Monday, January 12, 2009

The Death of Capitalism? On the Contrary, the Death of Socialism.

While I have some charts from last week and a few from my forex trading today that I’d like to post, at the moment I’d like to discuss something else: The Death of Capitalism; or, on the contrary, the possible renaissance of Capitalism that will be born from the ashes of Socialism.

Over at ContraHour, the most recent post on Martin Armstrong’s work piqued my interest. It focuses on the question often asked in the media: Does the current crisis suggest that Capitalism is dead?

He argues that this is not the case—far from it.

To understand the reasoning behind his conclusion, we should turn to Armstrong’s main contentions:

1) “Vote for me and you will get something for nothing” is a central tenet of our current government doctrines (socialist).

This is the steal from Peter to pay Paul idea, except at the moment, the politicians are stealing from a Peter who has yet to be born to pay for a Paul who may never die (I exaggerate, albeit people are living much longer than expected). People aren’t being encouraged to work at developing new skills in order to obtain better health care or a higher standard of living; instead, they are obtaining a higher standard of living and longer life spans funded by debt.

2) We cannot spend our way out of a crisis that stems from excessive leverage and debt, but government is definitely going to try.

Armstrong discusses the collapse of the Spanish, the Romans, the French, and how all of these collapses were caused, fundamentally, by excessive debt. Each of these entities failed to understand the importance of maintaining their credit. If we do the same, and we are on are way, we too could face collapse as we struggle with untenable debt to foreign entities.

Armstrong argues that, of course, the government will try to spend its way out of the mess it has created for itself (e.g. Obama’s stimulus plan, bank bailouts, auto bailouts, etc). This is done so that those in positions of government power can retain their power. However, such spending can only go so far before it begins to oppress the members of the union, leading to revolt or extreme discouragement.

3) Communism and socialism centralize power in the government, not in the forces that increase wealth, forge progress, and enhance life in the long-term.

Because of the tendency for government to misallocate resources (refer back to point number one for the reason this happens), the centralization of power can stifle progress and harm citizens. While communism and socialism redistribute wealth in order to more equally equip members of society, capitalism distributes wealth to those who develop skills and towards that which allows progress.

4) “Where in a normal economic model, to earn more one improves his skills, the Communistic model promotes advances income without improvement in skills” = Unions stall growth and causes skill to remain stagnant.

Currently, one of major strongholds of a union (the Detroit automakers), is displaying its own ineptitude. Compared to the non-union production models of automakers in the South, Detroit is failing miserably.

Teachers’ unions are perhaps an even better example of the failure of the union. Instead of making the educational environment more potent, it enables many teachers to continue work that they may not be suited for simply because of the difficulty in firing them. Through the collective, those without the necessary skills can impede the functioning of the education system. This happens in any business that is forced to use a "one size fits all" approach.

5) Unfunded state promises will collapse. It is helpful to understand them as an attempt to impose a Marxist-like (i.e. Utopian) environment on society.

Social Security, Medicare and Medicaid, are unfounded liabilities. The government cannot maintain these promises for very long, especially with the mounting economic crisis, the baby boomers coming retirement, exploding debt, increasingly expensive health-care, and more.

Yes, without these promises our union will not be as utopian-like as it would be with them. However, remember what the word utopia actually stems from: the Greek for “not” “place,” or a nonexistent place. While the homophone eutopia in Greek means “good” “place,” it is much more likely that when Sir Thomas Moore wrote his book he intended for the former to take precedent over the latter, as his vague explanation of the perfect society is oftentimes humorously naïve and at others satirically unbelievable.

It is time to stand back and look at what the current situation is telling us.

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