Marxists never learn

Gerard Jackson
BrookesNews.Com
Monday 31 July 2006

The collapse of communism has, as expected, taught our Marxists nothing, least of all humility. Unable to face reality they invent their own. According to the socialist creed it is capitalism that is in big trouble. This was brought home to me by followers of the late Paul Baran (Marxist economist and Stalinist) and Immanuel Wallerstein, a Marxist sociologist.

Realising that capitalism had refused to implode Baran rewrote the Leninist fallacy that it was the exploitation of the Third World that prevented the collapse of capitalism. Wallerstein also vigorously pushes this garbage. (This fallacy can be traced back to at least Jeremy Bentham, who was persuaded by James Stuart Mill that it was a fallacious argument. It was later resurrected in 1829 by Wakefield). In away it’s rather funny. In order to defend Marxism this pair of America-haters were forced to abandon it. Instead of an exploited proletariat rising up against capitalist exploiters we get an exploited Third World peasantry rising up against an exploiting capitalist west.

This brings us to those true Marxists who still argue that capitalism is inherently unstable, carrying within itself the economic seeds of its own destruction. (This is pretty rich given the economic and social collapse of the socialist states, not to mention the 100,000,000 plus people this grand socialist ‘experiment’ murdered). But Marx was as wrong on this as he was on just about everything else. Let us do this by the numbers, starting with Russia.

Russia’s Communist dictators did all they could in more than 70 years of tyranny to destroy the concept of the rule of law and exterminate institutions, tendencies, customs, beliefs, titles to private property, etc., that could lead to the re-emergence of capitalism. In addition, their irrational central planning policies turned the economy into one gigantic heap of malinvestments.

Just as the Austrian school predicted (Economic Calculation in the Socialist Commonwealth, Ludwig von Mises, 1920), the Soviet economy finally collapsed under the weight of its socialist inner contradictions — contradictions that were severely aggravated by the Reagan military build up and the rise of Solidarity in Poland. What was left was a devastated country whose capital had been shamelessly squandered and which had lost those traditions and institutions that make for free-markets.

Despite these indisputable facts, Marxists cultists have still got the nerve to blame capitalism for socialism’s failure. Some even have the gall to claim that the Marxist states were not “fundamentally different” from the democracies! Rather than come to terms with the Marxist failure these cultists choose instead to disconnect themselves from reality and descend into the ideologically corrupt world of moral equivalence.

If these Marxists were right then how do they explain the fact that Poland, Latvia, Estonia and the Czech Republic did not suffer as badly as Russia once the communist regimes collapsed? In fact they are still doing pretty very well. A remarkable achievement given the 40 years of socialist planning they were forced to endure. But of course, their Marxist rulers had failed to fully uproot the traditions and institutions that enabled markets to successfully re-emerge and accomplish much in a very short time. This is something that True Believers have closed their minds to. (I do not consider Wallerstein a true believe but someone who has bastardised Marx to justify his hatred of the US and the West).

Early industrialisation was plagued by the boom-bust cycle. It was this phenomenon that Marx tried but failed to explain. Yet Henry Thornton and David Ricardo had developed a very good theory to explain these recurring economic crises. What became known as the currency school developed the insight that the these crises were the product of monetary disturbances. It argued that by issuing notes in excess of the quantity of specie banks sparked a boom that was eventually brought to a halt when they were forced to contract the note issue in an effort to reverse a gold drain and avert runs.

(Though crude this theory still surpasses any Marxist explanation of the boom-bust cycle. Unfortunately the currency school refused to accept the fact that deposits as well as notes are money substitutes. This is why Peel’s 1844 Bank Act failed to prevent financial crises and had to be suspended more than once).

Professor Ludwig von Mises greatly refined the theory by applying Austrian economic analysis to it. Central to the refined version was the role of interest and the heterogeneous nature of capital. When the banking system artificially lowers the rate of interest it increases the demand for loans which are met out of credit expansion. The lower rate of interest now makes profitable projects that had been unprofitable, i.e., it creates malinvestments that will have to be liquidated by a recession. This interest rate policy increases investment activity, especially in the higher stages of production. (To give Marx some credit he did note, as did others, that disproportionalities emerge during the crisis).

Because the real pool of savings has not expanded, businesses now find their costs of production are rising faster than their selling prices as they compete for factors of production, thus squeezing profits. Unless the banks expand credit further the phenomenon of falling output, rising unemployment and ‘excess capacity’ begins to appear. But to continue to expand credit can only delay the inevitable by accelerating inflation and generating even more malinvestments, thus making the recession even more painful when it finally arrives.

This is what happened to South Korea, Japan, Thailand, etc, during the Asian crisis. Their banking systems engaged in massive credit expansion that created large-scale malinvestments and brought about the financial crisis. Of courses, when the crisis finally broke the Marxists were able to blame the market. In addition, these countries had for years employed industry policies (government planning) which means they targeted specific industries and firms for investment. This in turn created its own malinvestments, South Korea being a good example of this practice. Credit expansion aggravated these errors by supplying these projects with an abundance of fictitious savings.

Unfortunately Marxists are incorrigible cultists, completely impervious to facts and carefully reasoned arguments. I distinctly recall an incident in the late ‘90s when a fanatical Australian Marxist by the name of Alison Stewart argued that the free market had failed because millions of Europeans had voted for leftist parties. It had evidently eluded here that she was committing the fallacy of begging the question.

Would she and her fellow cultists have argued that Marxism failed because the scores of millions it enslaved for decades finally broke free of its shackles? Never in a million years. Leftist parties only succeed because they lie to those who vote for them. They lie when they claim they can provide higher living standards than markets and they lie when they blame markets for unemployment or falling living standards.

Come to think of it, Marxism is just one big lie

Gerard Jackson is Brookes’ economics editor