The Philippine Daily Inquirer has recently published two articles of pretty much the same vein, declarations of governments’ supposedly new role in these challenging economic times: Walden Bello’s ‘The coming capitalist consensus’ and Roland Simbulan’s ‘Emerging alternative to neoliberalism.’
Thus do we hear of an alleged recent ideology of ‘neoliberalism,’ whose advocates want a free market no matter the cost and the marginalization, who insist on maintaining obliviousness to the suffering in the community. With the collapse of financial markets over the past year, the general public and economists tell us, we have witnessed the downfall of such backward dog-eat-dog thinking, and it’s time for the state to provide an alternative policy.
However, the idea of a truly free market as envisioned by so-called neoliberals is not new. Adherents are no more ‘neoliberal’ than they are ‘neo’ anything. The Great Depression is cited as the most famous example of laissez-faire inevitably gone wrong, while the state’s interference through the New Deal was heralded as just that, ‘new’ – a major innovation in policy that would lift America out of its economic quagmire.
We’ve heard this blame game before, and today, world leaders are likewise preaching a new solidarity that would enable the people to get through the mess that capitalism caused. This would involve “securing the benefits of the market while taming its excesses,” otherwise known as ‘Global Social Democracy.’
Such labels and frameworks are utterly false, recycled and lead to even worse global catastrophes, and it is really quite simple to refute these ideas built on flimsy economic foundations.
There are two main erroneous premises present in Profs. Bello and Simbulan’s articles:
1. The financial crisis was caused by capitalism; and
2. The government must intervene in the market to fix the problem.
What did not cause the crisis
On the first erroneous premise, one must rectify the notion that a free market created the bubble and its eventual bursting. Why, you may ask a Keynesian, did this crisis happen at this time and not at any other time? Chances are, if stuck in a Keynesian framework, they would say it just had to happen; it’s inevitable that businessmen, left to their own devices, would engage in all sorts of speculative behavior and optimism, which must inevitably come to an end. The government must then ensure that demand is maintained to ‘stimulate’ the economy and nurse it back to health. Supposedly, by getting the public to continue consuming goods as before, businesses will be able to make a profit and thus resume normal operations after some time.
This is the framework that Keynesians deal with, and just about every professor in the Philippines would not question it.
But nothing has been answered as to, why a crisis now? What policies were instituted, whether by the private sector or the government?
The Keynesian would then say that the greedy businessmen who bought and sold these faulty mortgages were a prime (pun intended!) example of laissez-faire’s speculative nature that leads to an economic collapse.
The government’s role in the creation of the bubble would be downplayed by the Keynesian, even though this is precisely the answer that makes sense of all of it.
Indeed, it was the United States Federal Reserve, both during the 1920s and the early 21st century, that allowed for the creation of all this money by which all this speculative behavior seemed to pay off, for the duration of the boom that is.
Without the Fed’s loose monetary policy, people wouldn’t have had the money to purchase such anomalous no-downpayment loans. Banks wouldn’t even dream of approving mortgages with no hope of ever being paid back. If they did, this would be the height of business stupidity and none of these banks would last long enough to victimize a significant fraction of a community. However, with the Fed creating an endless stream of funds by which debtors can partake in, and by the subsidizing and sponsoring of the entities guaranteeing the loans – Fannie Mae and Freddie Mac – such mortgages did not appear stupid, at the time that is.
With such a background provided, as well as other factors such as the specter of the Community Reinvestment Act that provided penalties for banks who appeared biased or prejudiced in the approval of loans, could anyone in their right mind say that the crisis was not caused by the government?
Oh, but it’s still those fat cats at Wall Street that created those financial derivatives on top of one another. This does not change the fact that such activity was government-sponsored; those profiting from the boom can aptly be called cronies.
If this crisis was indeed merely greed-induced, as is alleged, can we conclude that the capitalists of the early 21st century were greedier than at any other time? Of course not. The difference was the manipulation of money during this period to simulate a healthy economy.
A ‘deregulated’ free market was clearly not at work here. Socialism, in particular, socialized housing, should be recognized as the culprit of this crisis.
Why couldn’t such loose money be maintained forever, and the prices of houses continue to increase in a perpetual boom? Because the money created for this did not represent actual valuable assets. People could not continue being deceived that prices accurately represented the value of economic items.
