Power & Market
The economist Alex Tabarrok in a post today criticizes what he calls ”identity economics”. Tabarrok says: “Identity economics is bad economics”. By “identity economics,” he means a theory that jumps from an accounting identity to a claim about causation. Keynesian economics is a prime example of this fallacy, as Tabarrok’s quotation from Nick Rowe illustrates:
1. Y = C + I + G + X – M. Therefore an increase in Government spending will increase GDP.
2. Y = C + S + T. Therefore an increase in Taxes will increase GDP.
My guess is that you are much more uncomfortable with the second of those two examples than the first. You have probably seen the first argument before, but have probably not seen the second. But they are both equally correct accounting identities and are both equally rubbish arguments.
Murray Rothbard long ago in Man, Economy, and State made the same point. He offered a reductio ad absurdum of the Keynesian multiplier:
"Social Income =Income of (insert name of any person, say the reader) + Income of everyone else, Let us use symbols:
Social income =Y
Income of the Reader=R
Income of everyone else =V
We find that V is a completely stable function of Y. . . .Let us say the equation arrived at is: V =.99999 Y Then, Y =.99999Y +R
This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social income and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines.
Herbert Aptheker: Studies in Willful Blindness. By Anthony Flood. Independently published, 2019. I +93 pages.
Anthony Flood tells that in “the early 1970s, I was an acolyte of Herbert Aptheker(1915-2003). Known mainly for his writings on African-American history he was also, during the Cold War and even after, a theoretician of the Communist Party USA (CP).” (p.1) Flood became Aptheker’s research assistant and friend, but he eventually turned in disgust from his mentor, repulsed by Communist tyranny and atrocities.
Flood has documented a striking example of the way Aptheker’s rigid adherence to the Stalinist line corrupted his historical writing. Aptheker is best known as a historian for his American Negro Slave Revolts, his doctoral dissertation, published in 1943. In that book, he never cites the West Indian Marxist C.L.R. James’s Black Jacobins (1938), a study of the San Domingo Revolution of 1791 that overthrew the slave regime and established the Haitian Republic. Aptheker fully recognized the significance of the event; why then does he ignore James’s book? “What scholars virtually never even mention. . .is Aptheker’s life-long practice of rendering James invisible.”(p.15)
The answer, Flood suggests, is that James was a follower of Leon Trotsky. “Aptheker could not have missed the reviews it garnered in scholarly journals and the mainstream press. And yet in the few pages he devoted to that revolt in American Negro Slave Revolts, he neither cited Black Jacobins nor even listed it in his bibliography. For a card-carrying Stalinist like Aptheker, however, there was no lower form of life than a Trotskyist. “(p.80)
By no means did James ignore Aptheker. To the contrary, he attacked Aptheker for downplaying the role of blacks in abolitionist organizations. The Stalinists, James claimed, viewed blacks as subordinate shock troops of a prospective revolution rather than independent actors, and this Stalinist line Aptheker faithfully followed. True to his policy of treating James as an invisible man, Aptheker never responded to James’s criticism.
Flood discusses a number of other examples of the corrupting effects of Aptheker’s Communist bias, such as his tendentious The Truth about Hungary, approving the Soviet suppression of the Hungarian Revolution of 1956, and his claim in a newspaper article written in 1950 that the lack of revolts in North Korea showed that the Communist regime in power had popular approval.
Flood’s book is enlivened by stories of his conversations with Aptheker and Aptheker’s bitter enemy, the philosopher Sidney Hook, who was one of Flood’s professors. His careful account of the “invisible man” in Aptheker’s historiography is a valuable contribution.
The CBC (Canadian Broadcasting Corporation) broadcasts select NHL games on Hockey Night in Canada. These are "free” to watch on TV or stream online. "Free" is placed in quotations because the CBC’s advertises that their content services can be streamed for “free” by the public. It is worth noting that the CBC's annual share of revenue for 2018 was roughly 1.2 billion. Hockey fans may attempt to recuperate their tax dollars by watching as much hockey as possible.
The aforementioned gives context, but it is not the CBC which is the main focus of this article, but a commercial advertisement which is played during CBC’s Hockey Night in Canada.
The advertisement is for Export Development Canada (which is also funded by tax dollars).
A quote from the EDC website:
Our Export Guarantee Program can help your bank provide you with additional access to financing. We share the risk with your bank by providing a guarantee on the money you borrow, encouraging them to increase your access to working capital.
