The first economists – the two Adams, Adam Smith and Adam Ferguson – called themselves “moral philosophers.” They were studying the human economy as though it were an anthill — to see how it worked. They figured it must follow rules – just like all other things under Heaven – and tended to see mistakes people made, such as spending too much money, as moral failings.
Modern economists are more like auto mechanics. They think they can control the economy with a screwdriver. And to some extent they’re right. Which is why the world economy is in such a mess; they turned the wrong screws. But it’s why we moral philosophers are having such a good time; finally, we get to laugh and say “I told you so.”
In the news last week was word that the Argentines are taking back their national airline – Aerolineas Argentinas. Back in the heyday of privatization – led by economists from the University of Chicago – they sold it to a Spanish group. But now the Iberians can’t seem to make a go of it – not with oil over $130 a barrel – so the Argentines are re- nationalizing it.
What is the likelihood that the heirs to Juan Peron will do a better job of running an airline than a private company? You might put the same basic question to Gordon Brown. What are the odds the Labor Party will run Northern Rock better than private owners? And in the United States of America – almost 30 years after the Reagan Revolution – the federal government is effectively nationalizing the biggest and most important financial institutions in the world, Fannie Mae and Freddie Mac. Between the two of them, Fannie and Freddie hold almost half the entire nation’s mortgages – equal to about a third of the US GDP. It probably won’t be too long before General Motors is nationalized too. Someone is going to have to pay GM’s pension bill. Even if the company isn’t nationalized, its health and pension obligations probably will be. But can America’s Republicans and Democrats do a better job of running a mortgage company or an auto company than card-carrying capitalists?
On the evidence, maybe so.
Milton Friedman warned that if you put government in charge of the Sahara there would soon be a shortage of sand. But the heirs to Friedman have some explaining to do. The smartest of them have crashed airlines, busted banks and wrecked builders. They’ve ruined businesses so simple that even a half-wit could have made a profit. Fannie and Freddie couldn’t win at their business, even though the deck was stacked in their favor from the very beginning. And the Friedmanites’ beloved markets — which are supposed to “look ahead” and anticipate trouble before it happens — must have shut their eyes years ago. They walked out into the blazing desert without a map or a hat; no wonder they’ve been acting strange.
To many of the world’s politicians and opinion mongers, the evidence of the last 12 months has proved what they always suspected – that capitalists are greedy s.o.b.s. But we would have spotted them that…and readily conceded that they are often morons too. Still, a system in which people get what they’ve got coming is infinitely better than a system in which people take only what government gives them. That’s the essential difference between capitalism and socialism: one yields to Armani-clothed fraud; the other to cheap-suit force. Both have their moral failings. But one is wicked; the other is merely dumb.
Want to know who caused Aerolineas Argentina’s bumpy ride…and who’s responsible for bringing down Fannie and Freddie? Follow the money. Before 1971, in the Bretton Woods monetary era, major economies used the dollar as a reference of value. The greenback was a North Star – helping businessmen and investors find their way. The U.S. dollar was reliable because it was tied to gold, which the U.S. Treasury promised to deliver to any country at a rate fixed at $42 an ounce. Then, on August 15, 1971, the U.S. Treasury reneged. Egged on by modern economists, the last link with gold was cut. Governments, investors and businessmen could still look to the dollar as a point of reference, but good luck to them. This disgraceful mischief caused even the stars to wobble.
Since then, the U.S. government could print almost as many dollars as it wanted. Arguably, it printed too many. For something – perhaps it was too much cash and credit in circulation – led American homeowners to think house prices would rise forever. They over borrowed, homebuilders overbuilt, and Fannie and Freddie – even with all their Ph.D. economists on the payroll – over-lent. And something – maybe it was the same thing – caused the price of oil to rocket upwards 400% in the last five years. The airlines hadn’t seen that coming either. So, the big lenders and the high fliers are in trouble.
Those are only two of a long list of today’s troubles that can be traced…directly or indirectly…to the world’s monetary system of the last 37 years. Businessmen, consumers and investors respond to financial signals. If interest rates are set too low, they tend to borrow too much. If the money supply expands too rapidly, they expand too rapidly too. To make a long story short, a bubbly supply of cash and credit led to bubbly markets. The U.S. and major foreign stocks market bubbled up to all-time highs in January 2000; then they headed down. In inflation adjusted terms, most never recovered. Then, in 2003, it was housing’s turn…followed by emerging markets…and lately, oil and commodities.
Sure, the capitalists are greedy. And sure, many of them make mistakes. But with feds rearranging the heavens, it’s a wonder they didn’t wash up more often.
for Markets and Money