Could Socialism Make You a Better Capitalist?

I think that, maybe, to understand the present crisis - I mean even to wrap your mind around it - you have to have been schooled in Marxism for at least some time. I really do. It's not that Marxism itself is so informative here, although highly selected and re-interpreted portions can be. It's that to understand what is happening now, you have to have learned - at some time - to look at the capitalists system from outside of it. You have to have wondered "what's next?" and tried to come up with something positive, rather than just catastrophe.

And it really helps if you have had the experience of rejecting doctrinaire Marxism and developing a deeper appreciation for capitalism. I theorize that this is why Jim Cramer has had such good instincts about this crisis. He was a red for a while back in his college days, I understand. And of course George Soros - another devout capitalist schooled, if unwillingly, in Marxism - has done really, really well.

Meanwhile, his old partner Jim Rogers, is floundering. High-powered investment bankers - like Henry Paulson - are confused. America's greatest living expert on deflationary crises - Ben Bernanke - has been slow to react after making an entire academic career around the observation that people in government - in his very position - were too slow to react in the 1930's. But European leaders - schooled in socialism, whether right-wing or left- - are acting with increasing clarity. Meanwhile super-smart people who have gotten so many things right - like Brad Setser, Nouriel Roubini and even Warren Buffett - seem increasingly baffled.

What they seem almost unable to really understand is simply this:

...and why it's happening.

That is a chart of the Dollar Index - a measure of the value of the U.S. dollar against major currencies. During this period, the U.S. government and now other governments have been pouring an supply of dollars and dollar credit onto the market that is not just unprecedented, but previously unimaginable. And these governments are doing nothing but announcing plans to keep on providing dollars as fast as they can for the foreseeable future. And during this period, the value of the dollar is going up - fast.

The law of supply and demand seems broken when it comes to the U.S. dollar. They supply and the world just keeps demanding.

I think the misunderstanding is based on some fundamental misconceptions, but who am I to explain things to the smart set? Let them figure it out for themselves, the big show-offs. I'm just going to predict that it's going to keep happening for a while and that is going to be really scary and bad.

At the same time, the dynamic is forcing us to re-think the structure of our financial system and put some solid government backing behind it, which is a good thing. I think most of the major traded commodities and currencies are probably going to fall versus the dollar for quite a little while. Maybe even the renminbi will fall, although that is a currency highly subject to government intervention. Maybe even the yen will fall, although that is the currency of arguably the most-productive nation - person for person - in the history of the world.

And, yes, maybe even gold will fall, although panic-buying gives gold the potential for incredible volatility, as we've seen. If you're not looking at the system from outside the system - questioning some of the common assumptions - I just don't think you could even be expected to see this coming.

Brad Setser has a wonderfully informative article about the "End Of Bretton Woods 2" on his blog. It's very good, although I'm not sure it explains why we've seen the reverse of some of his most important predictions. But in economics the same dynamic can have effects that seem the opposite of each other, particularly if they involve foreign exchange. He did get the timing of his crisis call very right. Nouriel Roubini did also and Roubini doesn't really need to get mechanisms quite right. He observes so many things about the world that he's incredibly informative and flexible. And Warren Buffett? I dunno, maybe his call on stocks isn't so bad, although I'm not sure his predictions of record profits in 5 years for some American corporations is necessarily all that meaningful if the majority are in the soup.

Certainly unprecedented volatility looks like something we're going to have to get used to and people don't usually like having so much of their principal at risk. The point is that even people who saw a lot of risk in the American economy have consistently misidentified the likely results or made predictions that seem to ignore obvious risk.

To me, what looks clear about the world looks very clear and it's a strange experience. Every morning, I wake up expecting everything to reverse course, but it doesn't. I'm usually terrible at making specific calls on markets and now even my call on gold doesn't seem so bad. Even the yen looks like it might be turning. That's pretty wild.

I hope I'm not right. I hope I'm really not seeing something important. Although the future does ultimately look bright to me, it's going to be pretty scary and people will be hurt. What can you do, other than live in interesting times?

Comments

[Smarty_Pants:]

Is a massive unwinding of the short dollar/long commodities positions by leveraged hedge funds the world over too simple an explanation to believe?

Occam's razor is usually a pretty good first pass methodology. Don't make things more complex than necessary.

2008 Oct 23 09:59 AM

[moonbat1775:]

"our financial system and put some solid government backing behind it, which is a good thing."

Sure you left Marxism behind?

2008 Oct 23 10:21 AM

[henarl:]

Is there ANY really good form of government, either historically or currently?
At best, any form of political control of populations so far tried by mankind have been necessary evils. But we will keep trying (and probably failing).

2008 Oct 23 12:56 PM

[carey_jim:]

Hard as it is for most people to believe, Marx admired capitalism and free enterprise. He thought is was a great boon to humanity and he studied the works of Adam Smith diligently. He knew that individual initiative and entrepreneurial skills were the driving force that brought technological discoveries (railroads, telegraph, etc.) to market.

Marx died in 1883 and therefore did not live to see the new developments which created the modern world: radio, television, film, automobiles, airplanes, etc. If he had, he certainly would have admired Henry Ford, Thomas Edison and all of the other great capitalists who made these technological advances useful and affordable to the majority of Americans.

