Return to Capitalism

by William Northwall

  Surveys show that millennials believe socialism means social justice for all. Socialism is not justice for all, it demands huge government, and high taxes to pay for it. Perhaps socialism today is expressing: (1.) the need for a large government sized for necessary public service, (2.) with regulations necessary to maintain free markets, and (3.) societal relations governed by custom and power, rather than regulated by law to insure justice and liberty for all.

  The opposing viewpoint is (1.) the need for minimal government that we can afford, which relies more on individual initiative rather than asking government to solve all of our problems, (2.) minimal regulations to allow entrepreneurs to flourish, and (3.) maintain the U.S. Constitution rather than easily amend it to accommodate the current whims of fleeting popularity as the best guarantee to insure justice and liberty for all.

  As I see it, at least two phenomena have been responsible for propagating socialistic tendencies upon the mainly capitalistic United States of the past. They are: (1) expansion of what started as helping a small group that over a long time, grew to become a huge and unstainable expense. The other, (2) attempted enhancement of the economy by Keynesianism.

  To the first point, expansion of a helping hand offered to a small injured group works like this. After the Revolutionary War and again after the Civil War, Congress was compelled to offer aid to those disabled from war injuries, as well as to the widows of the fallen. But soon after, petitions from war vets with minimal injury, then for all vets, came forth, and arguments arose with time, often over generations, that aid should also be offered to more and more people. What began as a program for a small select group composed of those who were obviously terribly injured, grew over time into a gargantuan, cannibalistic monster. This effect, which I call a human-nature thing, has repeated and repeated. A couple of presidents in the latter 1800s realized that the federal budget had gotten out of control because of veterans’ benefits, and took steps to alleviate the impossible to pay for financial drain.

  This effect has repeated in other situations: those unable to work because of old age but with no retirement savings, to those with some unusual medical condition, and to those vets with war injuries needing special medical care. In all cases, there would appear some people having something in common with the compensated group, but lying just outside the parameters defining the original group. Then enough of these people petition Congress for redress, and eventually win a right to be included as a legitimate beneficiary. But doing so causes the costs to explode, making what started as a reasonable program of help for a small group grow into a huge group, and at an unsustainable expense. Today, we suffer from the same dysfunction over Social Security and Medicare. The solution is to rein in excesses, and return to helping only the small group.

  KEYNESIANISM –The other phenomena that has helped propagate socialism in the U.S. is Keynesianism, which became the perfect Trojan horse for socialism to invade a capitalistic system. John Maynard Keynes (1883-1946) was a British intellectual who studied business cycles, held various positions in the British Treasury, and was a director at the Bank of England. He wrote several books, and through his writings and meetings held with President Franklin Roosevelt in the early years of the 1930s Great Depression, became a huge influence to Roosevelt. My understanding of the origin of his thinking about cures for the Depression started with the idea that government, suffering from reduced revenues from taxes secondary to massive unemployment, should not cut services. He thought cutting services would only compound the problem. Instead, he thought it more reasonable to maintain the same level of government payments, even if it meant deficit financing. Then, when boom times returned, the government would have the tax receipts necessary to pay off the debts. His thinking then evolved into the idea that demand, not supply, is the key variable governing the overall level of economic activity. The idea being that without government intervention to increase expenditures, an economy would remain trapped in a low-employment equilibrium. (Think of supply and demand; from this concept came the idea that government spending on new programs enhanced the economy by meeting the public’s demand). This led to Roosevelt’s creation of numerous expensive public works programs. Then Keynes introduced the idea of a “multiplier effect,” saying that a dollar spent by government, and passing through the economy (think of passing through, like in waves) actually helped the economy by three or four dollars’ worth for every dollar spent. Further, he also thought that savings are anathema to an economy that is faltering, since the rich save more than the poor. So, taxing the rich and distributing to the poor, who will spend rather than save, became the goal. (Reinforcing the legitimacy of the progressive income tax).

