The Capitalist Road to Serfdom

To some, Friedrich Hayek's book The Road to Serfdom is a cautionary work. To others it is an instruction manual. It answers the question under what conditions free people can be made into serfs.

Just because some people are capitalists (meaning rich people), it does not make them supporters of capitalism. Under certain circumstances, they will act against the principles of capitalism. For example, they will generally not refuse a profit or a new idea for profit just because doing so endangers competition, the markets, and perhaps the very system that made them rich. They do not run their affairs by any particular philosophy but by the rule of always working to increase their store of capital. If the best way to do that seems to be enslaving the population and moving away from capitalism, then they will be sorely tempted to become slavers. If for no other reason, they will do it in self-defense, to prevent other capitalists from striking first and enslaving them instead.

In fact, the notion that free markets are self-regulating for the good of all encourages capitalists to "think outside the box" in order to maximize their capital. That is, capitalism itself encourages them not to let moral or philosophical boundaries restrict their scope of action. Playing by the rules is for losers. After all, the free market itself will restrain them if they go too far.

Or not. This is where philosophies of capitalism break down. Cooperation is not always the "rational" choice (meaning "rational" in economic terms). When the disparity in wealth between rich and poor becomes large enough, the free market is no longer strong enough to regulate the activities of the rich. From the capitalists' standpoint, it is no longer worthwhile to cooperate in poor, weakened markets even if they themselves are the ones who weakened the market. At that point, the rational choice may be coercion rather than cooperation, and the rich may choose to work to make the markets less free, less competitive. So much for Adam Smith's "invisible hand."

These thoughts might be considered theoretical except for the recent examples of Greece and Cyprus. The coercive tactics by the troika of the EU, ECB, and IMF are on public display. In Cyprus, the government has been forced to restrict capital flows and confiscate deposit accounts, all in the name of saving capitalism. And all against the principles of capitalism.

Fortunately for the average Cypriot, the proposal to confiscate funds from "insured" accounts was too raw and was eventually dropped. However, the idea does tell us what European leadership was thinking. They want the money, and they will get it by whatever means they can. The poor dodged a bullet in this case, perhaps.

Unfortunately there is more than one bullet, and the Cypriot people will not dodge all of them. One large bank already is being closed, leading directly to higher unemployment and leading indirectly to economic pressure on the bank's vendors. Capital controls will slow the economy even further and increase the price of doing business. We do not know exactly how things will work out, but it seems likely that the average Cypriot will experience even tougher times in the near future than they have already experienced.

At least the rich "Russians" will take the bigger part of the immediate hit, perhaps losing up to 40% of their deposits above the insured limit of 100,000 euros. For the really rich ones, we can be sure that this is very annoying, but it does not threaten their livings like confiscations would threaten the livings of the poor. In addition, the rich, foreign "Russians" (really, many different entities and not necessarily foreign to Cyprus) are already seeking to blunt the confiscations and make deals so that they recover as much as possible. The rich are never without resources.

We hope that the people of Cyprus will take this incident as a warning that they should take collective action to secure their savings in better ways.

From tosoc.org's point of view, poor Cypriots thought they were depositing their euros in safe, insured accounts, and that bank regulations would keep the banks from investing in risky assets. The truth was that the banks were combining internal deposits and external deposits, insured and uninsured, and using them to invest in highly risky external assets. Poor Cypriots did not realize that their deposits might be considered reserves against the failure of those risky asset purchases. They also did not realize that external "Russian" money was used to multiply the risk.

It all seems especially crazy since the Cypriot bank managers already knew about the banking crises in two other island banking centers by the end of 2008, Iceland and Ireland.

We recommend that Cyprus bring back the pound (a.k.a. the lira) for internal transactions. Except for those in government or working for the government, Cypriots would generally choose which market they want to be in. The risky external market using the euro or the safer internal market using the lira. Those in the internal market will only be allowed to own lira while those in the external market will only be allowed to own euros.

The reason why persons in the government would only be allowed to own lira would be to make sure that their self-interest is to protect the lira. If the interest of the Cyprus government is in the euro, then its interest will be in conflict with the interests of the people (which explains why recently the Cyprus government was considering confiscating "insured" deposits). Even if by some chance the government had the people's interests at heart, the Cyprus government has little power over the euro anyway.

