Capitalism’s Origins

Capitalism is often discussed as if it is a recent invention. Even in Wikipedia, which I typically find a very reliable source of information, they state that capitalism has its roots in the activities of 9th to 12th century Arab traders. In Europe capitalism is generally thought to have arisen in the middle ages. Some of this has to do with the types of private property rights that were enabled (vs. property rights of the state.) However, Sparta, Ancient Egypt, Carthage and almost every other major civilization had a merchant class, collected taxes and had some form of private enterprise. Thus, it is difficult to see how these civilizations were not capitalist.

What Is The Definition of Capitalism?

Some of the problem is definitional. That is if an economic system is not capitalism then what is it? Typically the different economies are defined as capitalist, socialist, or command (aka centrally planned). Although it is a very loaded word, capitalism in fact has a humble definition.

An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. – Apple Dictionary

This would only eliminate civilizations that did not have private owners, but which everything is state controlled and owned. The vast majority of economies through history were certainly not centrally planned and they were not socialist in that they had a small or no safety net when compared to socialist economies that we define as socialist today. Thus, its hard not to come to the conclusion that the majority of economies presently, and through human history have been capitalist.

A little known fact to most Americans is that centrally planned command economies like the one implemented by the Soviet Union are quite rare in economic history. People seem to generally enjoy denouncing communism, but firstly, the Soviet Union was not actually communist, and secondly, centrally planned economies are an aberration historically. It seems historically incoherent to rail against something that was a really just a historical anomaly.

Missing Scholarship

Another problem is that of scholarship. From my literature review I did not find many books that dealt with capitalism past the last few hundred years.

Fernand Braudel’s The Wheels of Commerce is considered one of the most comprehensive historical account of capitalism, but it only covers back to the 15th century.

Therefore its important to consider that economics history is not a significant topic in the study of history generally. History has a much stronger emphasis on art, politics and warfare. Notice the number of books on these topics vs. the history of economics. In all of my exposure to economics only one person, Michael Hudson, has brought up much about the history of economics. He actually pointed out that the Mesopotamians had in a way a better understanding of banking than we do today, because they understood that debt grows in a constant linear fashion, while the economy grows in an S pattern. The result being that interest payments eventually outstrip many borrower’s ability to repay this debt. The answer was that after a new king came to power, the debt was forgiven and the slate was wiped clean. It is unlikely that Goldman Sacks would like most people today to be aware of what the Mesopotamians understood thousands of years ago.

The study of economics is incredibly restricted in its historical analysis. Providing examples from the 1920s is about as far back as most economists go. In fact this is a tremendous blind spot of the profession because its sampling of the human experience is just so small, and it makes the recent history seem more important than it actually is. While political historians think nothing of going back to ancient Egypt to discuss the system at the time vs. more modern systems, economists almost never do this.

Much more seems to be known about Renaissance painting than the Renaissance economic system. However, this painting my Michelangelo was paid for by the Catholic Church, which was in fact a capitalist enterprise and was apart from the state. Secondly, books in history are filled with discussions of merchants, seafaring traders and marketplaces. These are all hallmarks of capitalism.

Missing Importance of Oil

Most people who write on economics and business tend to lack historical economics training or understanding, and almost always have a low exposure level to science. Deprived of this exposure, they tend not to know what is and is not possible in science. However, the problem is that understanding economics requires understanding science at at least a basic level. Because they largely do not, this causes writers to overemphasize economic systems vis-a-vis technological changes. This much is certainly true:

• Current economic patterns would cease to exist without cheap a power source.
• World population and economic growth correlate much more strongly with the discovery of and exploitation of petrochemicals rather than with capitalism.

Why Oil Made Such a Difference

It is important to consider how energy dense oil is. Oil contains as much energy in one gallon as a man can produce work in one entire year. This gallon can be purchased for $2 in the US. It also is comparatively easy to transport, store and handle. However, if this amazingly cheap and concentrated energy source is clearly such a boon for human civilization, why is it rarely discussed by economists? Why do most the discussions regarding the phenomenal economic growth over the past 100 years always tend to focus on the economic system? Why is capitalism seen as something novel when it goes back at least 6000 years to ancient Egypt?

Conclusions and the Misinterpreting History

The problem of misinterpretation of history is a serious one. If we are lead to believe that it is economic systems that were responsible for the change in standards of living over the past century, then we will focus on our economic system. However, what if that interpretation is wrong. What if capitalism has been there all along, but it was the discovery of an unlimited (in the medium term) and cheap fuel source that has been responsible for the growth. How does this change things? And also how does this change our interpretation of the future when this fuel source runs out, which it is about to. Furthermore, how does it interpret out projections for the future if we come to learn that there is no substitute source of energy that can match what oil offered us in terms of power density, transportability and ease of access?

This chart roughly estimates the decline of the world population after oil is no longer as abundant.

Its an important question, because there is no substitute for oil, which means that when peak oil comes, we will find out very quickly if our standard of living is based upon capitalism (something we created) or an inexpensive power source (something that was essentially given to use by the planet). I think it is entirely possible that we fixated on capitalism to explain the improvements in the standard of living for a reason. It makes us feel as if we are in more control of our destiny, and makes it feel as if the improvements over the past 100 years have more to do with us, and less to do with luck.

References

http://www.fjkluth.com/sparta.html

Here we go again….every several articles or interviews that we read from Michael Hudson lead to upturning the commonly held beliefs that were inserted in our mind by our propagandized business education, business controlled media, conversation with others or all of the above.

Flimsy Sanity Interview

In this excellent interview with the Flimsy Sanity blog Hudson explains that the very concept of a business cycle was manufactured by those elite interests opposed to government regulation, in order to present economic declines as natural and self correcting. Come to think of it, this reminds us of the advice provided by “investment advisers” and CEOs that the normal investor should not sell investments in bad times, but “hold out for the long haul.” Of course, what do investment advisers and CEOs do themselves? Well, they sell out as soon as they can, using inside information to beat the masses to the sell. Its important for the non-ultra elite to remember, much of the concepts that we think are true, have been implanted in us through a very heavy propaganda effort on the part of the ultra wealthy. This explains why so many people despise unions (while turning a blind eye to executive compensation) think they can personally benefit from investing in stock, and have a natural inclination to be against regulation.

Here is the quote below.

National Bureau of Economic Research by opponents of government regulatory policy. The fantasy is that the economy oscillates in a fairly smooth and regular sine curve. But this always has been a fiction. 19th-century writers didn’t speak of economic cycles, but rather of periodic financial crises. There is a slow buildup, and a sudden plunge, so the shape is ratchet-shaped.

Michael Hudson has been covering real estate for some time and is one of the very few experts on real estate taxation. The picture above is a good representation of how banks see the optimal real estate situation, people who are so in debt that they have to allocate most of their income to their mortgage. This is accomplished by both the mortgage deduction (increasing the price of houses and the desire to finance as much as possible with the bank) and also through moving taxation away from real estate (which ads very little of substance to the economy) and on to income and sales taxes.

Every now and then an article comes along that changes how you think about an issue. Michael Hudson writes more than his fair share of these types of articles which is why we consider him the most innovative economist that we have been exposed to. First lets lay out the common assumptions regarding real estate and taxation.