Boom and bust
As students of Philippine history in grade school and high school, we have heard about ‘Mickey Mouse’ money during Japanese rule, and in essence this is what the US Fed’s fiat policy creates. The more money produced, the more worthless the money becomes. Now, we are headed to understanding what is inevitable in booms, and how capitalism in itself does not produce this inevitability.
Inevitably, with house and stock prices continuing to go up, with more and more people joining in the supposed prosperity, the items’ actual values come to question, and the market left to its own devices would create new valuations. Hence the drop in prices of houses and in the stock market.
However, people get worried about the drop in prices, even though the changes merely depict the value of goods more accurately. Measures for price stability are tossed around, and the government, too antsy or too ‘concerned’ to just watch what unfolds, decides it must ‘stimulate’ the economy through pump-priming, in order to save businesses from having to put up with lower earnings.
The subsequent retention of the high boom-time prices and the continued high cost of production thus prevent businesses from taking advantage of lower prices and maximizing output, and the depression is prolonged.
It is also neglected by government policymakers that although numbers are smaller as a result of lower prices, real or inflation-adjusted incomes still retain purchasing power.
What about jobs?
There is nonetheless a depression, and the excesses and bad business decisions during the boom must result in a loss of jobs, with greater unemployment the more rigid wages are. It is a mistake, however, to say that, conceding that government did cause the crisis, we can’t just let these people lose their jobs; the government must now rescue them. This is an example of good intentions coming to naught.
Jobs programs as implemented by the government are wealth suckers. More than any other time, firms and individuals must be unburdened of high taxes, in order to once more accumulate the saving that would allow the economy to recover. Government spending for employment and welfare programs must then be cut drastically, if not completely, for these are funded through taxes, or, just as bad, more government borrowing or more fiat money.
These state programs also divert the good money left in the economy from their best uses, for less productive and less efficient purposes as envisioned by well-meaning bureaucrats.
Alba
Prof. Simbulan cites measures that are “emerging” in Latin America, heralded as the alternative to the profit-oriented failure that is capitalism. The Bolivarian Alternative to the Americas (a.k.a. Alba), with its resemblance to Soviet, East German, and New Deal policies, is doomed to fail.
“Prioritizing people’s needs and interests.” Where have we heard this before? It’s a very typical line of a politician regardless of geography. Most recently, president-elect Barack Obama has made similar utterances. His promise of two million jobs will not be kept, but he already has an excuse up his sleeve – his ‘capitalistic’ predecessor. This was Franklin Roosevelt’s card during the Great Depression. Let it be known, however, that George W. Bush, despite his defense of free markets, was no more a promoter of capitalism in deed than Herbert Hoover was in word and deed.
Like Prof. Simbulan, I can only wait to see what becomes of this “new trend in international relations.” But clearly, the idea of inter-government coordination, “socially-oriented trade,” better infrastructure, better health care, better education, better welfare, better jobs, etc. is nothing new, nothing to crow about, and certainly no substitute for a profit-oriented economy that makes no qualms about respecting property rights.
Verily, ‘profit’ is a noble motive that enables firms, when left alone by the state, to come up with the best goods and services, freely patronized by those seeking value for their money. It only makes sense to let the free market – not the central bank- or vote-seeking-bureaucrat- or Fannie Mae- or Freddie Mac-sponsored market – do its own wonderful thing. It is only through a free market that a people’s needs and interests, regardless of social class, are truly prioritized, wherein the population is truly a participant in the determination of the value of goods and services.
State intervention either way
Why must Prof. Bello give credit to the virtues of capitalism that make possible all economic growth, yet prevent free rein of this creature, via state regulation? This keeping-in-check of capitalists, however, is just as much an impediment to creation of wealth as the outright ownership of the means of production. In both nationalization of industry and regulation of industry, businessmen are subject to whatever fancies whoever is in power. Such uncertainty in itself is an impediment to investing, and prevents markets precisely from providing the advantage of capitalism – the most beneficial and most efficient use of capital. In criticizing such regulation, I am not even considering the lobbying, connivance and monopolistic powers that come about from crony capitalism and that ultimately lead to substandard products and a stifled economy.
Prof. Bello also gives too much credit to Obama’s rhetorical ability, as if this will have anything to do with the success of Global Social Democracy. The only thing it would allow is a coordinated decline of nation’s economies.
