Why didn't it work?

Marge, I agree with you -- in theory. In theory, communism works. In theory.
- Homer Simpson.

Communism failed for many reasons, not least due to the effects of Stalin's dictatorship. Yet modern communists are quick to point out that Communism as a theory doesn't exclude free and fair elections, nor does it by nature result in a dictatorship of the sort we saw under Stalin. And you know what? They're right. But there's no point protesting and saying "True Communism has never been implemented" when the simple fact is that a massive long-term communist experiment was tried in Russia between 1917 and 1991 and, while it did lead to many notable successes (Nuclear weapons, Space Program, recognised superpower) we need to remember that it did collapse.

One of the more interesting subjects I studied at Macquarie University was "Modern Russian History", taught by David Christian. Christian was a communist in his youth and did his post-grad work in Leningrad in the early 1970s. Over time he became a critic of communism - not so much because of an ideological shift but because he came to realise that, as an economic system, it failed to deliver what it promised. He pointed out that whenever the Soviet Union wanted to increase the production of goods (eg wheat, tractors, AK-47s) it would simply increase the amount of factories or farming land to achieve it. To put it mathematically, if x is the amount of land set aside for growing wheat, and y is the output of wheat, then the path to 2y is to 2x - doubling the output meant doubling the means of production. The problem arose when there was no more room for increasing output - short of felling Siberian forests and forcing women to have lots of babies.

Capitalism, by contrast, (and this is Christian's argument), sought to increase production by increasing efficiency and productivity - and the way this was done was through profit driven innovation. Rather than being content with 2x = 2y, capitalism sought to change the equation to read x = 2y, to increase production without increasing labour or space or equipment by the same proportion. Christian therefore concluded that, in the "war of ideologies" that typified the post-war world, Capitalism had won because it was able to (eventually) deliver better and cheaper goods and services for people. Christian did not embrace capitalism, though - he still saw within industrial capitalism the exploitation and suffering of workers and thus the seeds of dissent that Marx saw. (note: this is my summary from memory of what Christian argues in his book Imperial and Soviet Russia).

Christian's arguments are very cogent because he steers away from the Stalinistic dictatorship / loss of democracy line of argument that so many people today use to explain Communism's failure. While it is no doubt true that Stalin and the lack of democracy were serious blights upon communism, their presence alone did not lead to communism's collapse. There are three nations today which espouse communism - China, North Korea and Cuba. Of those three, only one (North Korea) has remained ideologically true. China and Cuba abandoned Communist principles decades ago, and these nations have essentially become undemocratic societies with varying degrees of free market activity and private ownership of wealth (anathema to pure communism). By contrast, North Korea continues to be the beacon of hope for the workers of the world, and what a terrible, inefficient, controlling and frightening beacon that has turned out to be.

So all hail capitalism? Not quite, of course. I have often in the past compared the misguided ideological purity of the communist party to the ideological purity of conservatism - especially political conservatism in the United States. This is one of those times.

Modern American Conservatism (modern) can be traced back to the election of Ronald Reagan in 1981. For the past 28 years, US political discourse has been dominated by conservative beliefs and ideals. Yet in that time we have not only seen lower GDP growth than the previous period, but also a massive shift of wealth to the rich. Real median household income growth since 1981 has, according to the Krugmeister, been around 0.7% per year. Moreover, US Census figures clearly show that median income has stagnated since 2000, while the top 5% of wage earners have increased their income by 25% over the same period.

Then we add to this the ridiculous level of credit market debt as a percentage of GDP, which shows just how much of America's current wealth is illusionary. Also add the massive expansion of public debt under Reagan and both Bushes, the financial corruption of conservative politicians in recent years, the FEMA debacle in New Orleans and, of course, the housing bubble and credit market collapse which has led the world into the worst economic downturn since the great depression. Not to mention the conservative controlled Federal Reserve Bank (Alan Greenspan and Ben Bernanke were both appointed by conservative Presidents. Alan Greenspan was a disciple of conservative philosopher Ayn Rand).

