Don’t Know Much About Capitalism

After eight years of watching conservatives blow trillions of dollars and comport themselves like anti-intellectual, jingoistic blockheads, I found myself ashamed to admit that the Left seemed to have all the genuine intellectuals—people who seemed to possess real curiosity, who refused to accept whatever official line the government was shelling out, and who sought genuine understanding instead of name-calling and pointless vitriol.

With the Left now in power, though, they’ve by and large reverted to form. The very same people who just a year ago prided themselves on evaluating every Pentagon press release with an air of suspicion and hostility now accept without cavil whatever the Federal Reserve chairman or the Treasury secretary tell them. They’ll believe whatever economic superstition, no matter how transparently ludicrous, that happens to be in fashion. Whatever happened to “Question Authority”?

Air America host Thom Hartmann is a perfect example. His article on the economic crisis posted at the Huffington Post gets pretty much everything dead wrong, and yet his point of view is by and large the conventional wisdom.

Let’s start with the economists whose ideas, according to Hartmann, led us to the current crisis. Why, they’re “Ludwig Von Mises, Freidrich [sic] Von Hayeck [sic], Milton Friedman, Alan Greenspan, Tom Freidman [sic], Robert Rubin, Larry Summers, and Ayn Rand.”

Now I’m sporting enough to look past the fact that Hartmann makes two spelling errors in a single economist’s name. Still, color me skeptical that Hartmann knows a blessed thing about the work of F.A. Hayek. (I assume he thinks these people are more or less interchangeable, that Mises = Friedman = Summers = Rubin, that Mises wouldn’t have denounced at least several of these figures, and that the differences between them are probably just trivial and not worth mentioning.)

Quiz time, Thom! Name one book on economic theory (so The Road to Serfdom, if you happen to have heard of it, doesn’t count) Hayek wrote that you’ve read, flipped through, held in your hand, or even heard of. Stumped? How about one article? Stumped again? Then why not do the decent and honorable thing and shut up until you can speak from authority rather than prejudice and ignorance? Sound fair?

Actually, Thom, I’ll be even more sporting. You can start condemning them again once you can at least competently summarize what someone who has read them tells you they say. How’s that?

Hilariously, then, Hartmann lumps Mises and Hayek in with Alan Greenspan, the so-called free-marketeer who thinks we need a Soviet commissar (namely himself) to plan money and interest rates. Um, Thom, Mises and Hayek opposed central banking altogether, arguing that it was not only a superfluous intervention into the market economy but also that it was destabilizing and the source of the boom-bust cycle. These men are supposed to be similar to Greenspan how, exactly? Can I take a wild guess that you’re out of your depth here, Thom, and therefore simply making things up?

I’ve summarized the Mises-Hayek position elsewhere (flip to page 13 here, for instance, or see Meltdown, my recently released book on what caused the crisis and why the free market is not the cause but the solution). In a nutshell, the point is that when the government’s central bank intervenes in the economy to push interest rates lower than the free market would have set them, the result of its tampering is a massive cluster of errors (to use Lionel Robbins’ phrase) on the part of investors and consumers alike. It goes without saying that a government central bank’s intervention into the market to push interest rates lower than the free market would have set them cannot, by definition, be the fault of the free market. The problems Hartmann identifies in his article, as well as the ones he neglects or doesn’t know about, are mere symptoms of a more fundamental cause, namely the creation of cheap credit by the Fed. Whatever happened to leftists’ interest in “root causes”?

This raises another issue about Hartmann’s piece: not a single word about the Federal Reserve System, as if it played no role at all in the crisis. Not one word! Is Hartmann actually ignorant of the Fed’s role? Does he, as I suspect, actually defend the Fed?

How I’d love to hear Thom’s defense of the Fed as a progressive institution. That would be rich. Here’s the guy who claims to oppose the transfer of wealth from the poor to the rich, and yet that is precisely what the Cantillon effects of expansionary monetary policy do. It’s also what the Fed’s role as “lender of last resort” does. If Hartmann thinks that power is exercised in defense of the little guy, he is hopeless. Hopeless with an exponent beside it.

Now I know you’re waiting with bated breath to know about Hartmann’s take on the S&L fiasco of the 1980s. What laser beam of insight might he share with us? Whatever could Thom blame that one on? Who can predict such a thing?

I’m telling you, you’ll need to do some breathing exercises, and perhaps a little quiet meditation, to prepare yourself for the careful nuance and devastating originality of Hartmann’s answer.

The S&L crisis was caused, he says, by…“deregulation.” (I’m as speechless as you are.)

Before Ronald Reagan and his crazy deregulation spree, you see, everything worked fine. Then Reagan was elected, and he repealed all the laws. Society practically reverted to barbarism. Everyone grew slightly hairier. Wolves ran free in the streets.

What actually happened was a little less cartoonish. First, so-called deregulation of the S&Ls began under Jimmy Carter, not Reagan. I say “so-called” because, as with most measures trumpeted as “deregulation,” it was nothing of the kind: all throughout the process of alleged deregulation, the S&Ls’ deposits continued to be covered under government deposit insurance. Deregulation means the removal of government involvement and control. Does this sound like the removal of government involvement and control to you? To the contrary, it gave us the worst of both worlds—though, naturally, Hartmann will blame the consequences on “deregulation” and “capitalism,” terms I doubt he could even define.

Under the government-established rules, the S&Ls could charge 6 percent on loans, and could offer depositors a mere 3 percent. Since most depositors had nowhere else to go, they had to content themselves with a miserable 3 percent return.

