Prime Minister Rudd launches attack on capitalism — and his rightwing critics crumble
Gerard Jackson
Kevin Rudd is in full crusader form and fully armed to save the world from "neo-liberalism", "neo-capitalism", "free-market fundamentalism", dandruff and tooth decay. There is nothing this super hero is not capable of — apart from being able to think. A bigger sanctimonious ignoramus would be hard to find, apart from the oily and equally ignorant Obama. According to this expert on economics, economic history and the history of economic thought free market thinking is an "emperor that has no clothes". "Free-market fundamentalism . . . [is] little more than personal greed dressed up as an economic philosophy".
Of course one need look no further than the present financial crisis to see what is fuelling Rudd's bout of self-righteous rage. Naturally the blockhead is completely clueless on the nature and causes of the crisis. Instead of consulting those who have at least made some effort to understand these "financial cycles" he defers to his prejudices and the prejudices of his advisors who are no more knowledgeable or intelligent then he is.
The first thing we should be clear about is that there is no unfettered capitalism, here or anywhere else. Anyone who thinks the financial sector, for example, in Australia, America or Europe is a free-for-all must have spent his life in a bubble or on an Australian university campus. The question that any intellectually curious person — which automatically leaves out Rudd — would ask is the simple one of: How is it such a highly monitored system that is overseen by central banks can breakdown? (This is a question that our own self-appointed guardians of free market doctrine never think to ask themselves).
The robotic response from the economic commentariat is that the thing is inherent in the capitalist system and is driven by the businessman's "animal spirits". Until his irrational (code for greedy) impulses can be sufficiently checked by the regulatory power of the state we will continue to have recurring crises. All of this is pure bunk. For starters, this assertion passing as an economic law ignores the fact that credit expansion always fuels "frenzied speculation". I do not know of a single case of a booming market that was not preceded by booming credit expansion. Yet this easily checked fact is not only ignored by critics of the market but also those who purport to defend it — especially in Australia.
Because of this perverse attitude one cannot get the link between the central bank's monetary policy and these financial disasters debated, no matter how much statistical and historical data one presents as evidence. For example, from when Howard was elected in March 1996 to October 2008 currency rose by 129 per cent, bank deposits by 201 per cent and M1 by 185 per cent. It was this monetary expansion* that fuelled the boom, sent house prices rocketing and sucked in imports. The US had the same problem. From October 1997 to January 2009 the money supply expanded by about about 120 per cent. This is where the speculative frenzy came from.
It is a sad but established truth that prolonged inflationary periods undermine moral standards and encourage reckless behaviour. In these times financial intermediaries eventually begin to start taking risks that in normal times would be considered utterly reckless, sometimes turning into a speculative frenzy, much like the tech stock during the Clinton administration. But this always happens when a boom is allowed to go unchecked for sometime. Benjamin M. Anderson referred to a speech that was made in 1929 before the New York State Chamber of Commerce
which discussed, among other things, the phenomena of a mob mind which had been so manifest in the year and a half that had preceded the crash. The speaker made the generalization, familiar to social psychologists, that the more intense the craze, the higher the type of intellect that succumbs to it. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979, p. 203).
Any informed person would have recognised the symptoms years ago of an impending financial crisis yet our economic commentariat completely missed them. One extremely important symptom was the emergence of idle bank deposits throughout the world's banking systems. A classical economist would have immediately spotted the problem as one of excessive credit expansion by the banking system — but not our mandarins and the economic commentariat.