  What started out as a run-of-the-mill downturn in economic activity, which today we call a recession, then was made worse by the mistaken raising of the interest rate by the Federal Reserve, along with the flawed Congressional Smoot Hawley tariff that set off a chain-reaction that basically collapsed international trade, all of which turned into the Great Depression. At its peak, unemployment reached 25%. The collapse lasted years and was devastating for almost everyone, not to mention its part in fostering WWII. From this financial disaster came a huge expansion of federal government along with myriad federal programs. Out of this chaos came what today we call Keynesianism, which became entrenched and later perverted into a mindset that has invaded not only the government, but the universities and college campuses, the news media, and huge numbers of our population who take modern-day Keynesianism as truth, and are blind to any opposing thought. Hence, we have multitudes of federal programs, including Social Security and Medicare, with runway costs resulting in huge federal deficits. At the same time, the federal debt is downplayed because it was just secondary to federal spending, which they believe is healthy (except when Republicans try to lower taxes, to which they checkmate Republicans saying that will increase the federal debt). Further, the spending gets enhanced because of the magic of the “multiplier effect.” And when tax reform comes up, they cover their tracks with “make the rich pay their fair share,” via the progressive income tax, which might have some merit, except for the fact that today about half the workers pay no income tax, and tax receipts from the small group at the top are unable to match the federal expenditures. So, we end up with an impaired economy with slow growth and stagnation (GDP 2% or less, when 3% plus has been and is possible and is needed to produce the tax revenues to service the debt of today) because the social programs have stolen much of the funds that could have been saved and invested in the private sector. This money could have gone into the real economy and led to job growth, raised wages (about half of potential workers have given up looking, or are in subpar jobs), and given us all more prosperity.

  Instead of private investment of business profits leading to increased productivity growth and output, Keynesians believe consumer spending and government debt create economic growth. This probably comes from the communist thinking that “your income is someone else’s spending,” along with profits for capitalists and wages for workers. STOP! In case you missed that, they believe that government debt (from excessive government spending) raises the GDP. No wonder President Obama encouraged the piling on of debt, and gave out bailout money willy-nilly. From this mindset, they came up with the notion that consumer spending was 70% of the economy (the other 30% being government spending). Keynes wrote two books declaring depressions can be ended with government spending, and from this came the idea that if the consumer stopped spending and starts saving, then we’re in big trouble.

  George Gilder’s book, Knowledge and Power, cites the economist and investor Mark Sousen. Sousen’s research concludes that consumer spending is in no way 70%. He figures business investment is about 50%, and consumer consumption about 30%. He goes on to say that there are many intermediate steps in producing products, and with every round there is an increasing productivity of capital because of ongoing renewal through information and innovation. Creative business and inf
ormed investment drive the economy and the stock market. For cues to the future, ignore the consumer and look to manufacturing plans, corporate profits, and productivity gains and venture capital. Federal Reserve studies show that higher savings rate is associated with higher economic growth. Thus, savings and investment drive the economy, and not consumer spending. And note Say’s Law, which is that supply creates its own demand. (French economist Jean-Baptiste Say, 1767-1832)

  So, what are we citizens to believe? More to the point, where should our votes go for political leaders? If we spent any time on a college campus, we most likely start with the bias that those whoknow about government and politics have studied up on these issues, and it’s now a settled issue, so “I don’t have to spend any time thinking about this myself, and those thinking differently must be ignorant.” If we read most any of the newspapers in the country, they just confirm our belief. If we listen to the main TV outlets, they confirm that which we already believe. Since we believe the big government programs like Social Security and Medicare have been a Godsend for so many, we believe we need a large government to provide these needed services. And if all this runs up a little debt, no problem, because the spending that caused that debt goes to enhance the economy, which benefits everyone.And how to pay for it?Well, obviously, there’s the rich—tax them.

  About half of Congress, basically all the news media, and virtually all of academia believe Keynesian principles are valid. That is, government debt is good, because the debt arose from spending more money than it took in, and spending is good because it causes growth. Since each dollar spent is actually worth three or four dollars as it courses through the economy, we get an even better deal. And on top of that, the bigger the government, the better, because we’ll keep all our services, and keep the door open for more in the future.