With the advent of the money-market mutual fund, ordinary people suddenly had the chance to earn higher returns, and began pulling their money out of S&Ls in droves. Consequently, the S&Ls wanted permission to offer higher interest returns for depositors, so “deregulation” allowed them to do so. Had the original government requirements remained in place, the S&Ls would have gone under then and there.

A consensus began to form that in order to save the S&Ls, their government-established loan and deposit interest-rate requirements, as well as the kind of loans they could make, had to be modified in light of the impossible conditions under which these institutions were forced to operate. The S&Ls needed to be permitted to engage in riskier investments than 30-year mortgages at 6 percent. (Notice: it’s the fault of the free market when the government modifies the government-established rules of a government-established institution, while its deposits continue to be guaranteed by the government. Got it?)

Maybe the S&Ls should have gone under in 1980. Perhaps they really did have an impossible business model. There is no non-arbitrary basis for deciding one way or the other, since the S&Ls were never genuinely subject to a market test. The government husbanded and cartelized the S&Ls, and stood ready to bail them out after that.

Thom Hartmann, meanwhile, looks at this situation and concludes that the problem was too much deregulation and too much capitalism. I am at a loss as to how to describe a person like this.

Hartmann also denounces the dreaded “Reagan tax cuts,” which were largely nullified by the Reagan tax increases and loophole closings. Tax revenues, in fact, rose substantially and consistently during the Reagan years, and you’d never know from Hartmann’s comments that the top 5 percent of earners now pay 60 percent of the costs of government. That’s not enough for Thom Hartmann, naturally, who never met a problem he didn’t think could be solved with more forced labor, which is what income taxation, stripped of the platitudes and propaganda, really is. (If you favor forced labor for the purpose of filling the coffers of our wise public servants, to be disbursed on behalf of society’s most vulnerable—since that’s our politicians’ number-one concern, don’t you know—then that makes you a “progressive” like ol’ Thom.)

Then comes the inevitable post hoc ergo propter hoc fallacy: the American economy was strong back when the top income tax rate was 90 percent, so therefore high marginal income tax rates are great for the economy! How does Hartmann know that American prosperity didn’t occur in spite of, rather than because of, those high rates? Without the help of economic theory, which Hartmann seems allergic to, how can we decide which of these possibilities is correct?

I genuinely wonder how someone like Hartmann thinks wealth is created. Nothing I can see indicates he’s given the matter much thought. The average person’s standard of living, he seems certain, occurs because we loot and shackle the wealthy, who are mere parasites on the backs of working people, the real engines of the economy.

Leaving aside the odd view that only manual laborers engage in “work,” all the brawn in the world could never have produced a steam engine or a Pentium processor. Only when informed by the knowledge of inventors and supplied with the capital saved by capitalists can the average laborer produce the tiniest fraction of what he is today accustomed to producing. The central ingredient in a laborer’s physical productivity is the equipment and machinery at his disposal. There is nothing natural or inevitable about the availability of this productivity-enhancing capital equipment. It comes from the wicked capitalists’ abstention from consumption, and the allocation of the unconsumed resources in capital investment. This process is the only way the general standard of living can possibly rise. Hartmann thinks it’s just swell to tax it.

The increases in the productivity of labor that additional capital makes possible, by increasing the overall amount of output and thereby increasing the ratio of consumers’ goods to the supply of labor, make prices lower relative to wage rates and thereby raise real wages. That’s why, in order to earn the money necessary to acquire a wide range of necessities, far fewer labor hours are necessary today than in the past—say, 1950 or 1900. Thanks to capital investment, which is what businesses engage in when their profits aren’t seized from them, our economy is far more physically productive than it used to be, and therefore consumer goods exist in far greater abundance and are correspondingly less dear than before.

American society, in short, would have been far wealthier and the material level of all people would have been dramatically higher had top income tax rates been lower throughout the twentieth century. Had government not seized so many resources to squander on consumption, those resources would have been available for investment that would have made the economy permanently capable of producing far more wealth than otherwise. Everyone’s standard of living would, as a result, have been far higher.

Hartmann gives no indication that he understands any of this. To the contrary, he seems to think (in addition to the egalitarian rationales he’d surely give for the seizure of some people’s property) the lack of government wealth redistribution yields the boom-bust business cycle! If wealth disparities caused the boom-bust cycle, we’d experience economic depressions everywhere in the world, constantly.

Hartmann’s argument runs, in effect: “Citizen, you need to be looted in order to stabilize the system [a nonsensical idea Hartmann came across in the popular Keynesianism that forms the entirety of his economic knowledge]. Let us hear no more anti-social talk about your so-called rights. All hail The System! Wherever would we be without the stabilizing power of violence!”

As for the nonsense about FDR’s New Deal “stabilizing us”—and the perverse argument that our economy will never be stable unless the people are violently expropriated—check out economist Robert P. Murphy’s new book The Politically Incorrect Guide to the Great Depression and the New Deal. Its playful title notwithstanding, this book mercilessly bludgeons thoughtless clichés like this.

At least the mafia has the decency not to put such transparently phony claims over on you. They’re honest: we’re taking your money because we have power, and you don’t.

What it all boils down to is this: one side of our political spectrum favors the central planning of Iraq, while the other favors the central planning of Americans. We can only hope for the continued growth of a third side, one that rejects as unworthy of a free people all the superstitious nonsense about the magical powers of our overlords, whether that power is exercised at home or abroad.

Thomas E. Woods Jr., is the New York Times bestselling author of nine books, including (most recently) Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse