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The first economists – Adam Smith and Adam Ferguson – called themselves “moral philosophers”. They were studying the human economy as though it were an ant hill – 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. But it’s why we moral philosophers are having such a good time; finally, we get to 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 privatisation – led by economists from 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 – so the Argentines are re-nationalising 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 the federal government is effectively nationalising 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 nation’s mortgages – equal to about a third of US GDP. It probably won’t be too long before General Motors is nationalised too. Someone is going to have to pay its pension bill. But can the Republicans and Democrats do a better job of running a mortgage or auto company than capitalists? On the evidence so far, 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. Fannie and Freddie couldn’t win at their business, even though the deck was stacked in their favour. And the Friedmanites’ beloved markets – which are supposed to anticipate trouble before it happens – must have shut their eyes years ago.
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 SOBs. 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 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 evil; the other just stupid.
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 US dollar was reliable because it was tied to gold, which the US Treasury promised to deliver to at a rate fixed at $42 an ounce. Then, on 15 August 1971, the US Treasury reneged. The last link with gold was cut.
Since then, the US government has been able to print almost as many dollars as it wanted. Arguably, it printed too many. For something – too much cash and credit perhaps – led American homeowners to think house prices would rise forever. They overborrowed, homebuilders overbuilt, and Fannie and Freddie – even with all their Ph.D economists on the payroll – overlent. And something – maybe the same thing – caused the price of oil to rocket upwards 400% in the last five years. 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 to the world’s monetary system of the last 37 years. Businessmen, consumers and investors respond to financial signals. If the money supply expands too rapidly, they expand too rapidly too. So a bubbly supply of cash and credit led to bubbly markets. The US and major foreign stockmarkets 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 governments rearranging the heavens, it’s amazing they don’t do it more often.
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Bill Bonner
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