The banks would have an external division and an internal division. The external division would work in euros, would not be insured, and would have light regulation. Deposit at your own risk.

The internal division would work in lira, would be totally insured, and would be heavily regulated. In particular, the reserves of the internal division would not be available as reserves for the external division. The use of different currencies would make this easier to accomplish because no external entity could "vacuum up" all the available cash. The ability of the Cyprus government to print lira would also make sure there was always enough cash.

The tricky part is how to convert euros to lira and vice versa, and how much conversion to allow. The nation of Cyprus would have to earn euros and spend euros for international trade. External debt would be denominated in euros and it would still be possible for the nation to get into debt trouble. However, the economic relationship between Cyprus and the eurozone would be simpler, and simpler to regulate. At the same time, unlike euros, the eurozone could not use Cypriot lira anyway even if they could get hold of them. The temptation to coerce and confiscate would be less.

The Australian economist Steve Keen has criticized the current dominant form of economics ("neoclassical economics") in part because it assumes that capitalist systems are stable. Like him, but for somewhat different reasons, tosoc.org does not at all believe that capitalism is stable by itself. Sure, if markets are free and fair, capitalism is great. The trouble is that the very operation of capitalism produces capitalists who gain the power to coerce the markets. Once the markets are not free any more, the neoclassical models are almost useless. Two current examples of this are Greece and Cyprus, who are suffering because of coercion. The creation of multiple exclusive markets with their exclusive currencies, each market regulated to have better-balanced competition than the single huge market, would help prevent the market distortions that capitalists cannot help themselves from creating.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (tosoc.org)

Copyright © 2013 TheOtherSideOfCapitalism

Cyprus: The Breakdown of Capitalism II

Coming from the "rich tail wags the poor dog" department, we find this week that a few decision-makers in the Cyprus banks, plus failed Cyprus bank regulation, have caused risk to every Cypriot's savings. One proposal was to confiscate 6.75% even from allegedly "insured" small accounts! And the politicians claim, "We have no choice!"

In tosoc.org's eyes, this is a typical financial squeeze play. In order to save the world, the poor have to pay for the mistakes of the rich.

It worked like this: first you lure Cyprus into the euro zone in 2008. Then you allow Cyprus banks to take in deposits from Russia and elsewhere until the banks are 7 to 8 times the size of the Cyprus GDP. Mix in a financial crisis and a lot of bad loans to Greece, and suddenly the people of Cyprus find themselves on the hook to save the banks.

If we seem repetitious at tosoc.org, it is because we see the same trick working over and over again. You chain the poor with a single currency and they are prosperous for a while. Then a financial crunch comes and you whip them with economic fear until they cough up their money. The poor cannot escape because they are chained to the single currency.

The rich on the other hand work in many currencies. They escape.

If you say this cannot happen in the United States, tosoc.org says that it already has. It has just happened in a different form. Instead of confiscating our bank accounts, the government has added enormous amounts of public debt. This is debt that the rich ultimately do not have to pay because if taxes get too high, they can run away to "friendlier" countries, leaving the debt problems behind.

If the Cypriots do not pay up, another proposal is that they sell their country cheap to raise the cash. In an online Reuters article by Michelle Kambas here, the plan is described this way:

Trying to placate its lenders, the government proposed to parliament a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened by JP Morgan to "a national fire sale".

When an entire nation has to sell its future cheap to pay off obligations made by a few, capitalism has broken down. That is why we called the Greek experience a breakdown of capitalism, and this is just another manifestation of it.

Note also this quote in an online article by Jeff Macke from Breakout, and the accompanying video discussion with Jon Najarian.

Should the EU come under meaningful strain because of a $13 billion bailout, then it was never a real Union in the first place. For the time being, Cyprus is a camera opportunity. The real victims are lined up in front of ATMs trying to extract their deposits, while the truly well-heeled make alternate plans.

Exactly. Many have made this point, including tosoc.org. Why are the few allowed to victimize the many?

Laws and regulations have failed to put a stop to this. That is why tosoc.org recommends multiple exclusive currencies and markets. This automatically imposes capital controls when not everyone is allowed to own units of some currencies. If the internal economy of Cyprus had still been run on the Cypriot pound (a.k.a. the lira), and no one but poor Cypriots allowed to own it, then there would be no currency shortage and threats of confiscation now. There would have been no internal bank closures and the poor would have access to their money.

At the same time, with multiple exclusive currencies, external Cypriot banks could still have played the external currency game with the Russians. Everyone would have known that the people of Cyprus would not be on the hook for international shenanigans. Let the international rich take their own chances. Yes, the banks could fail and some Cypriots would be put out of work temporarily, but it would not have become a national crisis and burden.

One way to express the basic problem is that large banks can put entire populations at economic risk, and they do. The way to stop that is to firewall them away from the rest of us by making them operate in worldwide, external currencies that the poor do not use. That way they cannot reach directly into the pockets of the poor to save themselves, or hold the people hostage in order to make governments help them do it.

The case of Cyprus puts the open and raw extortion efforts by the EU, the ECB, and the IMF on public display. We have a solution at tosoc.org, so please help us put a stop to it, both in the U.S. and elsewhere.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (tosoc.org)

Copyright © 2013 TheOtherSideOfCapitalism

The 24/7 Worker

No matter how much you work, it is never enough. No matter how much you train, it is never enough. No matter how much you give, it is never enough. That is the attitude of world corporations. Continuous improvement. "Harder, better, faster, stronger." The question is what this vision of the future will lead to.

Take for example the popular Agile with Scrum management methodology. It organizes the time of teams of workers by sprints, often two-week periods of work on projects. The goal of management of course is to pack as much into these sprints as possible. After the team finishes one sprint, they immediately start another. The teams are always sprinting, never resting, and never really thinking because they have short-term delivery goals. In the past, long-term difficult projects became death marches. Now they can become an series of death sprints. Nothing has really changed.

Consider also today's employee evaluations, used to decide who gets higher percentage salary increases each year. They are used as well to help decide who to let go if times get tough. Frequently the highest mark on these evaluations is "exceeds expectations." This would make sense if the worker were being compared to an average worker in the position. But in the "harder, better, faster, stronger" world, that is not the case. Workers are expected to exceed their own expected efforts. That is total nonsense, of course – how can one expect to exceed what one already expects? Managements lose a little of their touch with reality when they put this kind of thing in their employee evaluation process.

As with politicians, however, maybe it is better not to ask whether "expecting to exceed expectations" makes any sense. Maybe it is better to ask what management means when they say it. At tosoc.org, we believe that it means that workers' productivity is expected to grow between every evaluation period and the next. The only job security workers have is to continuously increase their output. And for the same pay.

The issue, really, is what constitutes fair pay for work done. There is a story from the old Soviet Union in which a young Communist Party member is sent to work in a coal mine. On his very first day he notes that it is easy to meet the assigned quota and wonders why his experienced co-workers cannot keep up.

When they realize what he has done, however, his co-workers do not praise him. Instead they gang up on him and shove him against the wall. "You fool! Look, if we meet today's quota, then tomorrow they will increase the quota! And then more after that! We pretend to work and they pretend to pay us, and it is good enough as it is. Take your Revolutionary fervor and shove it! Do not make it harder for us to live!"

The point is that management, either capitalist or communist, will always demand more productivity. If they successfully convince workers to "take the hill," then they will exploit the workers as far as they can. They will exhort workers to "take" a sequence of ever-higher "hills" until the workers fail.

This accomplishes two things. First, the managers can tout their own glory. "See, we got more out of our workers than our competitors did." Second, it is always psychologically useful to put workers in the wrong by making them fail, especially if one can make them break their own promises. This is a variation of the financial "squeeze play" that tosoc has mentioned before.

As in the story from the Soviet Union, workers get used to being in trouble at all times and to failing management expectations. In fact, it is important to fail in order not to be exploited. Workers cannot overtly resist management, so resistance must be passive – passive-aggressive. This has advantages for both sides because it is essentially an armistice. The workers do enough work, get paid enough, and take the blame for their failure to do more. The managers get to crack the whip, blame the lazy workers, and feel personally superior to the "average man."