It is easy for critics to label true laissez-faire as ‘dogmatic’ or ‘utopian,’ implying by this that policies must be pursued in an illogical, senseless manner. Marxism and Keynesianism are of the idea that it is good intentions, and not entrepreneurial ability, that result in greater production and equitability in society. It seemingly was good intentions that led Alan Greenspan, whom I otherwise admire deeply for his pre-bureaucrat advocacy of a gold standard, to lower interest rates far beyond what the market could sustain with existing savings. During the boom period, millions realized their dreams of owning houses, and businesses, stimulated by easy credit, optimistically invested in people and resources beyond what they normally could. The fault lies in thinking that such bullishness, built on non-existent assets, could last beyond the short term.
No matter the good intentions, continued government intervention through bailouts and other types of subsidies rests on a delusion that the boom can be maintained. This is defying the very simple economic concept of supply and demand. You can not simply wish for greater supply to satisfy demand, nor can you continue stimulating demand when the foundation for the creation of the supply is not present.
A return to prosperity – the long and short of it
Contrary to what socialist Profs. Bello and Simbulan say – and I can not call them or their ideas anything but socialist – the depression, with all its unemployment and non-productivity, will not last forever. Barring any more government intervention, a two-year period would be enough for a return to relatively normal levels of jobs and output. With continued intervention, however, the depression can last as long as that of the 1930s and 1940s, which US Presidents Hoover and FDR collectively spent the most of two decades battling through their respective brands of socialism. Contrary to FDR’s propaganda, the New Deal was a disaster. How else can it be explained that all previous depressions in the 19th Century up to 1921 (which themselves were caused by inflationary war financing or attempts at post-war recovery) lasted only about 18 months each?
How can real prosperity be created then? I emphasize again the need for real savings, accumulated through the productive use of capital and the making of real profits for goods and services that give value to consumers. Only when supply, in this case capital, is able to meet demand, that is, the ever-varying wants of the public, can an economy truly flourish. This is what capitalism – unfettered, unregulated capitalism, where people can transact according to their desires and means, holding with highest regard each other’s right to property – allows. It is a slow but sure way, as opposed to socialist measures that only look good and provide a sense of relief for the immediate future but whose wrongness is unraveled as time passes.
Thus do we hear of an alleged recent ideology of ‘neoliberalism,’ whose advocates want a free market no matter the cost and the marginalization, who insist on maintaining obliviousness to the suffering in the community. With the collapse of financial markets over the past year, the general public and economists tell us, we have witnessed the downfall of such backward dog-eat-dog thinking, and it’s time for the state to provide an alternative policy.
However, the idea of a truly free market as envisioned by so-called neoliberals is not new. Adherents are no more ‘neoliberal’ than they are ‘neo’ anything. The Great Depression is cited as the most famous example of laissez-faire inevitably gone wrong, while the state’s interference through the New Deal was heralded as just that, ‘new’ – a major innovation in policy that would lift America out of its economic quagmire.
We’ve heard this blame game before, and today, world leaders are likewise preaching a new solidarity that would enable the people to get through the mess that capitalism caused. This would involve “securing the benefits of the market while taming its excesses,” otherwise known as ‘Global Social Democracy.’
Such labels and frameworks are utterly false, recycled and lead to even worse global catastrophes, and it is really quite simple to refute these ideas built on flimsy economic foundations.
There are two main erroneous premises present in Profs. Bello and Simbulan’s articles:
1. The financial crisis was caused by capitalism; and
2. The government must intervene in the market to fix the problem.
What did not cause the crisis
On the first erroneous premise, one must rectify the notion that a free market created the bubble and its eventual bursting. Why, you may ask a Keynesian, did this crisis happen at this time and not at any other time? Chances are, if stuck in a Keynesian framework, they would say it just had to happen; it’s inevitable that businessmen, left to their own devices, would engage in all sorts of speculative behavior and optimism, which must inevitably come to an end. The government must then ensure that demand is maintained to ‘stimulate’ the economy and nurse it back to health. Supposedly, by getting the public to continue consuming goods as before, businesses will be able to make a profit and thus resume normal operations after some time.
This is the framework that Keynesians deal with, and just about every professor in the Philippines would not question it.