The major criticism of capitalism Marx had was the criticism of monopolies which he thought should be taken over by the workers/government. It's well known that Marx thought the state would "wither away" in time because he thought that people would control monopoly corporations directly, without the need for government. (In that sense, Marx would be in agreement with the libertarians.)

But Marx did not suspect that inventions would cause all businesses, large and small to continue to innovate or go out of business. His socialist successors in Europe saw this and tried to deal with it.

The way Europe differs from the United States is that Europe has a long history of taking over monopolies, as Marx taught, but they have learned that the results were often bad and so they sold the state owned corporations back to the private sector with good results.

Keynes was not a socialist but he believed that the government had a role to play in regulating business.

Marx would probably not have approved of Keynes' ideas because he would have seen them as a way of propping up inefficient monopolies and oligopolies which he thought should be taken over by the workers and run by them in a democratic way without the interference of the government.

And Marx thought, as most believers in free enterprise do, that businesses should be left to compete in the free market, with various rules and regulations (no child labor, humane work week, daily work hours, safety laws, etc.) of course. Only when they become huge monopolies should the people take them over with the help of their governments but governments should be as little involved with these takeovers as possible and the people should run them by themselves.

Marxism is not Keynesianism.

2008 Oct 23 01:04 PM

[dlaw:]

Thanks for the comments.

Smarty, 122 times out of 123 huge swings in any market are, as you say, just the unwinding of positions. Then there's the 123rd time.

I may be looking for a large economic trend because that's what I like to do, but when you have such a massive upswing versus such a massive government credit supply intervention, you have to come to the conclusion that something is going on.

Moon, the answer is definitely "no." I sure didn't leave all the Marxism behind. Lucky thing the European leaders didn't either or we would not have been able to save the capitalist financial system.

We have a fiat currency system with a central bank that requires (per Diamond and Dybvig) government deposit insurance. So the system pretty much rests on a "socialist" foundation - if you want to call it that. You want to go back to the private, gold-based system of the 1500? Get in line behind Osama Bin Laden.

2008 Oct 23 01:07 PM

[Alex Filonov:]

You are looking for a large economic trend? In one word: deflation. Yes, US government and Fed are trying to flood world with US dollars. But those dollars only go to banks and don't move any further. Credit is almost completely frozen, and credit is like blood for economy. Of course, world economic crisis and worsening political outlook also add to that, people buy dollars to buy most reliable investment tool, US treasuries.

In short, the amount of money in the economy doesn't mean anything if you don't take money velocity into account.

Disclosure: long UUP.

2008 Oct 23 03:43 PM

[dlaw:]

Sorry to comment on my own post, here, but Carey - that's incredible. What you said is completely true, but that has to be the first time I have ever read somebody who knows Marx's (early) view of capitalism and the importance it had to the development of his theories.

Marx himself got very irritable, a lot more political and a lot less theoretical (and a lot less intellectually useful) in later life but he was definitely an early appreciator of capitalism. And you also note the very important fact of how much of the capitalist revolution Karl Marx missed altogether because it took place after his death. So many people forget that Marx missed the entire period between really the late 1870s (history traveled slowly back then) and the Russian Revolution and speak as though Marx was rejecting capitalism *after* that period. Most actual Marxists forget that Karl Marx was really looking at the very earliest stages of capitalism and so could not possibly appreciate how much it would change.

Wow, I'm so shocked to read anyone who knows anything about Marx on a blog like this. I'm sure a lot of people here know about Marxism and have some very negative experiences of it, but that makes me all the more surprised. 20th century Marxism did so much to dilute and wash away everything useful than can be taken from Karl Marx it's a wonder anyone knows anything about him any more.

Muddling: Yes. Agree totally. It's deflation. But deflation is just so hard for most people to understand because it destroys so many of the normal assumptions of capitalism.

2008 Oct 23 05:55 PM

[carey_jim:]

I wish more Americans studied other theories of economics and not just neo-classical economics but that's the way it is in America.

A few more little known facts about socialism:

1) John Maynard Keynes developed his system as an attempt to SAVE capitalism during a time when it seemed almost certain to many that it was doomed (1920's and 30's) and NOT as an attempt to bring about socialism which he didn't like. His system was criticized by others of course, namely by Friederich Hayek, who thought that his system WOULD lead to socialism but that is obviously not a foregone conclusion, just a well-reasoned opinion.

2) Joseph Schumpeter, who was one of the bright lights of the Austrian school of economics, believed that Marx was correct in his belief that monopolies would inevitably be taken over by the people to form socialism but he didn't like it. He simply saw it as inevitable.

3) Marxist socialism was never tried in the Soviet Union (or China, Cuba, North Korea, etc.) because the conditions that Marx stipulated did not exist in those countries: Many large monopolies with work forces that are capable of running and owning those monopolies themselves (including existing management, of course) the way some cooperatives are today.

Just for the record: Even though I've studied socialism and other economic theories, I've never been attracted to socialism because I'm too much of an American (trader, adventurer and gambler) and I love freedom too much for that kind of life. For example, I've always refused to work in large corporations but only in small Silicon Valley start ups and in jobs where I could be independent. Unfortunately however, I believe that the corporate American mind set would accept socialism in a heart beat if they could be assured "cradle to grave" security and I think that's a sad thing.

2008 Oct 24 12:53 PM