Gradually, however, management is beginning to intrude more and more into the lives of American workers. The downside of instant communications is that you are never more than a text or phone call away from work. How can a worker refuse to do just an hour or two of urgent extra work every once in a while (unionized workers being an exception)? It is when urgent situations, or emergencies, last for weeks and even months that one realizes that one is being exploited.

Some managers call workers in for overnight sessions, offering some kind of energy boosting drink for free. Instead of the exception, putting in extra unpaid hours is expected, though managers try to make it as "fun" as possible. This makes some sense for start-ups where the workers have significant numbers of stock options and are trying to get rich. However, many of these situations are fakes because workers get only a few stock options and the company has no chance of being the next "Google."

Now that so many enterprises are 24/7, tosoc.org expects that managers once again dream of 24/7 workers. If only there were a drug that workers could take so they would not need sleep and would stop caring about what happens outside the workplace. At one time, amphetamines were the solution, but it turned out that amphetamines have undesirable effects. Now that there are companies with "X"-hour energy drinks, however, maybe further research will increase them to 10- and 18- and, ultimately, 24-hour energy boosts.

There are limits to growth, yet the job of corporate management is to encourage growth in every way. For workers, that means ever-more training, ever-greater donations to the company's favorite charities, and ever-higher productivity per worker. Management is always a little insane because they by nature question all limits. It is true that science and technology have helped humanity overcome so many limits over the last few centuries. This may have led us into overconfidence that all limits can be overcome and all expectations exceeded.

To illustrate this, there was once a U.S. general in charge of a satellite communications program who was told that there was a four-millisecond delay between sending and receiving. Naturally the general became angry, demanding that this four-millisecond delay be eliminated. Of course, the four-millisecond delay is due to the speed of light, a physical law. It is not clear whether the general was ever convinced that it is pointless to demand the overturning of a law of physics.

On the other hand, an enterprising researcher might say, "Sure, General. We can do that with a new research program. We estimate that it will take 20 years and 100 billion dollars." Do not fight the craziness; work with it.

All management is a little crazy in demanding never-ending growth and improvement. Tosoc.org thinks that this is necessary, however, to keep us all on our toes and to keep us questioning our assumptions. That is one reason why we support the rich and propose external currencies and markets for their businesses.

What we want to avoid is crazy systemic processes that drive workers to fail and into passive-aggressive behaviors. To accomplish that we recommend multiple exclusive currencies and markets, national unions for all workers who are members of internal markets, and that all elected officials and government employees be paid only in internal currencies. These steps plus a few others will by their nature blunt the exploitation of workers by external companies and by their own government, and reduce the impact of management craziness.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (tosoc.org)

Copyright © 2013 TheOtherSideOfCapitalism

The Law is No Excuse

Many pundits say that our government is dysfunctional. They say that from the President and his administration to the Senate and the House of Representatives, partisan politics rule and they cannot get anything done. We hear that they are a bunch of clowns, playing around while the country goes down the drain.

Tosoc.org does not see it that way. Those who get elected to federal offices have survived a very tough and competitive process, and they represent their constituencies. They are very competent in their way and they are not clowns. The reason they cannot agree on things is that the American people cannot agree. When the nation is divided in half on the issues, it is only natural that half of the elected officials are opposed to the other half, and no permanent satisfactory policies are possible.

If the government is dysfunctional, that is only a reflection of the dysfunction of the electorate.

U.S. voters are divided right down the middle by economics. Half are net lenders (the rich) with their supporters. The other half are net borrowers (the poor) with their supporters. Net lenders want relatively high interest rates, deflation, and "the gold standard." Net borrowers want low interest rates, inflation, and money-printing.

(Those of you who have read previous posts on The Other Side of Capitalism may recognize that the simultaneous desires for these opposed sets of policies in the populace results directly from the single currency. If the U.S. had multiple exclusive currencies, policies could be made differently for each currency. In other words, the single currency causes the policy conflicts.)

Another factor in the policy conflicts is political ambition. The basic political ambition is to raise oneself above others by centralizing power in oneself and one's family as far as possible. Not even the most egalitarian political theory has ever prevented top leaders from seeking control over everything and thereby gain the power to meddle in everything, both within and outside their societies. We have mentioned already the Kim dynasty in North Korea. We feel confident that Hugo Chavez of Venezuela, who passed away recently, was headed in the same direction. We consider this a fundamental fact of the human condition, one that will never change while human beings exist.

Desire for a single currency is a corollary to the desire to centralize power. Currencies make good chains because it is hard for people to make the connection between control of the currency and control of the people. Economic policies are boring. It is hard to inspire collective action against a change in interest rates.

It has been said that one should never waste a good crisis, and we have seen that principle in action frequently in recent years. Fiscal and monetary crises require solutions, but the drive to centralize power means that the solutions always end up ratcheting the economic chains tighter around us. More money yet less wealth. More debt yet high unemployment.

Here is a final additional note about centralization of power in the U.S. Speaker of the House Nancy Pelosi famously said about the healthcare bill ("Obamacare") that Congress would have to pass the bill to find out what was in it, since perhaps none of them had actually read it at the time of the vote. On the surface this seems perfectly ridiculous. How can Congresspersons think of themselves as lawmakers if they do not even know what laws they are making? Perhaps the old saying is outdated: "Ignorance of the law is no excuse." Perhaps we should think outside the law.

Tosoc.org does not see Congressional ignorance of the law as the main issue. We see it as an admission by the legislative branch that the executive branch is supreme. It is a statement that American society can no longer be managed by legislation, but must be managed by bureaucratic regulation. The healthcare bill was not "law" in the traditional sense, but advice, recommendations, and powers granted to the executive branch regarding health care in the U.S. In that sense, precise wording was not important, and that is why it was acceptable to pass the bill even if no one actually read the text. Congress acted more as an advisory panel and in the future it will act as a group of health care customer service reps, handling complaints and fixing problems as they arise.

In a sense, the Supreme Court did the same thing as Congress with the healthcare bill. Chief Justice John Roberts with his tie-breaking vote struck down the the bill's language. That opinion upheld the traditional role of the Supreme Court. Then he went beyond the traditional role. Like a teacher correcting an errant student's paper, he told the Obama Administration and Congress that they got a passing grade on their work, but not a perfect grade. It was clear what they meant, and their clear intent passed the Constitutional test. Unfortunately their wording in places expressed thinking outside the Constitution. Chief Justice Roberts did not make them re-write it to make it correct, but in the future, in similar situations, they should take his advice and use "tax" wording rather than "penalty" wording.  In other words, bad wording in a bill is no excuse for striking down good policies.

Tax or penalty, so what? The text is not very important, after all, and bills are just text. What is important is to get things done. The U.S. Supreme Court will not stand in the way of the executive branch doing what is right.

Some see this centralization of power in the executive branch and are appalled. They feel insecure. They feel that the balance of power has broken down and that the rule of law is breaking down. They want to restore it. They want to return to some imaginary legal "Golden Age."

Tosoc.org has only limited sympathy for that viewpoint. There never was a legal Golden Age for everyone, in the U.S. or anywhere else, and we expect that there never will be. For example, ask almost any African-American how impartial the law was during the Segregation period, and how the Constitution was used.  Large segments of the U.S. population come from subcultures for which the law has been a source of insecurity instead of security. These subcultures tend to celebrate lawbreakers.

Note that tosoc.org has already pointed out that legal solutions to the problems of capitalism are not very effective.  While the rich are not necessarily above the law, they have the power to blunt the law and escape it at need.  Law dominates the poor much more than the rich.

So tosoc.org does not recommend legal solutions as such. We are thinking outside the box, too. We want to set up systems that operate more cooperatively. Systems where ambition and competition are limited not by porous legal boundaries, but by more natural boundaries -- that is, by currency boundaries.

If politicians had the policy flexibility that multiple exclusive currencies would give them, then they could cooperate rather than compete. They could do the right thing for both the rich and the poor at the same time.

They could also nurse their most ambitious dreams while still serving their constituents well. The ladder of ever more competitive markets separated by exclusive currencies would also be a political ladder, not just a prosperity ladder. Budding policy makers could prove themselves on less competitive levels and "graduate" to more competitive levels as they gain experience, but the system would not give them enough power to abuse anyone very much at any level.