Ben Bernanke, Princeton economist and former Federal Reserve Governor, stated that there's a "global saving glut". Ricardo Hausmann, a Harvard professor of economics, argued in the Financial Times (16 June 2005) that "excessive savings are at the root of the imbalance in China". On the same day the Wall Street Journal warned of a global housing boom driven by a "saving glut". I.J. Macfarlane, former Governor of the RBA, took — as expected — a purely Keynesian line arguing that Asian countries had "excess savings" (Talk to Economic Society of Australia Dinner, 28 September 2005" Dr Ken Henry, Secretary to the Australian Treasury, also took the Keynesian line. According to him:
The counterpart of the huge twin deficits (in the budget and the current account) being run by the United States are the surplus savings not just of Japan and emerging East Asia, as I discussed above, but also Europe and the Middle East. (Macroeconomic policy and structural change in East Asia: The issues, 2005)
As Jeremy Bentham would have said: "Fiddlesticks on stilts"
What we had was a world-wide credit expansion on an unprecedented scale that not only badly distorted the pattern of internal production but also the pattern of international trade. In plain English, the world was and still is suffering from a severe monetary disorder. And as I have written so many times, the market always gets the blame. Wilhelm Röpke spent decades warning against this sort of thing:
In speaking of mismanagement in the capital sector as a mark of postwar economy in many countries, I have in mind two things: an excess of investment [savings] in the national budget and an economically faulty choice of individual investment projects. Characteristically, both types of mismanagement tend to coincide, since excess [savings] investment presupposes the same collectivist and inflationary economic setting, that is, the same disturbance of the free forces of the market economy, which is responsible also for the faulty distribution of the excessive volume of capital. (Wilhelm Röpke, Against the Tide, Henry Regnery and Company, 1969, p. 156).
And what is the best our so-called rightwing commentariat can do in response to Rudd's ignorant screed? An outraged Bolt of the Herald Sun, hoping to pin Rudd to the mat, puffed out his chest and pompously declared:
Is Rudd really is so blind to the lessons of history and economics that he so airily dismisses the case for freeing up markets and limiting the role of government to ensuring they work most efficiently in the interests of the voters? Is he really so arrogant as to overlook the role of politicians and government regulators in creating the sub-prime debacle? (Saturday, 31 January 2009).
You and I, Andrew, know that you are as ignorant on the subject of free markets as is Rudd. And, not to put too fine a point on it, you come across just as blind and as arrogant as Rudd. What I find truly depressing about you and your pals is that you do nothing to inform yourselves. Like Rudd you would prefer to mount your high moral horse — no matter worn out the nag is — and loudly profess to knowledge you simply do not have. For instance, there is no way the sub-prime mortgage deals could have triggered this crisis. The most that can be said of them is that they aggravated the problem in the US. No more than that.
In addition, it is a tad hypocritical to sneer at Rudd for attacking "market fundamentalism" when John Stone did the very same thing. It was Stone who supported Donald Horne's nasty assertion that "economic fundamentalists — unlike ordinary economists — confuse the idea of market (and competition) with the idea of laisssez-faire policy . . . ." Of course, Stone had to take it further by stating that this is one reason why "economic fundamentalist views have not carried any significant weight within the great body of mainstream economic thought". (A Defence of Economic Rationalism, Allen & Unwin, 1993, p. 101). Well, without a doubt, we can thank the smug sneering likes of John Stone for helping to put the market on trial.
Rudd fatuously declared that "Franklin Roosevelt rebuilt US capitalism after the Great Depression". Absolute drivel. Roosevelt's ad hoc policies kept America in depression until Hirohito and Hitler restored full employment. It was not Roosevelt's policies that brought on post-war prosperity but their abandonment. Unfortunately Australia's rightwing are also illiterate when it comes to economic history.
Having a thoroughly distorted view of the Roosevelt years Rudd has decided that we need "social capitalism". This is the capitalism you have when you don't have capitalism. But we have been here before. After WWI Austria's Social Democrats implemented their version of "social capitalism", a world in which every worker got a square deal and his union stood ready to defend him against rapacious capitalists, a world in which capitalist inequalities were verboten and the social good prevailed over profit motive and greed. The result? It was calculated that from 1918 to 1930 Austria lost something like 79 per cent to 87 per cent of its capital. This caused Fritz Machlup to caustically observe that
Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin. (Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19).
Here's hoping — though I won't be holding my breath — that the likes of Bolt finally get their act together and start doing what really needs to be done. They can begin by doing their homework.
*I am using the Austrian definition of the money supply. For America this is cash, demand deposits with commercial banks, and thrift institutions, government deposits with banks and the central bank. For Australia it would be M1.
Kevin Rudd’s economic illiteracy and his attack on Hayek
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 2 February 2009