  2 - SOCIALISM

  I begin my book, Return to Capitalism, with a review of a very well-known, actually very famous book, The Road to Serfdom. Though I’ve known of this book for years, and was generally familiar with its message, I had never read it until after completing my book. It clearly addresses the subject of socialism, but skimps over the competing opposite subject of capitalism. We today, in the United States, are pretty evenly split into one of two camps, politically speaking. One camp is mostly represented by members of the Democratic political party, the leaders of which espouse views thatI believe are of socialistic nature of one kind or another. The other camp is mostly represented by members of the Republican Party, and their leaders espouse various views ranging from advocation for fiscal austerity, to wishing for a strong national defense, to others more concerned with law and order issues. While some members of this party favor business interests, I don’t really feel that there is a strong advocacy for what I call a capitalistic flavor (i.e., freedom, the Rule of Law, entrepreneurism, and the supremacy of the individual and his welfare and policies by promoting prosperity). While our citizenry is locked into a split and polarized state, confusion abounds. I write my book hoping to offer clarity. Hayek’s The Road to Serfdom makes clear to me that the many who favor socialistic ideals usually are completely ignorant as to where this will lead. Hayek lived in the most advanced socialistic country there ever was, pre-World War II Germany, and saw firsthand how it led to tyranny, and the horror that Adolf Hitler bestowed upon the world. I say this not as a scare tactic to gain attention, but to elucidate as clearly as I know how, addressing this conflict in the time frame of the 21st century. So, let me begin.

  Friedrich August von Hayek (1899-1992), born in Austria-Hungary, was an Austrian-British economist and philosopher who authored The Road to Serfdom. He was best known for his defense of classical liberalism. A Nobel laureate and prolific writer and publisher of many works, Hayek started writing pamphlets and articles in 1938. He later collected, reorganized, and added to these works, which became a most notable book, The Road to Serfdom. He lived a portion of his life in Germany, a portion in Britain, and later was on the faculty at the University of Chicago. He is associated with the Austrian philosophical school of economic thought, which was prevalent at University of Chicago. He served in WWI, lived in Germany and knew socialism first hand, and watched it transform into fascism and witnessed the rise of Adolf Hitler. He spent the WWII war years in Britain, then watched socialism expand in Britain. He spent most of his academic life at the London School of Economics (1931-1950), the University of Chicago (1950-1962), and the University of Freiburg (1962-1968).

  The Road to Serfdom arose from concerns in British academia that fascism was a capitalistic reaction to socialism, and was written between 1940 and 1943. The title was inspired by Alexis de Tocqueville’s writings on the “road to servitude.” Hayek’s book was published in both Britain and the U.S. and was popular in academic circles.An abridged version was published by Reader’s Digest in the U.S., after which it reached a far wider audience and became widely popular among those advocating individualism and classical liberalism. Please note that classical liberalism refers to liberty and freedom and has origins from the French Revolution, but for the purpose of camouflage,socialists picked the term “liberal” so that today the meaning of liberal is the opposite from its original meaning.

  I read The Road to Serfdom after writing the first edition of my book, Return to Capitalism. I am struck by the similarity of thought, but in no way does my book offer the extensive detail based upon research by an academic genius.His book offers to the reader of my book a background of the subjects of socialism and capitalism that is compelling and interesting as well as extremely well written. Starting in the next paragraph, I offer my brief synopsis of his book.

  The Synopsis – Starting off, Hayek emphasizes that this is a political book. And right from the get-go, he proclaims that the unforeseen but inevitable consequences of socialist planning create a state of affairs, in which, if the policy is pursued, totalitarian forces will get the upper hand. Put another way, those advocating for socialist policies fail to grasp where these policies may lead. The most serious development today is the growth of a measure of arbitrary administrative coercion and progressive destruction of the cherished foundations of British liberty and the Rule of Law.

  Originally, socialism meant unambiguously the nationalization of the means of production and the central economic planning which made this possible and necessary. Socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state, but nevertheless, the ultimate outcome tends to be very much the same. Unfortunately, most who favor socialistic policies fail to see where this leads—to tyranny.