• Promoting people to invest in real estate is good for the economy
• Housing should be tax advantages in order to promote “home ownership”
• The main way the middle class gains wealth is through the appreciation of their home

Michael Hudson calls into question all these assumptions, and many of the other pro-housing assumptions that we have heard. From his article A Tax Program for U.S. Economic Recovery Hudson points out:

Hudson’s Statements

…you want to avoid having the tax collector lower property taxes, leaving more revenue available to be pledged to banks as interest on higher mortgage loans.

To get a lower-cost world, you have to counter political pressure from real estate owners and their bankers to shift taxes off rent-yielding properties onto labor and capital.

Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge.

(we were surprised by this as this is the first good idea we have heard from Milton Friedman who we and other progressives view as simply a tool for concentrated power) http://counterecon.com/2009/04/30/the-problem-with-milton-friedman-compendium/

Right. The financial sector translates its economic power into the political power to cut back real estate taxes. What has really been fueling the rise in property prices in this country has been the fact that real estate has been untaxed. What the tax collector relinquishes is now free to be capitalized into debt service on higher loans to bid up real estate prices. In 1930 about 75% of state and local finances came from the property tax. Last year it was down to 16%, so that’s from 3/4ths down to 1/6. Cities have shifted the property tax onto wages and salaries – income and sales taxes that increase the price of business. Taxes used to fall on property and hence were progressive, but now have turned regressive. The result is that “tax deflation” now reinforces debt deflation. This threatens to aggravate the depression we’re entering.

The venture-capital model that you’re talking about applies to enterprises that create new goods and services, especially products that weren’t produced before. But in real estate what you have is not so much a profit as “economic rent” and the free lunch of land-price gains that John Stuart Mill said landlords make in their sleep. The rental value of their property is determined by economic conditions and by local infrastructure spending to raise the rent-of-location, not by their own efforts and enterprise. Land and natural resources therefore should be the basis of taxation, because a real estate tax keeps down house prices and makes them more affordable. Homeowners may imagine that they are benefiting when property is un-taxed. But this simply leaves more rental income available to be pledged to the banks and capitalized into larger mortgage loans. So people end up paying the same amount of income to carry property as they did when real estate taxes where higher, but now they pay the banker instead of the tax collector. In fact, not only do they have to pay the same amount – but in the form of mortgage interest instead of taxes –they still have to carry the tax burden. This tax burden now takes the form of income tax and sales taxes. So you double the sum of taxes plus debt charges.

Analysis

This is an amazing revelation and it is 180 degrees from what is taught in business schools across the country and what is the common thinking among most people. Now that the real estate market has bust, many people are saddled with very large mortgages that they must service the debt on. These people are all hoping the real estate market comes back and are essentially debt peons, which is exactly what banks like. CountryWide is reported to have suggested a borrower who was having problems meeting their mortgage could “eat less.” For those the sold out of expensive markets at the right time and moved to low cost markets (say retirees who sold in 2006 in San Jose and moved to Pittsburg) the housing bubble was great, as it was for real estate agents who pocketed exorbitant fees. However, for most of the rest of the population, the extreme tax benefits given real estate has meant the following:

• Financial discrimination against renters (who are generally lower income)
• A more expensive cost of living (thus a lower standard of living)
• An increased percentage of money flowing to banks

We have to say, after listening to the conventional wisdom for decades from real estate promoters, who really were preaching a bankrupt economic philosophy, it can certainly embitter someone. Increasingly we are beginning to wonder about the quality of economics that trickles down to the general population. Increasingly we find ourselves debating completely false economics information which is simply repeated by people who have a very strong focus on promoting things good for them, but really no abstract concept of economics and certainly not the history of economics. We are very thankful that Michael Hudson’s website is always available to provide both clarity and critical thinking that is so lacking in universities and media outlets.

References

http://www.michael-hudson.com/

We have reached the final stage of this process – when the financial economy has very little to do with the actual economy. In this model, the financial economy is simply subsidized to continue to exist in its enlarged state. The original concept of the banking and financial system was that it serviced the real economy. With $13 trillion so far pumped into the financial economy and only $400 billion in stimulus for the real economy we can see where the emphasis and political power resides. The main emphasis now is to come to the rescue of asset prices, not workers and not the physical economy. In the new philosophy, manufacturing is optional, however finance is primary.

Real Economy Craters

While the real economy is putting up its worst numbers since World War 2, the stock market has regained some life.

1. The economy is losing 700,000 jobs per month
2. Massive bankings losses continue to be hidden
3. Supposed positive information on housing starts has been completely misinterpreted by analysts that need to go back to school to learn basic analysis

Supported by further decreasing already flexible accounting rules, a number of completely dead banks posted fake pro-forma earnings estimates that many financial anchors on television (who are glorified weathermen and weatherwomen) mistook and misrepresented as harbinger of good things to come. The major networks could hire non-twits to present financial information, however the major networks are themselves part of concentrated power, and concentrated power wants to pump up the banking sector because:

1. The banks are big advertisers
2. The banks know this is a critical time and need more political leverage to prevent a populist revolt – hence the fake pro-forma earnings announcements

It is not clear that any of these anchors are actually voicing their actual views. Like Glen Beck – the Fox News anchor who is an ex-alcoholic born again Mormon with a high school degree who clearly has no idea what he is talking about, talking points are most likely layed out for them. Anchors and commentators are clearly being selected because of their low mental capability and suggestibility. This is so they can be easily manipulated and serve a puppet for what the top advertisers at the network want to be repeated. This approach worked so well with Ronald Reagan, who had Alzheimers disease while in office, and had no idea what was going on for most of his presidency (Footnote1), that the power elite have been copying this strategy over and over.

This woman has no knowledge of finance, economics, history or any other topic related to financial reporting. We know this because we can observe the MSNBC icon in the lower right hand corner. She is most likely fed what to say by an editor or producer who is in constant communication with advertisers. In case anyone thinks this statement has sexist overtones, we have one name that should put an end to that speculation…Jim Cramer. Jim Cramer is no fool (although he appears to have either ADD or a cocaine addiction), however Jim Cramer is a con-artist and is continually being caught either misrepresenting his record or lying. Jim Cramer will pitch any stock or idea if he is paid.

Main Street vs. Wall Street

When this crisis first broke, the issue was framed in a way that supported the notion that Main Street was dependent upon Wall Street (or the real economy was dependent upon the financial economy) and that Wall Street would have to be saved in order to save the real economy. The fact that Wall Street has improved, while the real economy has cratered highlights the disconnect between these two economies. Wall Street is not servicing the real economy, Wall Street is parasitzing the real economy. In fact, Wall Street’s effect on business in the US is almost entirely negative. It promotes concentrations of power through mergers and acquisitions and causing executives to look to their short term stock options over the long term interests of their companies. Unknown to most, Wall Street is actually bad for business and bad for democracy.

A full explanation of the ridiculousness of the US stock market can be found here:

http://counterecon.com/2008/01/11/stock-an-unnecessary-illusion/

What is to Come

Michael Hudson has written extensively on the financialization of societies and how it has marked the decline of many major powers through history. Examples includes Rome, The Netherlands and Britain. Essentially what happens is that as a nation goes through its arc of power, its people and institutions move away from doing things that add value (shipbuilding, manufacturing, etc..) and move into things that are primarily focused on chicanery (real estate speculation, creating bizarre financial products and practicing law). We either collectively put a stop to the financialization of our economy, or we get ready for a steep decline in our living standards. It is that simple.