But nothing has been answered as to, why a crisis now? What policies were instituted, whether by the private sector or the government?
The Keynesian would then say that the greedy businessmen who bought and sold these faulty mortgages were a prime (pun intended!) example of laissez-faire’s speculative nature that leads to an economic collapse.
The government’s role in the creation of the bubble would be downplayed by the Keynesian, even though this is precisely the answer that makes sense of all of it.
Indeed, it was the United States Federal Reserve, both during the 1920s and the early 21st century, that allowed for the creation of all this money by which all this speculative behavior seemed to pay off, for the duration of the boom that is.
Without the Fed’s loose monetary policy, people wouldn’t have had the money to purchase such anomalous no-downpayment loans. Banks wouldn’t even dream of approving mortgages with no hope of ever being paid back. If they did, this would be the height of business stupidity and none of these banks would last long enough to victimize a significant fraction of a community. However, with the Fed creating an endless stream of funds by which debtors can partake in, and by the subsidizing and sponsoring of the entities guaranteeing the loans – Fannie Mae and Freddie Mac – such mortgages did not appear stupid, at the time that is.
With such a background provided, as well as other factors such as the specter of the Community Reinvestment Act that provided penalties for banks who appeared biased or prejudiced in the approval of loans, could anyone in their right mind say that the crisis was not caused by the government?
Oh, but it’s still those fat cats at Wall Street that created those financial derivatives on top of one another. This does not change the fact that such activity was government-sponsored; those profiting from the boom can aptly be called cronies.
If this crisis was indeed merely greed-induced, as is alleged, can we conclude that the capitalists of the early 21st century were greedier than at any other time? Of course not. The difference was the manipulation of money during this period to simulate a healthy economy.
A ‘deregulated’ free market was clearly not at work here. Socialism, in particular, socialized housing, should be recognized as the culprit of this crisis.
Why couldn’t such loose money be maintained forever, and the prices of houses continue to increase in a perpetual boom? Because the money created for this did not represent actual valuable assets. People could not continue being deceived that prices accurately represented the value of economic items.
Boom and bust
As students of Philippine history in grade school and high school, we have heard about ‘Mickey Mouse’ money during Japanese rule, and in essence this is what the US Fed’s fiat policy creates. The more money produced, the more worthless the money becomes. Now, we are headed to understanding what is inevitable in booms, and how capitalism in itself does not produce this inevitability.
Inevitably, with house and stock prices continuing to go up, with more and more people joining in the supposed prosperity, the items’ actual values come to question, and the market left to its own devices would create new valuations. Hence the drop in prices of houses and in the stock market.
However, people get worried about the drop in prices, even though the changes merely depict the value of goods more accurately. Measures for price stability are tossed around, and the government, too antsy or too ‘concerned’ to just watch what unfolds, decides it must ‘stimulate’ the economy through pump-priming, in order to save businesses from having to put up with lower earnings.
The subsequent retention of the high boom-time prices and the continued high cost of production thus prevent businesses from taking advantage of lower prices and maximizing output, and the depression is prolonged.
It is also neglected by government policymakers that although numbers are smaller as a result of lower prices, real or inflation-adjusted incomes still retain purchasing power.
What about jobs?
There is nonetheless a depression, and the excesses and bad business decisions during the boom must result in a loss of jobs, with greater unemployment the more rigid wages are. It is a mistake, however, to say that, conceding that government did cause the crisis, we can’t just let these people lose their jobs; the government must now rescue them. This is an example of good intentions coming to naught.
Jobs programs as implemented by the government are wealth suckers. More than any other time, firms and individuals must be unburdened of high taxes, in order to once more accumulate the saving that would allow the economy to recover. Government spending for employment and welfare programs must then be cut drastically, if not completely, for these are funded through taxes, or, just as bad, more government borrowing or more fiat money.
These state programs also divert the good money left in the economy from their best uses, for less productive and less efficient purposes as envisioned by well-meaning bureaucrats.
Alba
Prof. Simbulan cites measures that are “emerging” in Latin America, heralded as the alternative to the profit-oriented failure that is capitalism. The Bolivarian Alternative to the Americas (a.k.a. Alba), with its resemblance to Soviet, East German, and New Deal policies, is doomed to fail.
