What kind of economy do we have?

The first thing we need to understand in dealing with the economic issues we are facing both individually and as a nation is what kind of economy we are dealing with. There are many descriptions having to do with economic theories or methodologies but there are two basic truths that we need to face in order to understand what is going on:

a) The US economy is, like our country itself, a blended version of many different ideologies; none of which can accurately describe the whole picture alone.

b) The US economy is, at least for the moment, the leading economy in what is actually a world economy comprised of many different national and regional economies more or less cooperating in business.

Let’s start with a) above. There are many terms thrown about these days in debates about economic theory. Capitalism, Socialism, Marxism, Totalitarianism, Fascism, and a fairly long list of other “isms” that are never clearly defined but used commonly to describe our economic system are thrown about in such debates with impunity. The truth of the matter is that no one wants to clearly define these terms when using them in a debate because the system we currently have in place is a combination of all of them. None of them are pure systems in existence anywhere in the world today. To be completely accurate, none of them have ever been pure systems but every economy in recent history has been some combination of them.

The purest forms of any of these systems have without fail been the most brutal. Most Americans are at least conversationally familiar with Fascism in Nazi Germany and Communism in Stalin’s Soviet Union but both were actually more accurately totalitarian governments. In any case, the brutality of these systems is sufficiently well known and documented so that I won’t bother to spend a lot of time discussing them. It is worth noting that the practical applicability of these systems seemed to be the downfall that led to the end results but human nature being what it is, it is hard to argue that such results wouldn’t be the same if we were to somehow decide to give them another try.

What is much less widely understood is the pure capitalism is just as brutal a system. It isn’t exactly a secret to anyone who cares to look into it but the societies in our history that veered closest to pure capitalism were also amongst the most brutal as well. Europe in the middle 1800’s is just one example. As the age of industrialization dawned there was a massive shift from rural to urban areas and working conditions for the vast majority of the population were to say the least brutally oppressive. Widespread use of child labor, 18 hours work days, and living conditions where filth caused disease that lowered life expectancy to ridiculously low numbers were the rule rather than the exception. It was against this backdrop that the formations of ideas in opposition to capitalism were born. Karl Marx, Friedrich Engels, and others wrote in reaction to the human devastation that pure capitalism caused all around them daily.

In this country, capitalism led to other less than stellar repercussions as well. African slavery was in some ways the ultimate expression of capitalist theory in that slave owners owned not only the capital and means of production; they owned the labor force as well. While this was abandoned after a brutal war that cost millions of lives the basic ideas of industrial capitalism practiced in the northeastern states was little better for the working class that it utilized to make profits. The closest this country ever came to a pure capitalist system was probably in the late 1890’s when we had many of the same problems that Marx had seen in Europe some 40 years earlier. Children worked 14 hour days in factories; unemployment cycles ran rampant in that large portions of the population of inner cities that were the labor force routinely faced starvation and death by exposure to the elements. Outbreaks of cholera and typhoid were widespread in many inner cities. The nation as a whole went from boom to depression with great regularity and there were basically only two classes of people, the very rich and the very poor. The very rich lived very well; everyone else struggled to survive. This is exactly why the greatest proponents of capitalism have always been those that profited the most highly from it. It has met with decidedly less satisfaction from everyone else who has ever been exposed to it.

In basic terms Capitalism implies individual ownership of the means of production. The system itself relies upon the laws of supply and demand to regulate the market and theoretically maximizes efficiency by allowing the free market to make all economic decisions. In reality Capitalism in its purest forms leads to a gradual separation of classes. The rich get richer while the poor get poorer. It also leads to the antithesis of free markets; monopoly. As an individual or corporation becomes richer and more successful they gradually gain control of a larger proportion of the market until they eventually own a large enough share to force everyone else out of the market. After this happens, a monopoly results and the rules of supply and demand are manipulated by the owner of the monopoly until there is no longer a free market at all. It is the basic flaw of Capitalist ideology that any unrestrained capitalist entity eventually eliminates competition which is the free market mechanism that the ideology depends upon to work properly. Marx understood this. His idea was that these weaknesses would eventually lead to the collapse of the system itself. If you carry the idea of Capitalism to its logical extreme you can easily see that it is a parasitic system in that it depends on constant growth to survive.