Footnote on Reagan

Strangely, though almost mentally retarded due to Alzheimers, Reagan is almost considered a god by Republican politicians. Actually Reagan’s complicity with power goes back to his tenure as president of the screen actor’s guild. Placed there by power broker Lew Wasserman of MCA – United Artists, Reagan traded his representation of the actor’s union for roles in Lew Wasserman’s movies. Prior to becoming governor he was a pitchman for General Electric. Thus Reagan began and ended his career as a pawn of the power elite. It is unlikely he hand an understanding of most the things he said.

References

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/false-hope-in-a-plunging-economy/

http://tpmcafe.talkingpointsmemo.com/2009/04/07/the_disaster_stage_of_us_financialization/

What would you do if you learned that your government had outsourced its central banking function to a private company? Furthermore that this company had only a loose affiliation to the government, and that the government have very little oversight into this entity both in terms of controlling its behavior and being able to see what this private company was doing. Would it surprise you to learn that, if you are a US citizen, that your government already has done this and actually there is nothing new in that privatizing the central bank was performed back in 1913.

What Does a Central Bank Do?

A central bank does a number of important things, but the most central to its role are the following:

• Creating money
• Controlling the money supply
• Setting interest rates (this is done through what is called the Federal Funds Rate – which is the rate they loan money to banks)
• Loaning money to banks

The central banking function is considered both one of the most important roles of government, as well as one its greatest powers. What is most unusual is that any government would give up this right to a third party, and how this happened, and the fact that it did happen tells us a lot about in effect who is running the country. That is, any government that can be persuaded to sign over its right to the central banking function, may indicate that the government may not be as powerful as one would presume that a government ordinarily is.

How Does the Fed Create Money?

The first idea to dispense with to understand this concept is paper money. Paper money is a physical representation of money, but it is less and less important as transactions are increasingly electronic. Therefore, money is increasingly accounting entries. Of the money that you have, unless you are a rare coin collector or a goldbug (someone who hoards gold), the vast majority of your money is a ledger entry at the bank of your choice. This ledger entry is supported by only a small fraction of reserves as your bank. The bank has the right to do this because  they have been deputized by the government to do so.

Now if the Fed wants to increase the money supply, they have a number of mechanisms they can do so. First they can reduce the federal funds rate, which is stimulative (causing more banks to borrow). Second, they can offer to make more loads to banks. Roughly speaking, for every $1 a bank receives, it can loan out $10 (called fractional reserve banking). Where does the Fed get this money from? Well, that is the thing, and why the Fed is so powerful. They can create money from air. They have been given this power by the government.

The Fed is nothing more than an organization that is a front for large banking interests. This is in the same way that the Cato Institute or Hoover Institute are fronts for large business and defense interests. The Fed is not only an example of a privatized central bank, many of the owners of the Fed are not even US banks. Controlling banks include a number of banks in Europe.

1. Rothschild Bank of London
2. Warburg Bank of Hamburg
3. Chase Manhattan Bank of New York
4. Warburg Bank of Amsterdam
5. Rothschild Bank of Berlin
6. Lehman Brothers of New York
7. Lazard Brothers of Paris
8. Kuhn Loeb Bank of New York
9. Goldman Sachs of New York
10. Israel Moses Seif Banks of Italy

We don’t like using the term “international banking cartel.” However, we are not aware of any other similarly important government function that is both privatized and also owned by foreign firms. This would be like learning that the Pentagon has as one of its member companies, companies in Fiji or Russia, or that the State Department is taking orders from the Illuminati. We can only conclude that central banking must not be as important as we thought it was!

Why a Private Fed?

Understanding how powerful the Fed is question arises as to why it is in private hands. And in fact, there are a number of experts in this field who believe that the current privatized Fed is unconstitutional and therefore illegal. We have been waiting for a lawsuit to be brought to the Supreme Court to test the constitutional validity of the Fed, but none have been forthcoming that we are aware of.

The Fed website seems to pretend that it serves a public interest function. They have tips for avoiding foreclosure scams. However, there is an inconsistency in their behavior. In the late 1990s when approached by the District Attorney of Cleveland about lending abuses by their member banks to low income households, they did absolutely nothing. The Fed behaves in ways that promote the interests of banks. Their public interest function is not apparent.

Who’s Interests Does the Fed Represent?

This issue of who’s interests the Fed represents is a critical one. There is evidence provided by cepr.net that in the early days of the current financial crisis that Fed Chairman Bernanke actively exacerbated the financial crisis through reducing liquidity through reducing its purchases of commercial paper. The reason this was done is that because the major banks were insolvent, and under federal law would have gone into receivership, and this would have caused the management of these banks to be removed. When one sees that one of the Fed’s owning banks is Goldman Sacks, and the Treasury Secretary at the time was the former CEO of Godlman Sacks, its not hard to see where the term “thick as theives” came from.

Paulson and Bernanke had the same employer….but its not the employer you think. Its actually Goldman Sacks and other controlling banks of the Fed. This is utterly masterful, both men pretending to work for the US government, when in fact that work for the banks that own the Fed. The banks control both the Fed and the Treasury. Because of this control of both of the major finanical branches of the US, they have the ability to collude in order to rig financial markets. For this reason it is not surprising that the bailout has been so bank friendly.

As for Bernanke, its important to point out that he lies for a living. He pretends that he works for the government when he does not. He may have a PhD in economics, but he is no longer an economist. He is now a professional actor, and he has only one role, he is paid to serially misrepresenting himself through his role as Fed Chairman.

What that major banks wanted, and what Bernanke wanted as he represents those interests, was a major bailout of the banks my taxpayers. This bailout would allow what are essentially his friends or his board of directors to maintain their management positions at these banks.

Conclusion

At last tally over $1.2 trillion has been loaned out from the Fed to banks, and that is actually an old figure. When asked about this in a congressional hearing, a representative of the Fed stated that they did not have the “specific list of banks” that received money (in fact, they did not name a single bank). The answer given was that they did not like to publicize this list as it could cause banks to be less likely to borrow from them. What should be remembered is that this is not technically the Fed’s $1.2 trillion. They have only been deputized to create this money by the US government, and without the US government, the Fed is nothing. However, what appears to be the case is that the Fed does not only not report to the US government, but they do not owe the government any accounting of where or to whom the money that they loan goes. That is a serious problem that needs significant investigation. Ron Paul seems to be one of the few congressmen who have had a long term interest in this topic.

In this excellent video by the Real News, a Fed representative refuses to provide specific banks that at least $2 trillion have gone to. Not being a government organization, they are actually not required by law to answer questions of any detail from Congress. That is why their testimony in front of Congress is primarily a dog and pony show.

Quote on this topic from Thomas Jefferson

“I believe that banking institutions are more dangerous to our
liberties than standing armies. If the American people ever allow
private banks to control the issue of their currency, first by
inflation, then by deflation, the banks and corporations that will grow
up around [the banks] will deprive the people of all property until
their children wake-up homeless on the continent their fathers
conquered. The issuing power should be taken from the banks and
restored to the people, to whom it properly belongs.”

References

http://en.wikipedia.org/wiki/Federal_Reserve_Act

http://www.geocities.com/CapitolHill/Senate/3616/flaherty3.html

http://land.netonecom.net/tlp/ref/federal_reserve.shtml

How the Federal Reserve complete failed in its duty to manage the credit and money supply of the US economy during the boom years.