The Future is Uncertain
When an entrepreneur identifies a market in which they believe a profitable enterprise can be undertaken, the entrepreneur will invest their available funds. If the entrepreneur possesses insufficient funds, then a bank may choose to act as lender and direct additional funds toward what they may also believe to be a profitable endeavour.
In this instance, it is both the entrepreneur and the bank who will bear the risk. If the risk is too high, then the bank may choose not to loan funds to the entrepreneur.
What happens when Export Development Canada steps in to "de-risk" the project? EDC is funded by taxpayers. This means that projects will be undertaken with someone else’s money (the tax payer). Neither the entrepreneur nor the bank will fully bear the risk involved. What if the venture turns sour? EDC explains, "we share the risk with your bank by providing a guarantee on the money you borrow."
In the end, someone must bear the risk. So, who will it be?
If the entrepreneur utilizes his own funds, then he has a vested interest. This also would apply to a bank acting as lender. The claim that “risk doesn’t stop you,” identifies the EDC not as “ risk experts,” but as “experts” in promoting risky ventures, underwritten with tax dollars.
Here's the advertisement which is aired during Hockey Night in Canada:
None of the entrepreneurs in this commercial appear to be concerned with risk. This should be a reason for concern on the part of the viewer. Such ads are misleading and promote a false of reality. The bearing of risk is unavoidable in any entrepreneurial endeavor. Future is uncertain. Resources are scarce.
Man shrugs his shoulders, "30,000 brake pads NO DEPOSIT. I said, why put the brakes on now?"
Indeed, why not? Why demand a deposit for surety? If the deal goes sour, someone else is left paying for your losses. It is easy to make risky decisions when the error of your way does not return upon your own head.
Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez unveiled sweeping new legislation on Thursday that would impose a federal cap of 15% on credit-card interest rates.
The bill would also allow state governments to set interest-rate ceilings even lower than the federal mandate.
Naturally, Sanders and Ocasio-Cortez are framing the bill as something designed to help "ordinary people." But in reality, the legislation will only act as to reduce access to credit for low-income and other high-risk borrowers.
Credit card companies don't attach high interest rates to credit cards because they are mean and cruel. Credit cards with especially high interest are that way because the borrowers have been determined to be an especially high credit risk. Credit card companies want people to borrow money from them, so if they can make loans at lower rates, they will, in order to undercut the competition. But these companies also must make sure they're likely to cover their costs. Thus, the high interest rate exists to ensure the lender can make consumer loans while still accounting for the high risk of default by borrowers based on a risk profile.
Given that interest rates are similar to a "price of money," if Sanders and Ocasio-Cortez manage to slap a new limit on credit card interest rates, they will be essentially imposing a price ceiling on credit cards.
And price ceilings are sure to lead to shortages.
That is, they'll lead to shortages in consumer credit for high risk borrowers — many of whom will be low-income borrowers.
If lenders cannot price their product in a way that allows them to recover costs, they'll simply stop providing that service. Rather than face lower interest rates on credit cards — as Sanders and Ocasio-Cortez imagine will happen — high-risk borrowers are more likely to not be able to borrow using credit cards at all. Given that default rates are generally higher for low-income borrowers, the cost of collecting payments is higher. Lending to high-risk groups then is only possible if the price of those loans is higher. Without the higher price, the service will go away.
Cutting Poor People Off — "For Their Own Good"
On the other hand, maybe this is exactly what Sanders and Ocasio-Cortez want. One way to claim to have "done something" about high levels of debt is to simply cut off potential borrowers from credit.
After all, there is an implicit paternalism in efforts to place roadblocks between low-income/high-risk consumers and the products those consumers may wish to purchase. In the minds of a government planner, the solution to the problem of people borrowing "too much" money is to pass a law preventing them from doing so.
This, of course, is inherently unfair to those people who are — for now — in the high risk category, but who do pay their bills most of the time. (They might simply be in their category because they are young and have never established much of a credit history.) Moreover, many people who missed payment in the past may now be much more reliable and less prone to default. As people who fit a certain high-risk profile at first, they're likely to face high rates. One of the best ways these people can build good credit, though, is to first gain access to credit at high interest rates. Over time, they will increasingly gain more access to credit on better terms. Should these people then be punished and cut off from credit because they can't qualify for more moderate interest rates right away? The effect of the Sanders and Ocasio-Cortez legislation would be to do exactly that.
