The Socialists' Problem

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, we'll be right behind you
--Tears for Fears

Although many continue to blame current economic and social problems on capitalism, it should be readiliy apparent to anyone who is intellectually honest that capitalism in its true sense does not exist today. In the United States, any semblance of free market operations began to disappear a century or so back, largely in line with the onset of the Progressive movement.

As a matter of fact, the United States was the last industrialized country to send free markets packing, as other countries had opted for alternative structure at earlier dates. Parenthetically, this is probably why the American free market myth persists--the structure of US markets may indeed appear relatively unhampered when compared to others.

Today, the design that dominates economic structure around the world is socialistic in nature. Increasingly, control of production and distribution of economic resources rests with government rather than with private enterprise. The primary rationale for this movement relates to the idea of equality or 'social justice.' Social justice requires that resources be distributed in an 'equitable' manner so that all have their 'fair share'--both now and when times get tough (i.e., sickness, unemployement, etc). Because the core competence of governments is coercion, they are well positioned to serve as strong armed agents for the forced distribution of ecoomic resources.

Socialists face a fundamental problem, however. The central planning function that makes production and distribution decisions in socialistic systems is inferior to market mechanisms for resource allocation. Consequently, productivity suffers. And with it, standard of living.

Lower standard of living makes the citizenry unhappy--particularly if citizens can observe people in other countries living more comfortably. Socialist planners, desperate to keep their jobs but recognizing that citizen desire for standard of living exceeds the resource-producing capacity of their economic systems, resort to borrowing resources from others in order to appease the unrest.

Borrowing permits those living in socialistic systems to elevate their living standards above their income-producting ability.

This artificially elevated living standard is a temporary condition, however. With the entire world moving more socialistic in nature, it is only a matter of time before pockets of economic resources that have been saved are subsequently borrowed. Moreover, if the resources that have been borrowed are to be paid back, then socialist economies already living beyond their means must dial back drastically on future standards of living in order to pay back their debt. The other alternative, of course, is to default, in which case lenders must dial back on their future living standards since they have less resources.

Either way, when the entire world is moving toward socialism, the system resembles a gigantic pyramid scheme heading toward dislocation.

There is a good case to be made that this is precisely what we're witnessing today. A world increasingly moving toward the socialism end of the economic spectrum has been sacrificing productive capacity in the name of social justice et al. Conditions of economic scarcity are higher than they would be otherwise. This has weakened standard of living, motivating bureaucrats to increasingly borrow more resources to make up the difference. The pool of real savings, however, is nearing (or has reached) depletion.

For a while, bureaucrats are apt to pretend that they are creating resources by printing money. But it is only a matter of time before citizens discover that pieces of paper are not economic resources.

The faster we look toward more government to 'solve' this problem, the more likely we will face a signficant dislocation in living standards worldwide.

It's also not hard to envision that, during the entire time that the economic system is collapsing under the dead weight of socialism, that mindless people will continue to point to capitalism as the cause.

position in SH, US Treasuries