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/systematic-risk-regulators-and-the-power-of-arithmetic/

Who Was Adam Smith?

Adam Smith was an economist who lived in the 1700s in Scotland had a great influence on economics through the writing of his book The Wealth of Nations. This book is quoted frequently by business majors and by conservatives as an explanation for how to setup an economic system. His most common quotation is…

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. – Adam Smith

One really has to wonder why this paragraph is so compelling. For instance, if someone else were to write a book that contained a paragraph that stated that cheating is good. In fact, let’s take a crack at it ourselves.

It is not from the benevolence of the used car dealer that we purchase cars with rolled back odometers, the oil executive that we receive environmental degredation, or the PR specialist that we receive false information, but from regard for their own self interests. – CounterEcon

The statement above is as true as the paragraph by Adam Smith, it simply focuses on the negatives of self interest. One can find both positive and negative outcomes of selfish behavior, but no sane adult would propose that only positive outcomes sprout from self interest. However, this seems to be the conclusion those that quote this paragraph from A Wealth of Nations seem to have arrived at. If Adam Smith actually thought this, he would not have been the thinker that he was.

US President’s Prefer Adam Smith

And this quote, or even a much shortened version has been used to justify all manner of deregulation and self dealing. In effect, it is philosophical and high minded cover for acting selfishly or in a greedy manner. It has become very fashionable to talk about Adam Smith and it seems to lend instant credibility to the individual. Recent presidential candidate Senator John McCain, stated that if given only one book to read when stranded on a desert island he would read.

If I could only choose one book, I might choose “Wealth of Nations” by Adam Smith, because we may be entering some pretty shaky economic times, and I think that`s probably one of the most seminal works concerning how the economy of the nation and the world functions.

We very much doubt that given John McCain’s history, and his simple minded view of the world combined with his short temper – indicative of impulse control issues, that he could either complete the reading of, or understand The Wealth of Nations. In any case, John McCain is not much of a reader. This would be akin to Dan Quale stating he would like to read a medical book on Biochemistry. It is not going to happen. (This problem of barely literate US presidents goes back for some time. George W Bush could not name any books he read when asked by a reporter several years ago. Ronald Regan was well known for having a low reading ability, could not read the reports given to him and would read Reader’s Digest and confuse articles in it with his CIA briefings. This is not so much snobbery as pointing out that people who can not read the necessary material can be easily controlled by others as they rely upon everything second hand.)

Its an interesting question, why would John McCain recall a book that is extremely unreadable due to the writing at the time (1700s) and a book writen before economics was a formalized area of study, especially when far more approachable books in economics are readily available?

Lets be honest, these men are not readers. As long as we choose leaders who lack the depth and background in the topics they govern, we will continue to get broken and illiterate policies. Intelligence and subject matter expertise are not critical simply for the purposes of status (i.e. the ivy league graduate repeatedly stating that he went to Harvard, which is of little practical consequence as Bush also went to Harvard.) but because knowledge often leads to better outcomes.

Why Reading Adam Smith is Unlikely

The problem is that Adam Smith’s work is very very highly quoted, but very very lightly read. The Wealth of Nations is a 900 page book, and extremely difficult to read. This is primarily because it is written in a dated prose, which seems circuitous by our standards. However, most MBAs and other people that quote Adam Smith, do not have the patience, the time or the reading ability to actually read Adam Smith, and therefore, this quote that you see above it all that the vast majority of people know about Adam Smith.

The end result is that Adam Smith’s work is greatly oversimplified and misunderstood. Adam Smith did not say that all that is needed is self interest in order for an economy to perform well. In fact Adam Smith wrote in a time when Economics was not even a profession, (as he was in some ways considered the father of it) instead Adam Smith is referred to as a “moral philosopher.” Adam Smith’s is so misrepresented, and is so known to be misrepresented among people educated on this topic that there is actually a book about how he is misrepresented called Adam Smith’s Mistake, published in 1990.

http://www.amazon.com/Adam-Smiths-Mistake-Kenneth-Lux/dp/087773593X

Intellectuals and Economists on the Misrepresentation of Adam Smith

Some prominent Economists such as Joseph Stligliz pointed that left to their own devices markets will produce too much of things that hurt other people (such as pollution) and too little of things that help other people (such as research – unlike what is presented in advertising, most research is still funded by the government, private companies have no interest in basic research, and much less interest in any research they can not immediately monetize.)

Noam Chomsky, a very serious intellectual, has repeatedly complained about the misuse of Adam Smith’s work. This quotation is also from Adam Smith, though never quoted. The invisible hand, he wrote, will destroy the possibility of a decent human existence

..unless government takes pains to prevent” this outcome, as must be assured in “every improved and civilized society.” It will destroy community, the environment and human values generally – and even the masters themselves, which is why the business classes have regularly called for state intervention to protect them from market forces

Don’t allow those who can barely read complex writing to misuse Adam Smith to justify policies that only benefit the wealthy at the expense of everyone else. The Theory of Moral Sentiments, also by Adam Smith is filled with discussion on how to create a just society and the importance of the government to help make this so.

There are other areas that Adam Smith showed concern for an overemphasis upon work and division of labor caused a tunnel vision causing negative spillover effects on the other portions of a person’s life.

Misappropriation of Adam Smith

Large numbers of quotes made by Adam Smith which are distinctly opposed to the concentration of economic power are never brought up. In fact, Adam Smith supported unions, and where is this ever noted in discussions about him. See this post for more details on his stance on this topic.

http://counterecon.com/2009/12/12/adam-smith-favored-labor-unions/

What To Do

Question the knowledge of Adam Smith by people that use the “invisible hand” comment. Here are a few questions that are likely to flummox a person attempting to brandish the credibility of a long dead author they know nothing about and who’s books they have not read.

1. What other parts of The Wealth of Nations do you know about?
2. Did Adam Smith ever talk about the downsides to the invisible hand?
3. Are you familiar with Adam Smith’s The Theory of Moral Sentiments where he talks about how important it is to build a just and fair society?
4. If everyone acts selfishly, does this sound like it will result in good outcomes? If I only look out for my interests and ignore yours and everyone else’s, would this make you happy?

If you would like to read Adam Smith, his work is available in PDF format here.

http://www.pdf-search-engine.com/the-theory-of-moral-sentiments–pdf.html

References

http://en.wikipedia.org/wiki/Invisible_hand

http://adamsmithslostlegacy.com/2008/02/adam-smith-is-innocent.html

http://adamsmithslostlegacy.com/2008/02/senator-mccain-chooses-to-read-wealth.html

We find the portions of the videos that focus on the past very good, the future projections are pretty extreme, and less credible, however the entire series is certainly worth watching.

Part 1

Part 2

Part 3

Part 4

Part 5

“I believe that banking institutions are more dangerous to our
liberties than standing armies. If the American people ever allow
private banks to control the issue of their currency, first by
inflation, then by deflation, the banks and corporations that will grow
up around [the banks] will deprive the people of all property until
their children wake-up homeless on the continent their fathers
conquered. The issuing power should be taken from the banks and
restored to the people, to whom it properly belongs.” Thomas Jefferson

Introduction

The term capitalism is often applied as a blanket term that connotes a positive view on any structure that concentrates economic power. Unknown to many that use the term, all economies are mixtures of capitalistic and socialistic structures, regulations and social programs. A free market solution is not applicable to many if not most situations to which it is commonly applied.