Meanwhile, lenders who offer loans to high-risk groups are themselves being blamed for the proliferation of credit card debt among American consumers of all types.
In his essay on payday lending — an issue very similar to that of high-interest credit cards — Tom Lehman analyzes the accuracy of these sorts of claims:
Finally, the allegation that payday lending "causes" chronic or habitual borrowing may ignore the old adage that "correlation does not equal causation." As indicated above, it is a well-known fact that payday loans appeal to a clientele that face numerous financial difficulties (many of them self-induced), quite independent of the payday lending industry itself. Most of these households have failed to establish good credit, have poor credit histories, are not known for their timely bill-paying habits, frequently bounce checks, frequently change jobs, and may relocate often. In short, they are the type of people who are going to be frequently short of cash and who will borrow "chronically" when given the opportunity. Because payday lending institutions provide them with this opportunity to borrow when other institutions will not does not mean that payday lenders cause this behavior. They simply provide an opportunity for this behavior to be exhibited more often than otherwise.
As is so typical of politicians, the answer offered by this new legislation is to limit the options available to the most at-risk populations.
A better approach is to allow freedom for both borrowers and lenders, to treat borrowers like adults, and to not assume they are incapable of managing their own money.
Last week, the the Federal Reserve left unchanged its benchmark federal funds rate, with Fed Chairman Jerome Powell declaring the US economy to be "on a good path."
In a unanimous vote, the Fed kept the rate in a range of 2.25% to 2.5%.
The Fed's reluctance to allow interest rates to return to what would be considered a more normal rate historically continues to spur speculation about what the Fed should do in case of a recession.
The media narratives from "experts" and policymakers we're now hearing suggests three takeaways from last weeks' developments from both the Fed board and at the Stanford monetary policy conference last Friday.
1. The Fed Fears the Economy Remains Fragile
For eight years, the federal funds rate remained near zero, and all the while, we were told the Fed was "cautiously optimistic" about the economy, and that economy growth was "solid" and moderately strong. Yet, the Fed could not bring itself to allow the target rate to rise above QE-level near-zero rates. Then, It wasn't until 2017 that the rate was allowed to rise about one percent. By then, we were told that the Fed was just about to get aggressive with rates, taking the supposed strength of the economy as an opportunity to allow rates to rise to something resembling the four or five percent rate that might at least be in the same ballpark with what we saw during the past two expansions. That, however, now appears unlikely, even in the medium term. Fed policy has never approached anything we might call hawkish, and now Chairman Powell has already signaled 2.5 percent is quite high enough.
In spite of all the talk about "solid" growth, the Fed still sees the current economy as too fragile to deal with interest rates that would have been quite ordinary during the past 30 years.
The Trump administration, of course, points to the jobs data as "proof" of a strong economy, but outside that one group of data points, we find quite lackluster data otherwise, and the Fed knows it. Hence, it remains unenthusiastic about doing anything that would take it beyond its decade-long stance of embracing stimulus through low rates and a huge balance sheet.
2. Just Stay the Course
The Trump administration, of course, points to the jobs data as "proof" of a strong economy, but outside that one group of data points, we find quite lackluster data otherwise, and the Fed knows it. Hence, it remains unenthusiastic about doing anything that would take it beyond its decade-long stance of embracing stimulus through low rates and a huge balance sheet.
And this is why the Fed appears content to just stand as still as possible in hopes it won't break any of the fragile and easily-broken stuff around it.
This is especially important when we consider the political importance of keeping interest rates low for the sake of keeping government debt payments low. If rates go up, Congress will face ever-harder choices about what spending to cut back in order to keep up with a growing debt-service load. No one in Congress wants to even think about that, and they want the Fed to keep it that way.
By adopting a policy of standing still, though, the Fed is pretty much guaranteeing that it will begin the next recession from a position in which it has already used up many of it's stimulus tools. If interest rates are already low, and the Fed's balance sheet is already nearly at $4 trillion. What tools are left?
3. Get Ready for Radical New Monetary Policy
Since the fed knows it will likely start from a very fragile position in the next recession, it is now "reviewing" its policy options. New York Fed President John Williams says now is the time to "rethink" how it has been doing things. But not in a good way. As Yahoo! Finance reports :
For its part, the Fed has acknowledged the concern and has launched a review of its monetary policy framework and communication practices. In focus: how it publicly explains and achieves its dual mandate of maximum employment and stable prices (through its 2% inflation target).