At tosoc.org, we believe that the base cause of our economic policy differences is the single U.S. currency. With multiple exclusive currencies, the power struggles would not be necessary because policies could be more flexible. Furthermore, there would be fewer crises for the ambitious to take advantage of in the hope of gaining more and more power for themselves. We should give multiple exclusive currencies a try.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (tosoc.org)

Copyright © 2013 TheOtherSideOfCapitalism

Motivational

Some people wonder how society will work if we take away the chain of a single currency and the whip of economic insecurity.  They may believe that too few will work unless all the poor are threatened with bankruptcy and with having their loved ones kicked out of their homes.  These are sentiments worthy of Julius Caesar in the old Roman Empire.  He was a very, very educated and civilized man for his time, but humanity has learned a thing or two since then.  By today's standards he would be considered a barbaric thug and a criminal.

For many thousands of years, it took almost all able-bodied men and women to produce enough so that all could survive.  In good years, the population could increase, but in bad years, there was starvation.  The hard lessons learned in those times still carry over in our attitudes about labor and production, and who gets what.  The motivators for work were starvation, illness, and death.

Today this attitude is still common among the poor, but means nothing among the rich.  It is an attitude that may even be encouraged by the rich since it helps keep the poor in their place.

We at tosoc.org have made the case instead that consumption is the other side of the coin of production and is equally valuable (see our post Consumers of the World Unite!).  Science and automation have changed things so that fewer and fewer workers are able to meet the needs of more and more people.  We no longer need so many laborers producing physical things.  Indeed, manufactured things in great numbers pose a threat to the environment.

Our current economic crisis resulted in part from the fact that our economic heritage favors production over consumption.  As production becomes cheaper and easier, and our economy, run according to outdated ideas, becomes more unbalanced.  Maintaining prices becomes a greater and greater struggle.

Most people will still not accept the changes needed to make things better, however.  They know in their hearts that a person has to work in order to earn enough to consume.  To "give people money" or forgive them of their obligations is a "moral hazard."  Not so fast.  If we have learned one thing from the financial crisis, it is that the biggest "moral hazard" is a banker with a new idea.

Instead we should recognize that for those who are safe, educated, and well-fed, very few want to become lotus-eaters, doing nothing.  People with high morale, opportunities, and positive visions of the future do not want to sit around.  They want something valuable to do.

In today's world, then, perhaps we should require that people consume enough in order to deserve their jobs.  Their consumption gives others (perhaps themselves) the chance to realize their own visions.  Consumers make production, and therefore producers, valuable.  The trick is how money fits in.

This can be thought of in terms of parents and children.  Children in the United States are not allowed to work.  Their parents guarantee them food, clothing, and shelter.  They do not generally sit around and refuse to do anything, however.  Very few healthy children from positive environments want to do that.  They are not motivated by fear of scarcity and starvation.  Instead they are motivated by marginal improvements in their environment and personal status.  They are motivated by visions of greater abundance.

Tosoc.org is about abundance, not scarcity.  We want everyone to participate in the economy, "earning" money and increasing the abundance in their lives (however they interpret the term abundance).  Certainly, some are too old, too young, or too infirm to participate, but many can and will.

It will be possible to do nothing in the world that tosoc.org wants to build.  However, even though society guarantees everyone the basics, society is not powerless.  For example, a parent with a recalcitrant child might say, "Yes, I have to provide you with food, clothing, and shelter.  However, no law says I have to provide you with the clothing you want or the food you like, or an allowance, or the respect you think your opinions deserve.  These things you have to earn for yourself."

In the same way, society will not give the best to those who do not earn more than they consume.  Individuals will not just be handed money for nothing.  Everyone will have basic food, clothing, and shelter, and a job.  If people want to go beyond that and customize their existences, purchasing the extra things they want, then they will have to earn a surplus of money to do so.

We want everyone to be motivated to earn more and more money.  They will not need the money to buy food, clothing, and shelter, as in the barbaric past.  They will need the money to get what they want and "keep up with the Joneses."  Keeping up, moving ahead, and proving one's worth to society are powerful motivators that will keep most people working hard at both consuming and producing.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (tosoc.org)

Copyright © 2013 TheOtherSideOfCapitalism