What is Capitalism?

In order to think clearly on this most politicized of topics, its important to dispense with the concept, highly touted by power structures, that there is one form of capitalism. Countries around the world follow capitalist principles and policies. This fact does not make them all identical. For instance a capitalist system can be:

• Highly or lightly regulated (i.e. the US in the 1970s, or the US in the 1990′s and 2000′s)
• Highly concentrated in economic power (i.e. Brazil) or have decentralized economic power (i.e. England)
• It can have high levels of taxation (i.e. the US) or low levels of taxation (i.e. Singapore)
• It can treat its workers very poorly (i.e. Indonesia) or well (i.e. Australia)

The concept that there is one form of capitalism and that the US expresses the perfect form is either naive or intended to deliberately mislead. This one size fits all dogma would be rejected in other areas of social studies, but has gathered acceptance in the main stream media. Instead, a reasonable person should say that capitalist systems are a combinations of continuums as those listed above. There is no one single measurement that can be used to define a country as capitalist.

US as Perfect Capitalist System?

Virtually unknown to many, US has ranged between different regulation levels and different levels of economic concentration all while following what most people consider to be a capitalist system. However, the US system is far less capitalistic than most people imagine with large public subsidies for specific industries, high levels of protection for things like agricultural goods and a public sector that is somewhere between 35 and 50% of the overall economy (depending upon how you measure it, such as whether you include deficit spending, etc..). A period which is greatly lauded in conservative lore, the WW2 period witnessed a government take-over of many industries as well as price controls as rationing. This is not unusual as wartime economies increase the central planning in the economy as well as its industrial concentration.

Capitalism in the US in the Modern Era

Starting with the Reagan Administration and continuing to the present day (2007) the US has moved towards a philosophy of:

• Very low regulation
• High concentrations of economic power (as well unchecked monopolies which are allowed to merge with virtual pre-approval by the Federal Trade Commission).
• High levels of taxation (especially if deficit spending and regulatory transfer of monies to the wealthy are included)
• Declining treatment of workers

The US now finds itself with moderately high taxes, very high budget deficits, and an only marginally effective regulatory system. Putting aside concerns about whether this is good for the country for a moment, the US has moved and is moving from one modality of capitalism towards another modality of capitalism. Both modalities are capitalist, but the outcomes for the country are very different. The problem is that this second modality been tried in multiple places and in multiple times and has never proven productive nor conducive for a democratic society. Surprisingly, (to many conservatives) it is also not conducive to economic growth.

Regulation

Insufficient regulation and its relationship to deep differences in income distribution are often discounted by conservative economists (economists view the market simply deciding the right level of income distribution, discounting the political influence on income or weatlh distribution) however there is a critical importance that is not surfaced in the many articles that make it into the mainstream. Countries with high wealth distributions suffer from the following chronic problems.

• Inability to pass or enforce environmental regulation
• Inability to curtail government corruption
• Inability to protect non-monied citizens from predation, either civil or criminal
• Poorly functioning democratic institutions which are often democratic in name only
• Disincentives for poor and well-off alike to enhance their skills (i.e. societies where effort counts far less than birth)

The best way to understand this is that countries with high disparities in their wealth distributions are generally backwards and result in much abuse levied upon those at the wrong side of the wealth curve. Rather than using the term “capitalism” to justify any pro-wealth program or initiative, it i more instructive to look through history to see the effect of the concentration of economic power and what it resulted in for countries that lived through it. The lessons are obvious, however, it is important to consider that the people promoting the market and not necessarily historians, they have a particular incentive to take a “pro market” or “pro wealthy” view on economic history.

Lessons from History in the Concentration of Economic Power

There are no shortage of countries to look at and no shortage of timeframes to analyze. Although capitalism is presented as if it is some new commercial innovation, it is in fact ancient. That this is not discussed, and that capitalism is treated as some new and recent scientific advancement, has more to do with special interests not wanting to discuss its origins rather than any lack of data. (discussing topics that undermine concentrated power are a downer for sponsors, and of course no one wants to be labeled un-American)

Textbook Cases of Capitalism and Inequality

Latin America

The countries of Latin America which have been plagued by extreme income inequality and slow growth. These countries followed a highly concentrated form of capitalism, the likes of which the US is moving towards. This capitalism has lead to low growth, low innovation and a horrid standard of living for all by the top 1% of the populations.

• The lessons regarding working capitalist systems is that regulation and prevention from power concentration is necessary. Concentrated power is negative regardless if the system is capitalistic or communistic. Examples of highly concentrated power in capitalist systems have failed all through Latin America. Here the power concentration is based in societies where European descendants (which form the elite of the countries) see themselves as totally separate from the mestiso and indian portions of the populations. These countries have horrid infrastructure, horrid services and where the main strategy for the non-elite is emigration to another country.

Russia

Russia was heralded as a newly reforming economy just 15 years ago. Anticipation was high as the formerly communist country was moving towards market reforms. What happened?

• In Russia both income disparity and power concentration skyrocketed after the Yeltsin era, primarily because Yeltsin sold off large portions of Russia’s state owned industry to politically connected entrepreneurs who then funded his campaign and helped him defeat a resurgent communist political threat. Very few people know this because the US State department (which is a transmission between corporate interests and international policy) wanted to support Yeltsin as he increased the profits of their multinationals while increasing the mysery of the Russian people (i.e. the irrelevant bottom 98% of the population). Certainly Yesltin made a Faustian bargain to hold onto power. There are some who say he was too drunk during his presidency to have cared. However, whatever his motivations, he recklessly auctioned off some groups of mining assets that would have fetched 5 billion dollars in the open market for just a few hundred million dollars. Russia did nothing but crater economically since that event, until that is, the recent run up in gas prices initiated by the imperialist neo-con US invasion of Iraq. Even though Yeltsin was more instrumentation is giving away state assets to what would become a new super rich class in Russia, he was considered a “reformer” by the western business press. This is not a great surprise as although his people may never recover from him, he did do what US multinationals wanted him to do. The multinationals became wealthy, the national assets were sold for pennies on the dollar. This is the standard by which one is measured as a reformer, at least in the US business press. and the US State Department. People that make concentrated power happy are treated very well in this life and in the history books. Just ask Milton Friedman.