As part of this revising of policy, many proponents of dovish monetary policy are suggesting that much higher inflation targets should be in order, and that everyone should stop worrying about pushing prices well above the old targets.
This leads to the idea that what the fed needs is a "bazooka," as noted by
Brian Cheung at AOL News:
“The central bank needs a ‘bazooka’ at the zero bound that makes credible its commitment to achieving its policy rule, and raising inflation if required,” Harvard economics professor Kenneth Rogoff said.
Rogoff’s recommendation : negative interest rate policy. The thesis: allowing interest rates to go negative, in which customers would be charged to keep money parked at their bank, would be a quicker way of spurring consumption and recovering jobs in a downturn.
Negative interest rates, of course, are an inflationist's dream. Banks would penalize people for saving money (which is really just the same as investing money) so as to incentivize them to spend their money on consumer goods instead.
The idea, then, is that it would easier to hit high new inflation targets because negative-rate policy would impel people to spend as much money as possible as quickly as possible. Prices would then increase, further encouraging spending.
It's basically just an old-fashioned inflationary spiral, but it's all necessary, we're told, to keep the economy going — at least until individuals want to retire or get into financial trouble. And then, suddenly, having no savings might be a problem.
But the experts at Harvard and the fed never let that sort of street-level household economics both them. What matters is macro policy, and the dream of a perfectly malleable economy that does what we tell it to do. And of course the economy will comply. We'll have a bazooka!
Friedrich Hayek’s The Road to Serfdom reached its 75th anniversary this year. This classic, published near the end of the World War II, was incredibly influential. In fact, Milton Friedman wrote that he had made it a practice to ask believers in individualism how they got there in the face of the “collectivist orthodoxy,” and reported that the most frequent answer involved The Road.
As it is one of my favorite books and I have long been an avid collector of some of the finest words in defense of liberty (See my Lines of Liberty), I thought I would use the occasion to collect some of The Road ’s most insightful passages, hoping to stimulate reflection. However, I quickly discovered that despite being a short book, The Road had too much material for one short article. As a consequence, I decided to organize the material by breaking it into three parts. Below is Part 1—Freedom or Coercion.
- We are fighting for freedom to shape our life according to our own ideas.
- We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.
- Wherever the barriers to the free exercise of human ingenuity were removed, man became rapidly able to satisfy ever widening ranges of desire.
- The fundamental principle is that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion.
- To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men.
- People still believe that socialism and freedom can be combined…the realization of their program would mean the destruction of freedom.
- The argument for freedom is precisely that we ought to leave room for the unforeseeable free growth.
- While there is nothing in modern technological developments which forces us toward comprehensive economic planning, there is a great deal in them which makes infinitely more dangerous the power a planning authority would possess.
- The very men who are most anxious to plan society [are] the most intolerant of the planning of others.
- Under the Rule of Law, the government is prevented from stultifying individual efforts by ad hoc action. Within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of government will not be used deliberately to frustrate his efforts.
- That people should wish to be relieved of the bitter choice which hard facts often impose upon them is not surprising. But few want to be relieved through having the choice made for them by others.
- The economic freedom which is the prerequisite of any other freedom…must be the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and responsibility of that right.
- The system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided…that nobody has complete power over us…If all the means of production were vested in a single hand…whoever exercises this control has complete power over us.
- Those who are willing to surrender their freedom for security have always demanded that if they give up their full freedom it should also be taken from those not prepared to do so.
- The more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and …the greater becomes the contrast between the security of those to whom it is granted as a privilege and the ever increasing insecurity of the under-privileged.
- In order to achieve their end, collectivists must create…power over men wielded by other men—of a magnitude never before known…There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.
- The competitive system is the only system designed to minimize by decentralization the power exercised by man over man…an essential guaranty of individual freedom.
- The “substitution of political for economic power” now so often demanded means necessarily a substitution of power from which there is no escape for a power which is always limited…centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery.
- It could almost be said…that wherever liberty as we understand it has been destroyed, this has almost always been done in the name of some new freedom promised to the people.
- Collective freedom…is not the freedom of the members of society but the unlimited freedom of the planner to do with society what he pleases.
- Contempt for intellectual liberty…can be found everywhere among intellectuals who have embraced a collectivist faith.