“Prioritizing people’s needs and interests.” Where have we heard this before? It’s a very typical line of a politician regardless of geography. Most recently, president-elect Barack Obama has made similar utterances. His promise of two million jobs will not be kept, but he already has an excuse up his sleeve – his ‘capitalistic’ predecessor. This was Franklin Roosevelt’s card during the Great Depression. Let it be known, however, that George W. Bush, despite his defense of free markets, was no more a promoter of capitalism in deed than Herbert Hoover was in word and deed.
Like Prof. Simbulan, I can only wait to see what becomes of this “new trend in international relations.” But clearly, the idea of inter-government coordination, “socially-oriented trade,” better infrastructure, better health care, better education, better welfare, better jobs, etc. is nothing new, nothing to crow about, and certainly no substitute for a profit-oriented economy that makes no qualms about respecting property rights.
Verily, ‘profit’ is a noble motive that enables firms, when left alone by the state, to come up with the best goods and services, freely patronized by those seeking value for their money. It only makes sense to let the free market – not the central bank- or vote-seeking-bureaucrat- or Fannie Mae- or Freddie Mac-sponsored market – do its own wonderful thing. It is only through a free market that a people’s needs and interests, regardless of social class, are truly prioritized, wherein the population is truly a participant in the determination of the value of goods and services.
State intervention either way
Why must Prof. Bello give credit to the virtues of capitalism that make possible all economic growth, yet prevent free rein of this creature, via state regulation? This keeping-in-check of capitalists, however, is just as much an impediment to creation of wealth as the outright ownership of the means of production. In both nationalization of industry and regulation of industry, businessmen are subject to whatever fancies whoever is in power. Such uncertainty in itself is an impediment to investing, and prevents markets precisely from providing the advantage of capitalism – the most beneficial and most efficient use of capital. In criticizing such regulation, I am not even considering the lobbying, connivance and monopolistic powers that come about from crony capitalism and that ultimately lead to substandard products and a stifled economy.
Prof. Bello also gives too much credit to Obama’s rhetorical ability, as if this will have anything to do with the success of Global Social Democracy. The only thing it would allow is a coordinated decline of nation’s economies.
It is easy for critics to label true laissez-faire as ‘dogmatic’ or ‘utopian,’ implying by this that policies must be pursued in an illogical, senseless manner. Marxism and Keynesianism are of the idea that it is good intentions, and not entrepreneurial ability, that result in greater production and equitability in society. It seemingly was good intentions that led Alan Greenspan, whom I otherwise admire deeply for his pre-bureaucrat advocacy of a gold standard, to lower interest rates far beyond what the market could sustain with existing savings. During the boom period, millions realized their dreams of owning houses, and businesses, stimulated by easy credit, optimistically invested in people and resources beyond what they normally could. The fault lies in thinking that such bullishness, built on non-existent assets, could last beyond the short term.
No matter the good intentions, continued government intervention through bailouts and other types of subsidies rests on a delusion that the boom can be maintained. This is defying the very simple economic concept of supply and demand. You can not simply wish for greater supply to satisfy demand, nor can you continue stimulating demand when the foundation for the creation of the supply is not present.
A return to prosperity – the long and short of it
Contrary to what socialist Profs. Bello and Simbulan say – and I can not call them or their ideas anything but socialist – the depression, with all its unemployment and non-productivity, will not last forever. Barring any more government intervention, a two-year period would be enough for a return to relatively normal levels of jobs and output. With continued intervention, however, the depression can last as long as that of the 1930s and 1940s, which US Presidents Hoover and FDR collectively spent the most of two decades battling through their respective brands of socialism. Contrary to FDR’s propaganda, the New Deal was a disaster. How else can it be explained that all previous depressions in the 19th Century up to 1921 (which themselves were caused by inflationary war financing or attempts at post-war recovery) lasted only about 18 months each?
How can real prosperity be created then? I emphasize again the need for real savings, accumulated through the productive use of capital and the making of real profits for goods and services that give value to consumers. Only when supply, in this case capital, is able to meet demand, that is, the ever-varying wants of the public, can an economy truly flourish. This is what capitalism – unfettered, unregulated capitalism, where people can transact according to their desires and means, holding with highest regard each other’s right to property – allows. It is a slow but sure way, as opposed to socialist measures that only look good and provide a sense of relief for the immediate future but whose wrongness is unraveled as time passes.
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