Recent Developments in Latin America

Recently left leaning governments have been taking hold and both reducing income inequality while increasing economic growth (notably Argentina and Venezuela). Venezuela’s success in poverty reduction is striking but not covered in the US because Venezuela has been hostile to US business interests and US business interests own the majority of US media outlets. It also extends past media outlets. Argentina and Venezuela are pilloried by the World Bank and the US press for taking an “independent path,” they continue to do well. Again, the US media has little interest in covering any of this positive economic news. They receive constant feeding by the US State Department that these are countries with bad governments, bad for US companies. The fact the are good for their people is sort irrelevant to US interests and the US media. This is because the citizens of other countries lack the media representation that citizens within the US also lack. The State Department and other news shapers discusses the editorial slant it wants to take by discussing with US corporations which make their dislike for countries that reduce their profits and praise those governments that increase them. The evidence for this can be found in the descriptions within the CIA Fact Book. This is a good resource, not to read for real information, but to read to find out which countries are making money for US multinationals and which are not. The “bad” countries don’t make money for the US or are not sufficiently subordinate to the US in other ways.

https://www.cia.gov/library/publications/the-world-factbook/

Capitalism vs. Communism vs. Socialism

One can not assume simply because one particular form of capitalism was better than than communism that our present form of capitalism is the best system as there are a number of different forms of capitalism. Furthermore the definitions of these different economic systems are poorly understood. Many European countries are called socialist. However, socialism actually would mean that the workers vote for their supervisors. This does not happen anyplace in Europe or anywhere else in the world. Thus socialism can be viewed as a completely theoretical system. Communism, a more extreme form of individual control has likewise never been expressed in any country or any time that we know of. At the height of the Soviet Union’s powers, it was no more communist than the US, there was a substantial upwards concentration of power and workers had little say or control over their lives. The only category where the Soviet Union may have qualified as communist is that it was centrally planned, but central planning does not make a system communist. The US highway system was centrally planned, but the US was not communist when it did this.

Communism and Socialism and Paper Tigers

Commentators would be good to stop qualifying every political program that puts more power into the hands of concentrated power as good because it is capitalist. This simplistic analysis by those with a fetish for the word “capitalism” is used to cover up all manner of corruption. For instance, human trafficking, child pornography and blood diamonds are all activities that naturally arise in capitalist systems. However, none are considered desirable. Whether they are desirable or no is a value judgement, but what makes them illegal is the government. Without this, all of these markets would actively flourish. This may seem like a pedantic point, but it is not. Capitalism itself has no value, it simply means some people are allowed to make money off other people. The will of the people, as exercised through the state decrees what is an what is not acceptable to make make profits in. Before any conservatives get too indignant at the examples, lets remember that the US, for the majority of its existence was either a slave society, or a Jim Crowe society, legally allowed forms of bondage, and mostly supported and even declared necessary to capitalism by what we would know as conservatives today. Stopping the abuse of people and animals by “capitalists” is a form of socialism.

See this article for more on this specific topic of how the legal system interferes with properly functioning markets.

http://counterecon.com/2009/12/09/child-pornography-shows-that-markets-do-work/

In this way communism has played a very important role of a paper tiger. With the collapse of communist systems (that were not in fact communist), no nuanced discussion of what type of capitalist system the US should have is possible. This is because the standard mental schema or intellectual framework is that capitalist systems are the absolute best way to organize anything. This is an environment where everyone is categorized as either a free marketeer or a socialist. Its almost as dangerous to one’s social health as being an atheist in parts of the US. Somehow, because the Soviet Union was not able maintain the economic growth that it produced during the 60’s and 70’s, any form of predatory capitalism is commendable. Lets not forget, capitalism, if that is what we can call it, has not been good for Russia and its satellites either, and has a worse record for growth and income inequality that faux communism produced.

The Problems with Wealth Concentration

The fatal flaw in economic / political systems is in designing policies that concentrate money and power to an elite few. This is never good for the overall economy as systems with high concentrations of power underperform those where power and income is more equally shared. Furthermore it is unstable and leads to economic and scientific stagnation. In the US the period of greatest economic growth was during the 50s and 60s, precisely when the US was the least concentrated in power and income. US income and wealth concentration hit a peak prior to the Great Depression. This is when the wheels fell off of the US economic system. Since 1973 real wages have stopped growing in the US and wealth has become ever more concentrated. Subsequently, productivity growth has also lagged during this time. Overall productivity has doubled since 1973, but wages for workers are roughly 5% lower than 1973. This may seem to contradict the previous statement, however the productivity growth form 1950 to 1973 was the highest ever recorded.

Further Back in Time

Lessons from the trading power that was Venice, promote the idea that stable political and economic systems have a series of checks and balances on power. Venice was the longest continual stable government in human history. These and other important examples have been very carefully excluded from national policy discussions. What has happened is a highly one sided and continuous march towards increasing political and economic wealth concentration. This has been entirely accepted and in fact accelerated by a corporate controlled mainstream media. This is a view ignorant to history and a view arrived at not from observing the evidence of what works, but from the the narrow-minded interests of concentrated power in the US and elsewhere. This has been justified under the rubric of following free “market principles,” in theory, while large companies accept government handouts and restrictions on the market below the surface.

See the book Pigs at the Trough

http://www.amazon.com/s/ref=nb_ss_b/102-2931495-8728918?url=search-alias%3Dstripbooks&field-keywords=pigs+at+the+trough&x=0&y=0

or

http://www.corpwatch.com

For a full accounting of massive corporate welfare programs all lobbied for heavily by companies which worship the market….in their public relations.

Here is a perfect example of the inability to think clearly on the topic of capitalism. For anyone that has worked at a job where there is a bonus at year end, it is known that bonuses need to be earned. And that if you diverge at all from your goals, the bonus can be removed. However, that is if you are a normal worker. If you are a master of the universe on Wall Street, your bonus is legally protected. In a year where Wall Street fell apart like a house of cards, the executives and other high flyers still received their bonuses. This is supposed to be an example of free market capitalism. It is not. The upper class have even come up with a phrase to support their bonuses as their companies crash. It goes like this…”In this environment, stocks appreciation is not a good indicator of actual performance.

How Wealth and Economic Power are Concentrated

As much as companies may say they shy away from politics and simply focus on the market, the resources they put into political lobbying tell a different story. Wealth and power are concentrated primarily with political actions. These include:

1. Allowing corporations to pay very little tax
2. Allowing corporate mergers which increased economic concentration and reduce consumer and worker bargaining power vis-a-vis the corporation
3. Allowing tax evasion at the upper end through both laws and lax enforcement
4. Allowing private banking
5. Creating monopolies in health care under the concept of managed care
6. Promoting labor competition at the lower and middle income levels while restricting it at the upper income levels (i.e. allowing illegal immigration and restricting working class union creation while encouraging unions for physicians and attorneys by calling it “licensing.”)
7. Crafting trade agreements that increase competition but only for the unprivileged classes

These policies are rarely discussed and infrequently questioned in the investment media or elsewhere. For instance, investment banking analysts very rarely speak in balanced or even consistent terms regarding a pending merger. To them every merger appears to make sense. The fact that their firms make fees off of the mergers is supposedly not tied to their positive impression of the mergers provided by these analysts. Instead analysts discuss the cost savings that will come from the merger, the future likely stock price, all without mentioning the fact that mergers are non-market actions sanctioned by the government. The terminology is reconfigured to account for this inconsistency. When large economic power interests form collectives its referred to as “synergy” and praised, however when individuals from collectives (say in the form of unions) its called socialism and scorned.

The Business Lexicon

1. Synergy = Non market economic behaviors and decisions that benefit concentrated power
2. Socialism = Non market decisions that benefit normal citizens

These views are very rarely analyzed in a critical context by the corporate media which reports on this. Furthermore, the conflicts of interest inherent in the views of analysts at large investment companies are also not divulged to the public. Economists, who are supposedly in favor of functioning markets are silent on mergers although they are well known to decrease competition, reduce service levels to customers and generally create less efficient economies overall. Economists can not afford to openly write against them, except in academic journals, because non-academics are employed by large power structures like banks and think tanks.