- There is no other possibility than either the order governed by the impersonal discipline of the market or that directed by the will of a few individuals.
- Individual freedom cannot be reconciled with the supremacy of one single purpose to which he whole society must be entirely and permanently subordinated.
- The conflict between planning and freedom cannot but become more serious…as the scale increases.
- A community of free men must be our goal.
- The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.
Friedrich Hayek ability to lay out the striking contrast between freedom and coercion is a central reason for the impact The Road to Serfdom makes on thoughtful readers. And that is just as true 75 years after its publication as when he wrote it. And as we have chosen to move along the wrong road in many ways since, Hayek’s insights into freedom remain central to our ability to defend it from the many centralizing efforts that would eviscerate it.
UPDATE: As of late Wednesday, the de-criminalization measure managed to close the gap of what had earlier been a 55 to 45 percent loss. It looks like the measure has now narrowly passed, and voters' laissez-faire attitudes toward mushroom consumption apparently (barely) overcame other concerns. The article has been modified to reflect this outcome.
Denver's municipal election this year featured a ballot measure to decriminalize psilocybin mushrooms — or as the Phish groupies called them back in high school — "shrooms." The measure was narrowly approved by 50.5 percent to 49.5 percent.
Denver, of course, is a place that voted in the majority for the legalization of marijuana in 2012's successful statewide ballot measure — with 65 percent voting for legalization in Denver. Denver voters also voted in 2016 in favor of a city-wide ordinance allowing businesses to have designated areas for public consumption of marijuana.
So why did the decriminalization of psilocybin mushrooms barely pass this year?
Well, based on my thoroughly un-scientific survey of Denver voters, part of it may have been fear over the risk of mushroom enthusiasts flocking do Denver to enjoy local mushroom freedom. In other words, given the lack of any other jurisdictions de-criminalizing psilocybin, some voters may have been less concerned about increased ease of access to mushrooms, and more concerned about attracting the sorts of people who use them.
This sort of thing was a relatively common complaint after marijuana legalization. Local residents rarely complained about the legality of marijuana, and few believed the hysteria of federal government agents — such as this guy — who maintained marijuana legalization would lead to a public health disaster.
On the other hand, many local residents were less than thrilled at the idea that potheads from across the nation would flock to the city primarily in to sit in their newly rented basements and smoke up all day.
Few had a problem with letting the existing local potheads be potheads, and few ever believed the propaganda that people otherwise uninterested in marijuana use would suddenly become addicts because of legalization. And there's still no evidence that has ever happened.
The problem stemmed from the perception that the proportion of potheads in the general population would increase substantially through in-migration from other states.
In the first few years following legalization, many local pundits and politicians asserted population growth and real estate prices were being driven quickly up by marijuana enthusiasts who were relocating solely to hit the bong, legally. The image this was intended to conjure up was one of scores of potheads pulling up in moving vans and moving in permanently.
It's unclear to what extent that was ever really true, though. And now that Massachusetts, Nevada, and the entire West Coast (including Alaska) have similarly overturned prohibition, few share this concern anymore.
However, when it came to de-criminalizing psilocybin mushrooms, fewer Denver voters may have been unenthusiastic about being pioneers this time around. Of course, even if the measure had passed, the situation would not have been very comparable to marijuana legalization. The city's DA noted "only 11 of more than 9,000 drug cases referred for possible prosecution between 2016 and 2018 involved psilocybin." Moreover, as a de-criminalization measure — as opposed to legalization — there wouldn't be any dispensaries popping up at the local strip mall.
Nevertheless, the prospect of local liberalization attracting more drug users is an unrecognized ace in the hole used by federal agents and regulators. Psilocybin remains a Schedule 1 drug under federal law. By using nationwide federal policy to both mandate illegality — and to encourage similar state and local ordinances — federal agents can more easily isolate and fear-monger within communities considering legalization or de-criminalization within what is otherwise a uniform landscape of prohibition. Were state and local authorities truly left on their own when it comes to prohibitions of psilocybin mushrooms and similar substances, we'd likely see far more regional variation, and at least a notable minority of communities with varying degrees of laissez-faire.
As it is, federal policy sets the tone in favor of nationwide prohibition, and this makes it harder for any single community to break away from established federal policy, even if the voters don't fear the direct effects of the prohibited substance itself.
As with everything in Venezuela, this week’s attempt at removing the Maduro regime was a mess. It seems to have had no coordination or logical planning. It consisted largely of opposition leader Juan Guaidó calling out civilians to support this attempt to take the control of the Venezuelan state, but with little effect. Some newspapers reported that Guaidó and ally Leopoldo López started to act before the plan was ready. Other sources say that high-ranking officers had negotiated with the U.S to keep Maduro in power. But one thing is sure: the current regime is still in place. Even more troubling is the fact some armored vehicles hit civilians that were on the streets protesting in favor of Guaidó. At the end of the day López with his family sought refuse in the Spanish embassy, and some military officers that were supporting Guaidó requested political asylum in Brazil’s Embassy. El Pais reports at least five people were killed in today’s chaos
Replacing the Current Regime with More of the Same?
Where to go from here? Venezuelans have suffered many disappointments, and there is a lot of skepticism in the population about the likelihood of replacing the current regime with something truly better. Here’s the problem: Venezuelans need to get rid of Maduro and his comrades, but we also need open the road to radical free-market reforms if they want to have a future with a long-run prosperity and liberty. In early March, Ben Powell and I wrote about this conundrum.
Unfortunately, the ideological fuel that would feed the engine of a new regime is not so different from the same that fed Chavez’s project. The “Plan País” supported by those seeking to topple Maduro is just another Keynesian recipe that will apply all the usual failed policies that have been used historically in Venezuela. In my country, this has only ever created a fake short-run “prosperity” which then creates cronyism, corruption, and an enormous states which owns of the commanding heights of the economy. In terms of human rights, a badly managed economy under some other group of hardline Keynesians might still be preferable to the current regime.
Nevertheless, at this time, it looks like an easy victory for replacing the Maduro regime with the opposition is not right around the corner. It looks increasingly like the best way to facilitate improvement would be for Guaidó and López to negotiate with Maduro for new elections, and more importantly to open the country to foreign capital yet again. With that in place there could be hope for an economic rebound. Of course, the government planners would still claim their intervention was the cause of the “economic miracle” that would come with stability, but we could at least hope for a gradual turn toward saner economic policy over time.
Some of his potential 2020 opponents, by contrast, are coherent but crazy.
And economic craziness exists in other nations as well.
In a column for the New York Times, Jochen Bittner writes about how a rising star of Germany’s Social Democrat Party wants the type of socialism that made the former East Germany an economic failure.
Socialism, the idea that workers’ needs are best met by the collectivization of the means of production… A system in which factories, banks and even housing were nationalized required a planned economy, as a substitute for capitalist competition. Central planning, however, proved unable to meet people’s individual demands… Eventually, the entire system collapsed; as it did everywhere else, socialism in Germany failed. Which is why it is strange, in 2019, to see socialism coming back into German mainstream politics.
But this real-world evidence doesn’t matter for some Germans.
Kevin Kühnert, the leader of the Social Democrats’ youth organization and one of his party’s most promising young talents, has made it his calling card. Forget the wannabe socialism of American Democrats like Bernie Sanders or Alexandria Ocasio-Cortez. The 29-year-old Mr. Kühnert is aiming for the real thing. Socialism, he says, means democratic control over the economy. He wants to replace capitalism… German neo-socialism is profoundly different from capitalism. …Mr. Kühnert took specific aim at the American dream as a model for individual achievement. …“Without collectivization of one form or another it is unthinkable to overcome capitalism,” he told us.
What makes Kühnert’s view so absurd is that he obviously knows nothing about his nation’s history.
Just in case he reads this, let’s look at the evidence.
Jaap Sleifer’s book, Planning Ahead and Falling Behind, points out that the eastern part of Germany was actually richer than the western part prior to World War II.
The entire country’s economy was then destroyed by the war.
What happened afterwards, though, shows the difference between socialism and free enterprise.
Before…the Third Reich the East German economy had…per capita national income…103 percent of West Germany, compared to a mere 31 percent in 1991. …Here is the case of an economy that was relatively wealthy, but lost out in a relatively short time… Based on the official statistics on national product the East German growth rates were very impressive. However, …the actual performance was not that impressive at all.
Sleifer has two tables that are worth sharing.
First, nobody should be surprised to discover that communist authorities released garbage numbers that ostensibly showed faster growth.
What’s really depressing is that there were more than a few gullible Americans – including some economists – who blindly believe this nonsensical data.