Conservatives will, of course, offer all sorts of retorts to these problems. Conservatism doesn't condone corruption; conservatism demands fiscal prudence; conservatism demands good government. Yet there is no doubt that conservatives held onto political power during the period of history in which corruption, fiscal stupidity and government incompetence occurred. Arguing that conservatism and free market capitalism wasn't really applied during this period is pretty much the same sort of argument as those who say that the USSR never practised "real" communism.

Nevertheless, I am sympathetic to those who do argue that conservatism and free market capitalism wasn't really applied. I am also sympathetic to those who say that the USSR never practised real communism too. Yet there is no doubt that the conservatives who today complain that conservatism wasn't really tried are the same conservatives who enthusiastically voted for conservative politicians over a long period of time and supported the conservatives in power when things appeared to be going well. When asking the question "why didn't it work?", conservatives need to examine themselves and their own failures rather than blaming others - in short, they should take responsibility for their own actions (or lack of them) rather than threatening civil war if they don't get their way.

Ultimately the answer, I think, lies in two areas:

1. No pure ideology can be practised, so we should embrace a more centrist political position (which is why I describe myself as an Ordoliberal).
2. Politics corrupts, so stricter anti-corruption policies should be initiated on politicians at all levels (which is why I like the idea of Demarchy).

Fascism and Communism

One of the more unedifying sights in the last twelve months has been American conservatives branding Obama as a Nazi, a Fascist and a Communist. Those of us who know something about history naturally scoff at these things, yet an entire section of the American population seems to think that the three isms - Nazism, Fascism and Communism - are pretty much the same thing. Strangely enough this realisation has only come about in the last few years - due mainly I would argue to a political discourse so crass that labelling your opponents as "Fascist" or "Nazi" or "Communist" or "Socialist" has become the norm (a process which I think will result in the sort of conservative violence already experienced at Oklahoma City and the Atlanta Olympics, both of which were perpetrated by government-hating conservatives).

Fascism and communism have been studied for decades and, while the two share similarities, they are different to one another. Fascism always places political power into the hands of a dictator. By contrast, Communism is run more by a committee. Both are non-democratic. When it comes to relationships with business, the two are very different. Fascism has always been supported by a nation's rich and powerful. Industrialists and business owners were supportive of the Nazi rise to power, they were supportive of Mussolini in Italy and they were supportive of Franco in Spain. Communism, of course, opposed the wealthy class and any form of private enterprise. The Soviet Union gradually removed all forms of private enterprise from Russia and replaced it with government owned and operated factories and farms. Private property under fascism was respected (and the greater the price of the property, the more respect it gave to the owner), whilst under communism it was relegated only to personal belongings (stealing was, after all, an offence in the USSR).

The biggest difference between Fascism and Communism was seen during the Spanish Civil War. Franco and the nationalists were supported heavily by Nazi Germany and Fascist Italy during this war. Those who joined up on the anti-Fascist side and who supported resistance against the Nationalists were called the Republicans. Who sent guns and troops to fight against the Nationalists? One nation was Mexico, while international brigades (the flag of which is to your upper right) existed for any anti-Fascist from overseas who wished to fight for freedom. Oh, did I mention that the Soviet Union was right behind the anti-Fascist effort too? Hardly something a fascist government would do. But then again, the USSR was not fascist.

This is not to say that the Soviet Union wasn't guilty of oppressing people. George Orwell, the famous author (and, let it be said, a socialist), fought against the Nationalists during the Spanish Civil War. He himself criticised the Soviet Union for being just as bad as the Nationalists, an act which the Soviets didn't appreciate.

Communism is not Fascism. The two are very different. But they do share one thing: they have oppressed people. And Obama is neither a Fascist or a Communist - he's just a liberal politician.

Krugman on pre- and post- Reagan

Important:

Take the United States, which wasn’t damaged in the war. Take per capita real GDP. Give hostages by taking data from 1950 to 1980, which means including the 1980 recession, but stopping at 2007, so that the current slump isn’t included. Then here’s what you get:

Growth in per capita real GDP from 1950 to 1980: 2.2 percent per year
Growth in per capita real GDP from 1980 to 2007: 2.0 percent per year

Oh, and if we look at real median family income instead, we get:

Growth from 1950 to 1980: 2.3 percent per year
Growth from 1980 to 2007: 0.7 percent per year

Sorry: there’s no measure I can think of by which the U.S. economy has done better since 1980 than it did over an equivalent time span before 1980. It may be something you’ve heard, it may be something you’d like to believe, but it just didn’t happen.

In other words, since Reagan and the era of modern finance, GDP growth has dropped and far more money has gone to rich people. The era of conservatism has led to the ordinary person being left behind.

Current Real Interest Rates

Sources to click on:

10 Year Bond Rates
Inflation Rates

Edit:

2009-11-20: Figures on Sweden, Switzerland and Mexico were messed up by me.

Random Thoughts on inflation and interest rates

Let's assume that you live in an area that has been flooded. Let's assume that there are thousands of you sitting in houses on a large "island" caused by the flood. Now let's assume that the flood takes years to subside and that you don't have any way of getting goods from the outside or exporting goods to the inside. Let's also assume that there is no legal tender and that rescue is impossible.To summarise:

• Forcible closed economy for many years.
  
• No way for imports/exports.
• No currency.
• Rescue is impossible.
  

So what would you do? Naturally the best option would be to ration out necessities, like food. Because food is so scarce, and because it is so important, hoarding it for future use is logical. Other economic activities, like dance classes, would become less important. As a result, the relative value of food goes up while the relative value of dance classes goes down. In this environment, people are more likely to stop teaching people to dance and more likely to plow up their back yards to grow food. By contrast, people who chose to teach dance instead of grow food are idiots.

Now let's add money into the equation. With the economy suddenly becoming closed and no longer having the ability to export/import goods and services, the result would be a huge jump in inflation in some sectors (such as the cost of food) and deflation in other sectors (such as the cost of dance classes). But let's assume that the net effect is inflationary. What to do?

There is a choice - you can increase interest rates to control prices, or you can keep rates low to stimulate production.

If you increase interest rates to control prices, the "economy" contracts considerably. Because money becomes more valuable, people are no longer using it to purchase food, which results in a drop off in the purchase of food.

In other words, the raising of interest rates to control the inflationary effect of a supply shortage leads to the common sense conditions of the currency-less flooded island economy I have outlined.

By contrast, letting money devalue via inflation will lead to people using it to purchase the wrong goods and services, which occurs because confusion over money's usage increases the more often it changes in value. If money keeps inflating out of value, a barter system will eventually result and the "common-sense conditions" will eventually arrive... except the currency system has been ditched.

So, when faced with inflationary pressures from supply shortages, we have a choice - we can either kill off inflation, which leads to common sense austerity in the face of poverty while still using a currency; or we can let inflation confuse everyone for a while before common sense austerity is finally reached after having ditched the currency.

And, of course, the removal of currency then leads to further poverty, or at least a severely impaired potential to regrow.

tl;dr Price stability is essential when using currency, no matter where the inflationary pressure comes from.

Random thoughts on Keynesianism

The net effect of Keynesian stimuli is proportional to its relative broadness.

The broader the stimuli, the less growth seen in the short term, the more sustainable it becomes in the long term.

The narrower the stimuli, the more growth seen in the short term, the less sustainable it becomes in the long term.

Eg: Should we spend $30 billion on one company or upon 3000 companies?

Question: Is debt reduction a better choice than production?

(these are random thoughts outlining some of my thinking, not any of my conclusions)

A weird thought

I have to write this down, just in case it ends up being true.

It is 2009-11-06, 10.19 UTC

I have this theory that Major Nidal Malik Hasan, the guy has been charged with the Fort Hood massacre, was not the gunman. I think he was mistaken for the gunmen and shot by someone responding to the massacre.

The gunman himself committed suicide and is one of the 12 dead people.

Just a wild theory, but I've put it out there just in case.

Living for today makes for bad monetary policy

Ben Bernanke has said that US interest rates will remain where they are - at the historically low 0.25% - for the time being. By contrast, Australia's interest rates have been going up. What's going on?