Conclusion

The discussion level on what is a capitalist or socialist policy is so infantile, and so deliberately misleading that we can only assume that the mainstream media is more concerned with making advertisers happy than in presenting any objective information about events which concentrated economic power. The public has largely bought into Milton Friedman’s unsupported view that any policy that is labeled as “capitalist” by conservative think tanks or investment banking interests is good for the country. The US needs a healthy dose of critical thinkings skills because the policy decisions and economic rules that make the US a vibrant and more fair economy are being stripped away and will continue to be stripped away until the US population becomes conscious.

References

]]> http://counterecon.com/2008/01/11/unquestioned-capitalism/feed/ 3 countereconadmin http://counterecon.com/2008/01/11/lessons-from-privatizing-retirement-funds/ http://counterecon.com/2008/01/11/lessons-from-privatizing-retirement-funds/#comments Fri, 11 Jan 2008 23:29:09 +0000 countereconadmin http://counterecon.wordpress.com/2008/01/11/lessons-from-privatizing-retirement-funds/ ]]>

Elite corruption and lying about retirement saving methods is sure to end retirement for large numbers of the US population. However, the retirement for the wealthy will be better than ever.

Retirement Privatization = Stealing Retirement

The history of retirement fund privatization is clear…it is a total failure. However, failure does not stop monied interests from attempting to push it, because as Chomsky says, “the population is considered irrelevant.” Retirement funds have been heavily privatized in the US, and the defined pension is becoming uncommon. Its important to understand who is driving retirement fund privatization, as well as who wins and who loses from this change.

When Did This Begin?

The United States has been on a retirement fund privatization tear since the early 1990s. Up to this point (2007) the privatization has been limited to private investment accounts. However, the Bush Administration has been attempting to push through Social Security privatization. Few companies offer pensions newly joining employees. Unfortunately there has been no research disseminated to determine whether privatized retirement funds are adequate replacements for defined pension benefits. The decision to change the entire US retirement system was made on an ad-hock basis and driven by corporations with very little input from the public and very few limitations from the government. Furthermore, the final output from this conversion in retirement policy has not yet played out due to the long lead time between the policy’s introduction and when people covered under 401k programs reach retirement.

What the Research Shows

Unpublicized research demonstrates that the 401k program are a giant leap back for the majority of Americans. In fact, the move towards 401ks have extremely negative implications for the vast majority of America ’s retirements (details here). Outside of the US, other countries have had similarly undesirable outcomes, yet these facts have resulted in very little media coverage. One country which engaged in retirement fund privatization was Argentina. According to the Center for Economic Policy Research, Argentina’s experience was one reasons for the severe economic crisis which the country experienced in 2002. (details here) The privatization of their retirement system deprived Argentina of critical tax revenue. The financial crisis was very poorly covered in the US, most likely because US financial interests (The International Monetary Fund, World Bank and large US banks among others) were partially to blame for the crisis. The IMF and World Bank are very powerful institutions which have a strong unearned legitimacy US media outlets. Because of this, few people know that the World Bank directly reports to the Department of the Treasury. By ignoring the underlying reasons for this story, the media deprived US citizens from learning from Argentina’s mistakes.

Results of Retirement Fund Privatization

Proponents of retirement fund privatization, which is primarily large investmen banks and mutual funds (as well as their political surrogates that receive campaign contributions from them) leave out a number of critical items when they discuss the subject of privatizing retirement funds. You will never find these issues or facts discussed on a 401k brochure or on a company’s website.

Critical Facts

The organizations supporting privatization intend on making significant fees off of the movement o funds from either government hands or pension funds to their accounts. This is for the following reasons

1. Employers like 401ks not because they are good for employees but because they reduce the employers contribution to their em loyees retirement. Employers contribute roughly 1/2 what they did under the older defined benefits pension programs. (401k costs employers roughly 1 to 2% of payroll, while defined pensions cost roughly 8% of payroll)
2. 401ks transfer the investment risk from the employer to the employee. Employers are washing their hands of their responsibilities to employees. If the employees investments do well, the employee may do well, if their investments o not do well, their retirement may be short-lived.
3. A number of companies have violated the law by skimming their pension funds during periods of strong stock markets only to find them underfunded when the stock prices normalize. This pract ce could easily be stopped if executives were prosecuted. Sadly this rarely happens.

The history of privatization of retirement funds is abysmal. it is not just abysmal in the US, but in every country that has tried it.

Pick a country, no matter where retirement privatization has been performed it has provided retirees with less income, but has enriched corrupt elites. This is why corrupt elites in the US want to roll it out in the US.

The Actual Case Studies

Specific Examples of the Abysmal History of Retirement Privatization:

1. Argentina privatized its social security system, and this combined with very high interest rates were a primary reason for the Argentina financial crisis and subse uent depression. In addition to the macro-economic problems, social security benefits were permanently reduced. The IMF attempted to use Argentina’s financial crisis, which was primarily due to the IMF’s power centered policies to implement a shock doctr ne strategy to introduce policies beneficial to monied interests. After the the damage was done the IMF attempted to pushing through policies even more hurtful to the economy, (called “Shock Therapy”) which would have made Argentina more reliant on the IMF and money centered interests. Argentina wisely rejected these policies and righted its economic ship by doing the exact opposite of what the IMF recommended. The IMF and World Bank have been punishing Arg ntina ever since in their publications by under-representing Argentina’s growth since the crisis and doing whatever they can to get Argentina blacklisted from the sources of international capital.
2. The British privatized their social securit system back in 2005. The British now have the stingiest government pension system in the G8 “Back in 2002, many U.K. insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system — something hund eds of thousands of Britons have done already.” – http://www.prospect.org Much like how the 401k (pension privatization) was introduced and how the attempts at privatizing Social Security have left out critical information from the national discussion “neither the voting public nor most politicians understood the implications” Britain’s privatization is considered a failure. However, Britain has a strong private pension system, something the US does not have.

In all, eleven countries have privatized their social security systems, lead by Chile which privatized back in 1981. These case studies include Mexico, Canada, Sweden, UK, and Argentina. There are simply no good stories from countries that have gone through privatization. The issue of retirement fund privatization is presented in the US as if it is a new issue precisely because the old examples that could be referenced are all negative.

Facts About the 401k Program

The US has already privatized part of its retirement system when it opened a loophole in the tax law called section 401k. Few people know that the 401k was originally intended as a way for executives to shelter income. However, since then, the 401k has rapidly replaced pensions at companies. Companies love them because they only contribute around 1 to 2% of payroll while defined benefit pension used to cost them 8% of payroll. The fact that the 401k program is voluntary, and that middle lower income earners receive substantially lower returns from 401k programs (see here for details on 401k returns) than the top income groups means that very large numbers of our population will not have enough money to retire and will have to work until they are unable to work any longer…or will become burdens on their children.

The Effect of Heavy Propaganda from Concentrated Financial Interests

Concentrated financial interests have spent the past two decades attempting to build up a case for the privatization of Social Security (according to the Center for Economic Policy Research) What is so offensive to Wall Street about Social Security is that its administrative fees are so small, roughly .5 percent of assets under management. Wall Street could significantly increase the administrative costs and correspondingly increase its profits. This steady drumbeat for privatizing Social Security is communicated through conservative think tanks which are able to have their articles published in establishment outlets like the New York Times and the Washington Post. The result is that there are a large amount of articles circulating in print and on the internet which are pure propaganda. Furthermore, this propaganda goes completely unchallenged by the main stream media. See this exerpt from Time Magazine’s expose on retirement rip-offs.