The success of a capitalist system is always measured in its growth. It is in large part the only factor that really matters. This is exactly why the most important measurement of the success of the US economy today is the Gross Domestic Product and whether it has increased or not. Our economy is not built upon the idea of sustaining a level of affluence or sustaining a lifestyle, it is built entirely upon the idea that we have to keep growing. It is in fact a logical reality that this is not possible in the long term as there are limits to everything and uncontained growth can only be supported by unlimited resources.

What happened to change things after 1893 in this country? Was Marx right in thinking that capitalism couldn’t survive, that it would collapse on its own flawed basis? The answer to the first question contains the answer to the second as well. Let’s take a more detailed look at what was going on in 1893. I have already pointed out that the problems in industrialized areas were severe but what I haven’t touched upon yet is that the problems in rural America were just as bad under this pure capitalist system.

Farm prices were in constant flux from the 1860’s on with periodic rises and falls that routinely devastated farmer’s ability to make a living. Almost all farming done at that time was by small independent farmers who were at the mercy of market fluctuations that were basically uncontrollable. To make matters worse, the banking industry was beginning to become more organized as the laws of capitalism led to the inevitable situation where larger banking interests were gobbling up smaller banking interests. This led to a situation of more centralized control of money which essentially meant that large banking interests began to gain a monopoly on the market of lending money. This led to ever increasing interest rates and less available money at the same time that farmers were more dependent on bank loans to get by from year to year as crop prices fell.

The situation got bad enough so that farmers began to organize into cooperatives and form political parties. In an effort to increase the money supply the movement advocated greenbacks based upon silver which was in more plentiful supply. A combination of events occurred to guarantee the movement was unsuccessful in this endeavor but it did serve to push the country towards an understanding that more liquid credit capabilities were needed to smooth out the cyclical nature of the farming industry. The point is that this more pure form of capitalism which existed during the latter half of the 1800’s and the start of the 20th century was undeniably a failure as far as the average American was concerned. Farmers suffered, factory workers suffered, and small business owners suffered. The only people who benefitted from this system were the bankers themselves as Adam Smith had pointed out some 150 years earlier.

It is worth mentioning here that the great fear of inflation which drives the financial markets today is the same fear that kept bankers from increasing the credit supplies that farmers and small business owners so desperately needed in the early part of the 20th century. In reality it is basic common sense that a little bit of inflation is in fact a good thing for the vast majority of consumers. If the value of money goes down while the value of goods go up who is gaining in the market; the person trading money for goods or the person trading goods for money? It is simple really. If you own more money than goods inflation devalues the commodity you own. If you own more goods than money it inflates the value of what you own. This is a nasty little secret that bankers and financial market people go to great lengths to disguise for the simple reason that inflation hurts them where they live even though it actually improves the standard of living of the vast majority of working people. It is also worth noting that every major collapse of our economy has been preceeded by a period of financial speculation by this same class of people.

The final straw the broke the camel’s back came in 1907 as far as pure capitalism in the US is concerned. In 1907 the stock market nosedived some 50% in October. As is usually the case in such collapses there were some very greedy individuals involved in rampant speculation of large amounts of borrowed money which I will go into in more detail a little later but the important point I want to make right now is that this event precipitated a nationwide depression on a vast scale. It was a depression wherein numerous state and local banks collapsed, untold businesses went bankrupt and the US economy itself came very close an actual bankruptcy on the part of the Federal Government. It was in reaction to this depression that American political leaders realized that we HAD to make a basic change from a purely capitalist system and it was a result of this realization that the US government formed the Federal Reserve System.

The Federal Reserve System is a bone of contention for many to this day. Many believe it is the basic flaw in our system but the reality is that it was formed in reaction to the fact that without a central banking system there was no way to control our economy. The Free market had basically collapsed our whole economy and everyone recognized that we simply couldn’t afford to keep going down that path. The Federal Reserve was formed to stave off the absolute collapse of our economic system, yet it was a definitive step in the direction of socialism, a direct admission that Marx was indeed right; a purely capitalist system cannot survive without devouring itself.

To be continued……