The only real reason to adjust interest rates is in response to inflationary pressures. The latest CPI figures from the US indicate that prices have remained relatively stable over the past month (+0.2%) while the 12 month result is still negative (-1.3%). From that data alone, keeping interest rates where they are appears to be the right move.

But as regular readers know, I'm not a fan of Ben Bernanke. Bernanke not only misjudged the severity of the current downturn while it was happening, he was also partly responsible for the creation of the downturn, being part of the Fed board that approved Greenspan's negative real interest rate regime. My lack of confidence in him knows no bounds.

Good monetary policy doesn't just depend upon current data - it should also look to the future, and the future for the US Dollar is not bright. I have predicted a dollar crash for many years now and while I am happy to be wrong in predicting the when, I stand behind my predictions of what will happen. Whenever currencies drop in value, the result is more expensive imports which is then translated into higher inflation. Inflation can only be dealt with by restricting money creation, which means that interest rates will have to rise. In short, America's future involves inflation.

Given that my predictions about a US dollar crash are correct, Bernanke's decision to keep interest rates low smack of reactivity rather than proactivity. Had Bernake raised interest rates 25 basis points, he would be acting in response to a future event. Instead, he's stuck in the present.

Such activity is not new. The negative real interest rate regime under Greenspan between 2002 and 2005 was based upon present concerns and ignoring the potential for future problems. It also ignored the teachings of history - that negative real interest rates were a recipe for financial and economic disaster (a point which The Washington Consensus makes). If a dollar crash is coming (and the current data shows nothing but a downward trend), then Bernanke should be doing better - adjusting interest rates in response to a future inflationary environment makes perfect sense.

OSO's Debt Watch

GDP = $14.3015 Trillion (source)
Public Debt = $7.58007414906503 Trillion (2009-11-03)
Debt/GDP ratio = 53%
Population = 308,013,326 (Resident Population + Armed Forces Overseas, 2009-10-01)
Public Debt / person = $24,609.57

Note: In October 2008, the Debt/GDP ratio was 43.43%

Recovery?

The signs are there that the US economy is beginning to recover. The last quarter GDP came out at 3.5% - which, though it might end up being revised downwards over the next few months, does indicate some level of economic growth. Moreover, other signals, such as manufacturing increases, seem to indicate a potential recovery.

I can see two possibilities before us.

The first possibility is that growth will continue over the next few years but the rate of growth will be low. Any form of Keynesian spending of the sort practised by Obama and congress will result in an economic slump over the medium term. The hope, of course, is that the spending will stimulate the economy enough for it to be self-sustaining and thus end up paying off the debt accrued by the stimulus in the first place. Given the sheer level of US public debt (which is approaching my predicted 55% of GDP), I doubt that the benefits will end up outweighing the losses. Yet the US economy has had the ability to surprise in the past so I can't discount the idea that GDP will return to growth over the next 4-6 quarters. What I am certain of is that such growth, if it occurs, will be hobbled. I can't see anything beyond 2% being achieved. In terms of unemployment, such hobbled growth will result in only a slight improvement over the current situation, which is, of course, terrible.

The second possibility is that the 3.5% growth is merely a blip on the way further downwards. This means that Q1 2009 and beyond is likely to see a return to recessionary conditions. One of my predictions for 2009 was for the US Dollar to drop below 60 on the US Dollar Index which, in hindsight, appears to be too pessimistic. Nevertheless, the fall in the US Dollar this year has been the steepest on record and there seems to be little evidence that it has reached the bottom. As I have pointed out over the years, with bond yields too low and business profits rare, why would investors wish to invest in America? The US is still ripe for capital flight given the superior conditions elsewhere (or at least "less bad" conditions). The US Dollar cannot continue to fall without some inflationary pressure and, when it comes, will require increasing interest rates in an already poor economic situation (increasing interest rates always dampens economic growth).

What I can't see is any possibility of the US returning to consistent 3-4% GDP growth. The damage caused by runaway public spending since Reagan, a badly unregulated financial market and cheap borrowing cannot be ignored. There is a time for the US to reap what it has sown, and the harvest has only just begun.