One of the few major articles on the systematic theft of retirement funds by executives from workers.

Perhaps the best yardstick to assess the outlook for the later years is the defined-benefit pension, long the gold standard for retirement because it guarantees a fixed income for life. The number of such plans offered by corporations has plunged from 112,200 in 1985 to 29,700 today. Since 1985, the number of active workers covered in the private sector declined from 22 million to 17 million. They are the last members of what once promised to be the U.S.’s golden retirement era, and they are fast disappearing. From 2001 to 2004, nearly 200 corporations in the FORTUNE 1000 killed or froze their defined-benefit plans. Most recently, Hewlett-Packard, long one of the most admired U.S. companies, pulled the plug on guaranteed pensions for new workers. An HP spokesman said the company had concluded that “pension plans are kind of a thing of the past.” In that, HP was merely following the lead of business rival IBM and such other major companies as NCR Corp., Sears Holding Corp. and Motorola. The nation’s largest employer, Wal-Mart, does not offer such pensions either. At the current pace, human-resources offices will turn out the lights in their defined-benefit section within a decade or so. At that point, individuals will assume all the risks for their retirement, just as they did 100 years ago – Time Magazine

Retirement Privatization = Investment Banking Fees + Lifelong Work

Large investment companies are fully aware of both what happened in Argentina, Britain, Chile, Mexico, Canada and Sweden with regards to retirement privatization. They also certainly are aware how poorly performing and unsustainable the present 401k system is for 80% of US workers. They know this because they maintain the databases for millions upon millions of retirement accounts; and they know the typical return on these accounts is abysmal. However, they have not made the statistics from this database available to the public. The government also knows but chooses to remain silent on the topic. However one independent retirement program consultant has made this information public. Brooks Hamilton is a consultant who has for several decades migrated companies from defined pension systems to the cheaper (for the employer) 401k program. After decades as a retirement program Brooks Hamilton has amassed a database of 401k performance data. What he sees is not pretty. His research shows a massive yield disparity in 401k accounts between high income and low income earners. Because the 401k is so valuable in saving companies money, the actual returns are never published by the investment management companies. If these results were known there would be a revolt against the 401k retirement system and a call for a return to defined pension benefits. Furthermore the discussion regarding privatizing Social Security would disappear from the national stage. In order to test this theory, try to remember the last time you saw research published on the real returns of 401k programs. This is clearly an important subject and research to investigate all sorts of less important things are funded on an hourly basis in the country (i.e research into hydrogen fuel cells, a technology for which no fuel source exists). However, the actual return of 401ks appears not warrant research. Typing a search about 401k returns into Google returns a number of search results related to how to increase the returns or other links to investments sites, however nothing on the returns of of 401k programs. In fact research of this type is neither funded nor published.

This is the future of retirement in the US….for the top 1% of the country. Much of the rest of the country won’t be retiring. For decades average people voted against their interests and against regulation and a fair and sustainable economy. We are curious if they will be bitter when they realize that everything they voted for and all the tolerance they showed for the “free market” only paved the way for their money to go towards the super elite?

Pensions

Pensions are not bulletproof, but primarily because they are raided by executives, which is greatly supported by the Republicans, and very little is done to protect them by the Demotrats. See this article for details.

http://counterecon.com/2009/11/09/raiding-pensions-and-the-pgbc/

However, pensions are still far better than 401k programs, not the least of which is because employers contribute twice as much under them than 401k programs.

Conclusion: The Solution to Retirement Policy Planning is Simple – Reverse the 401k Program

The data is in and the answer is crystal clear. Privatization means higher administration fees and more corruption with few people having real retirements. Not only should social security not be privatized, but the following should occur. Pensions should be brought back and the fraudulent and misleading 401k program eliminated with the management of the current retirement funds in these accounts transferred to a defined benefit pension system. The 401k program was the result of accidental legislation and it was never intended to replace pensions. Its time to admit this. Its time to tell people the truth about the history of the 401k as well as its real world results thus-far. The 401k program is a failure. The investment companies should be removed from decision making and political influence in retirement management. They are simply too biased and have no public interest function or concept of social responsibility. Their short term incentives and scandalous track record make them manifestly inappropriate for guiding and shaping national discussions on retirement policy making.

References

http://www.nytimes.com/2006/01/10/international/americas/10chile.html?pagewanted=1&ei=5090&en=597516f5ad9fbb0a&ex=1294549200&partner=rssuserland&emc=rss

Abstract

As long as the population knows little about history its easy to propose things that have never happened before (i.e. invading another country to bring it democracy). Concentrated power does not want the lessons of the city state of Venice to be understood.

“Venice endured as a republic while its neighbors did not, thus achieving  for itself an international reputation as a state in which the interests and passions of the citizens were almost mystically bound to the system of government. Until its capture by Napoleon in 1797, Venice had been an independent community for nearly a millennium; for the last five hundred years of its sovereignty it had been a republic under the continuous rule of a hereditary patriciate that styled itself as a nobility.”
 - Classical Ritual in Renaissance Venice, Edward Muir

For some reason it has been lost by history the reasons for Venice’s stability during that time. The lessons of this are displayed in the artwork and in the construction of certain key areas of the Doge’s Palace in St Mark’s square in Venice.

History of the Doge in Venice

The Doge was the political head of a Venice for 1000 years demonstrating the most durable political system even documented. The essential feature of Venice politically was not that it was a democracy…it wasn’t, but its elaborate system of checks and balances. The Doge was carefully watched and his power checked by various councils. This is shown in many of the paintings within the Doge Palace. The Doge is never shown above any of his watchers, but typically below them. This is in direct opposition to how most kings or queens are shown in paintings. The Venetian system of checks and balances was detailed and prevented anyone person from accumulating too much power. The kingdom’s around Venice which did allow for the concentration of power were highly unstable.

Power Sharing and the US Constitution

Concepts of power restriction was incorporated into the US system of government and into the US Constitution. The founders had just fought a war with what they viewed as a corrupt kingdom and wanted a more balanced system, albeit a system that was hardly democratic (slaves could not vote, women could not vote, etc..) Through US history the executive branch has repeatedly used wars to overcome these checks and balances. We now have an executive branch which is far more powerful that it was ever intended to be. It has usurped much of the war making power that was designed to lay with the Congress. Furthermore, the Senate through the efforts of people like Tom Delay is really in the hands of just a few people. Rather than each member voting, the votes are orchestrated and bribed by earmarks so that what looks like 100 decision makers is actually closer to 5, the senators that sit as chairmen of the powerful committees. (Ways and Means Committee, etc.) This use of “extraordinary events”  which are many times manufactured in order to concentrate political and economic power is described in Naomi Klein’s book The Shock Doctrine and is explained in short form here.

The fact that people pay little attention to this important historical precedent of Venice, we think based upon two important reasons:

Concentrated power does not want the precedent understood as it contradicts their policies. Most American’s have a very limited knowledge of history, and therefore if the history is not brought to their attention in some way, too small of a percentage of the population does the independent reading required to develop non-media approved lessons from history. That is too bad, and we hope that somehow the case study of Venice could be better understood by more people.

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