Your Melbourne-based editor is up to his eye-balls in a project that you’ll read about shortly. In the meantime…a few reader notes.
Reading the Markets and Money today reminded me of a quote made 100 years ago by Karl Marx
“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be
nationalized, and the State will have to take the road which will eventually lead to communism.”
– Karl Marx, 1867, Das Kapital
That quote is almost assuredly bogus. We haven’t tormented ourselves by re-reading sections of Das Kapital. Once in college was enough. This quote, though, has been making the rounds on the Internet, as if Marx and his minions somehow knew all this was coming.
Whether the analysis is accurate is a separate question from whether Marx ever wrote it. German is a torturous language to read in translation, full of compound sentences and words. And it’s highly unlikely, writing in the late 19th century, that Marx would have referred to the working class buying houses and technology. The horseless carriage hadn’t even been invented yet, much less the iPod, the BlueRay, or the George Foreman grill.
Nope. This is a clever bit of revisionism by some unemployed Marxist student or tenured professor trying to discredit the free market while rehabilitating the Marxist playbook. Marx did indeed say capitalism would eventually evolve into socialism and finally communism. He claimed it was riddled by contradictions which made the system inherently unstable.
But his theory was evolutionary, based on his views of human nature and a rational “homo economicus.” Like Adam Smith, Marx was a materialist who defined wealth in terms of physical goods. Thus, his view of human nature is rather materiel too, which explains his atheism.
In any event, the Austrians (especially Rothbard) would point out that the boom-bust feature of capitalist economies is not inherent in the system, but is actually a product of the government’s manipulation of interest rates. This changes the price of money and causes risk taking entrepreneurs to mis-calculate the underlying demand for their production.
Thus, you get a massive, credit-induced production bubble, global in scale with resources devoted to supplying a fictional demand. It happened with residential real estate in the U.S. and Europe. It’s happened with commercial real estate in China. And it probably happened all along the commodity supply chain, as raw material demand increased for the production of finished goods made in China for Americans who bought on credit.
That isn’t to say you wouldn’t have normal cycles of growth and recession in an economy with natural interest rates. But in an economy with natural interest rates, the cost of capital would go up during a recession. Bankers would get more prudent with their lending as the market place sorted out which lending resulted in productive new enterprise and which businesses failed.
The bad investments would be written down and eventually new demand for capital from entrepreneurs would resume. At least, that’s how the Austrians drew it up. Today, of course, we are engaged in the great global project of trying to prop up investments gone bad, whether they be in residential American real estate or the collateralised bonds based on that real estate that currently reside like dead weight on balance sheets all over the globe.
No amount of rearranging is going to improve the quality of those debts. But that won’t keep political busy bodies from trying-and wasting even more time and capital.
Meanwhile, some better news!
Thank you for making me feel like the biblical Noah. I am Dinakarananda from India and I am grateful to the entire DR team. I have been an avid reader of DR for the past two years. I am very happy that I stumbled on DR soon after I landed in Melbourne and looking for some Australian business news website that was sensible and truthful. I have been an avid investor in India since 1993 and in the US since 1999. I cashed out almost all my investments in equities and bought 130Kg of gold back in October-November of 2007. DR was one of the major factors that influenced my decision and I am happy every minute of my life now to have found DR.
Thanks a lot to Dan Denning, Bill Bonner, Mogambo guru and all of you in the DR team for guiding my ark and investments. One of those slumdog to millionaire stories inspired by DR I presume. I would be happy if my email finds its way to the reader email that is occasionally published and if it helps a few more slumdogs around the world.
And the Oscar for best letter of the day goes to you!
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