Second, I like this table because it confirms that Nazism and communism are very similar from an economic perspective.
Though I guess we should give Germans credit for doing a decent job on product quality under both strains of socialism.
I want to call special attention, though, to a column by an economist from India. Written back in 1960, even before there was a Berlin Wall, he compared the two halves of the city.
Here’s the situation in the capitalist part.
The contrast between the two Berlins cannot miss the attention of a school child. West Berlin, though an island within East Germany, is an integral part of West German economy and shares the latter’s prosperity. Destruction through bombing was impartial to the two parts of the city. Rebuilding is virtually complete in West Berlin. …The main thoroughfares of West Berlin are near jammed with prosperous looking automobile traffic, the German make of cars, big and small, being much in evidence. …The departmental stores in West Berlin are cramming with wearing apparel, other personal effects and a multiplicity of household equipment, temptingly displayed.
Here’s what he saw in the communist part.
…In East Berlin a good part of the destruction still remains; twisted iron, broken walls and heaped up rubble are common enough sights. The new structures, especially the pre-fabricated workers’ tenements, look drab. …automobiles, generally old and small cars, are in much smaller numbers than in West Berlin. …shops in East Berlin exhibit cheap articles in indifferent wrappers or containers and the prices for comparable items, despite the poor quality, are noticeably higher than in West Berlin. …Visiting East Berlin gives the impression of visiting a prison camp.
The lessons, he explained, should be quite obvious.
…the contrast of the two Berlins…the main explanation lies in the divergent political systems. The people being the same, there is no difference in talent, technological skill and aspirations of the residents of the two parts of the city. In West Berlin efforts are spontaneous and self-directed by free men, under the urge to go ahead. In East Berlin effort is centrally directed by Communist planners… The contrast in prosperity is convincing proof of the superiority of the forces of freedom over centralised planning.
Back in 2011, I shared a video highlighting the role of Ludwig Erhard in freeing the West German economy. Given today’s topic here’s an encore presentation.
Samuel Gregg, writing for FEE, elaborates about the market-driven causes of the post-war German economic miracle.
It wasn’t just Ludwig Erhard.
Seventy years ago this month, a small group of economists and legal scholars helped bring about what’s now widely known as the Wirtschaftswunder, the “German economic miracle.” Even among many Germans, names like Walter Eucken, Wilhelm Röpke, and Franz Böhm are unfamiliar today. But it’s largely thanks to their relentless advocacy of market liberalization in 1948 that what was then West Germany escaped an economic abyss… It was a rare instance of free-market intellectuals’ playing a decisive role in liberating an economy from decades of interventionist and collectivist policies.
As was mentioned in the video, the American occupiers were not on the right side.
Indeed, they exacerbated West Germany’s economic problems.
…reform was going to be easy: in 1945, few Germans were amenable to the free market. The Social Democratic Party emerged from the catacombs wanting more top-down economic planning, not less. …Further complicating matters was the fact that the military authorities in the Western-occupied zones in Germany, with many Keynesians in their contingent, admired the economic policies of Clement Atlee’s Labour government in Britain. Indeed, between 1945 and 1947, the Allied administrators left largely in place the partly collectivized, state-oriented economy put in place by the defeated Nazis. This included price-controls, widespread rationing… The result was widespread food shortages and soaring malnutrition levels.
But at least there was a happy ending.
Erhard’s June 1948 reforms…abolition of price-controls and the replacement of the Nazi-era Reichsmark with much smaller quantities of a new currency: the Deutsche Mark. These measures effectively killed off…inflation… Within six months, industrial production had increased by an incredible 50 percent. Real incomes started growing.
And Germany never looked back. Even today, it’s a reasonably market-orientednation.
I’ll close with my modest contribution to the debate. Based on data from the OECD, here’s a look at comparative economic output in East Germany and West Germany.
You’ll notice that I added some dotted lines to illustrate that both nations presumably started at the same very low level after WWII ended.
I’ll also assert that the blue line probably exaggerates East German economic output. If you doubt that claim, check out this 1990 story from the New York Times.
The bottom line is that the economic conditions in West Germany and East Germany diverged dramatically because one had good policy (West Germany routinely scored in the top 10 for economic liberty between 1950 and 1975) and one suffered from socialism.
These numbers should be very compelling since traditional economic theory holds that incomes in countries should converge. In the real world, however, that only happens if governments don’t create too many obstacles to prosperity.