  Individualism has a bad name today, and it brings to mind egotism and selfishness, but individualism of which Hayek speaks in contrast to socialism and all other forms of collectivism has no necessary connection to egotism and selfishness. Rather, he speaks of the essential features of individualism which from the elements of Christianity and the philosophy of antiquity were first developed in the Renaissance and have since grown and developed into what we know as Western Civilization.

  It is desirable that men should develop their own individual gifts and bents possible with freedom and liberty, as well as tolerance. This then allows growth of commerce with the unchaining of individual energies, and with science, has resulted in growth surpassing all expectations. Wherever the barriers to free exercise of human ingenuity were removed, man became able to satisfy ever a widening range of desire. By the beginning of the 20thcentury, the working man in the Western world had reached a degree of material comfort, security, and personal independence which 100 years before had seemed scarcely possible. With unbounded possibilities and ambition, nothing in the principles of liberalism to make it stationary, possible spontaneous forces of society, little resort to possible coercion, it became possible to create a system where competition could work as beneficially as possible. The crude rules of economic policy of the 19thcentury were only a beginning. Handling of a monetary system, the prevention
of control of monopolies, and growing impatience with slow advance of liberal policy produced just irritation with those who used liberal phraseology in defense of antisocial privileges. Our attitude toward society has changed,leading to the abandonment of the individualist tradition which has created Western Civilization. Socialism did not originate in Germany, but was perfected inGermany in the last quarter of the 19thcentury and first quarter of the twentieth.

  Socialism displaced liberalism as the doctrine held by the majority of progressives. Tocqueville’s democracy was essentially an individualist institution, and this stood in conflict with socialism. Democracy attaches all possible value to each man, whereas socialism makes each man a mere agent; a mere number. Democracy seeks equality in liberty. Socialism seeks equality in restraint and servitude. Democracy seeks freedom from coercion, freedom from the arbitrary power of other men, and release from ties of the individual to the obedience of orders froma superior to whom he was attached. Socialism seeks freedom from necessity, and the new freedom was thus another name for the old demand for an equal distribution of wealth. Thus, socialism leads to the destruction of freedom. Think in terms of communism, and then fascism, a stage reached after communism has proved an illusion.

  There is a confusion over the term socialism, as socialism is often used to describe merely the ideals of social justice with greater equality and security their ultimate aim. But to attain these ends, socialism means abolition of private enterprise, of private ownership of the means of production, and the creation of a system of a “planned economy” in which the entrepreneur working for profit is replaced by a central planning body. The dispute has become mainly over means or ends. That is, many who value the ends refuse to support socialism because of the dangers to other values they see in the methods proposed by the socialists, so that the dispute is mainly about means, not about ends. The situation becomes more complicated by the fact that the same means of “economic planning” can be used for other purposes. Thus, it is probably preferable to describe methods which can be used for a variety of ends as collectivism, and regard socialism as a species of collectivism. Successful use of competition as the principle of social organization precludes certain types of coercive interferences with economic life, but admits others which may sometimes considerably assist its work, and even require some type of government action. It is necessary that parties be free to buy and sell, that entry into the different trades should be open to all on equal terms, and that the law should not tolerate any entry by open or concealed force. All controls of the methods of production impose extra costs. They may well be worth the cost. For example, prohibiting the use of poisonous substances, limiting working hours, or requiring certain sanitary measures can be justified. These elements are fully compatible with competition. The question is whether or not the advantages are greater than the social costs. The functioning of competition requires adequate organization of certain institutions like money markets and channels of information, some of which can never be provided by private enterprise, but depends upon the existence of an appropriate legal system designed to preserve competition and to make it operate as beneficially as possible. The systematic study of legal institutions which make the competitive system work efficiently has been neglected and there are shortcomings in regard to the law of corporations and patents. It is the socialist propaganda for planning which has restored respectability among liberal-minded people who are in opposition to competition, and what unites socialists of the right and the left is this opposition to competition and their desire to replace it with a directed economy. The terms “capitalist” and “socialist” are still generally used to describe past and future forms of society, but they conceal rather than elucidate the nature of the transition we are passing through. Hayek’s argument is that the planning against which all of his criticism is directed is directed solely to the planning against competition.