

Let’s geekout.

With the CERN's Large Hadron Collider coming fully on line in only a few months, the economic crisis could find a solution, but not, perhaps, in the way one might expect.

            Let’s say that a source of energy is discovered with CERN, and this energy can do nothing but run spaceships that could colonize other planets.

            Immediately massive projects would begin in the most technologically (capitally) developed nations, probably at the expense of both government and private business funded by a slush of credit made possible through central banks and central governments. That slush of credit, instead of doing what it does these days and inundating some hapless, trendy part of the economy and causing useless and disorienting bubbles or funding another no-win war, would fuel a useful project which, like a Roman fountain, would distribute economic benefits to the whole society.

Like WWI or WWII or the Pyramids of Egypt, the advances in the division of labor, and the countless parallel but incidental technological discoveries would drive the whole economy of the nation to new heights of production, which would "pay back" the negative effects of inflation with gross increases in productivity in the whole economy, leaving real wages higher, taxes on greater profits balancing the government’s budget, and the economy stronger fundamentally.

This magical pattern of capitalist growth was discovered and its institutions outlined by John Maynard Keynes.

The economic crisis—the net negative effects of creating more money in the economy—happened because the suburbs weren’t spaceships. There were no productive discoveries made because of the artificial concentration of money on house building. It was just consumption, which could not "pay back" the negative effects of inflation with exponentially greater production per input.

Greenspan, the veritable Captain Kirk of the Keynesian economy, thought that the economy had phase shifted through technology, and that the negative effects of monetary inflation were at thing of the past. He was right, the economy has changed. But his fallacy is he treated intensive capital as though it were extensive capital; he treated a cell phone economy like a rotary one. Our society has no spaceships, no pyramids, no centralized productive project to fuel the general growth of the economy. The growth of the economy comes from decentralized and unpredictable entrepreneurial discovery.

If the Large Hadron Collider fizzles, and we don’t get our spaceships, should we delete these institutions? Could we at least build in an "Off" switch for those times when there aren’t any pyramids around to build?

It would probably be easier to just build the ships.

Bargaining, Prices, and Supply and Demand.

Thailand's hundred Baht bill is hot pink - hot pink so sweet it will give you headache.

Money’s not the same in Thailand, however, or, better said, buying things is not the same. They bargain. Even in the malls, with shiny price-tags, you can squeeze the assistant for 10% off.

To the fresh fish, this is a primitive game, and to those going through a six or seven month slump, during those two weeks, bargaining seems down right stupid. However, considered theoretically, bargaining actually leads to maximizing the fine-grain price structure, leading to greater value capture, therefore greater entrepreneurial profits, and therefore greater net addition of social value.

(“Of course,” you’ll say with the grin of someone who doesn’t actually mind being scammed, “a net transfer from the tourist purse into the Thai.”)

We are used to one price in the West. If we want expensive things we go to Gucci, if we want a deal we go to Ross for Men. We sort ourselves into our price category, and we are always on the look out for a deal. However, this ignores the little differences between people, and the big ones.

If the individual supply-demand-indifference curves of each individual customer could be taken into account (and largely it can be through a seller’s sixth sense and acculturated biases), then the result will be a more perfect reflection of individual subjective evaluations of goods and the inter-subjective money-relative evaluation of goods—or in other words, optimal pricing.

It hurts our western sense of fairness if someone who looks wealthy is overcharged for what someone who looks poor can buy. Looks are so superficial.

Yes, and no. This is not 'soaking the rich' through 'progressive taxation.' If rich people make voluntary exchanges at higher prices than someone else there is no injustice, and there are many positive social outcomes. 

The social outcomes of this is greater employment, because there is a greater profit margin, and even assuming a diminishing return on labor (which is not usually the case) more people would be employed to increase productivity and therefore net profit.

Another social outcome would be a more egalitarian distribution of real goods. It can be argued that the rich value money in abstract more than poorer people, but, in a concrete sense, the rich (who have say 100,000 dollars) do not value one dollar more than a person with only one hundred dollars. The person with one  hundred dollars might value other things more than his dollar, but the dollar to him must be more valuable to him, on the margin, than the dollar to someone who is flush with cash. 

Bargaining brings to light that supply, demand, and indifference curves are never and can never be known. Even looking at past historical data, all you see is prices and sales, and those are just averaged aggregates of single points. No line can be given from a single point, even a straight one; moreover, each individual customer has their own different demand and indifference curve, and each producer (even an individual sales person) has a different supply curve.

These curves are part of a Cartesian seduction that confuses the young and conditions the reasoning of the grown.

Think twice before you wince an understanding smile at the brown person haggling with you. But more importantly, think twice before you believe those economics text books (and teachers) who tell you "This is a supply curve. This is a demand curve."