Anti-Government Socialism

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Australian politics is turning into a game of musical chairs. Since our arrival, the leaders of both major parties have been changing so often, we can’t seem to keep track. Latham, Howard, Beazley, Nelson, Rudd, Turnbull, Gillard, Abbott.

As for the voters, they seem thoroughly confused. Each time we enter the Melbourne CBD to buy Krispy Kreme doughnuts there is a protest on against … well … something.

The ‘Slutwalk’ was a parade of women (and some men) dressed like ‘women of easy virtue’ marching for the right to dress that way, even though they do it every day anyway. We’re not sure whether the Libya protest was against Ghadafi or for him, against the war and killing or for it. The refugee bunch managed to stand still instead of taking up the street, which was considerate, but we’re not sure what they favour doing about the refugees.

The only constant amongst all this protesting seems to be that a group known as the ‘Socialist Alternative’ takes part. No matter what the cause, you find them amongst the protesters. Apparently protesting is a full time job. Especially when you don’t have a real job.

We had a look at the SA website and found out that their form of socialism isn’t represented by the likes of Stalin and communist China. (Apparently those were capitalism in disguise.) Instead, Socialist Alternative wants the worker to rule. True democracy, where workers get to make the decisions, not the politicians who pretend to be in favour of democracy.

Sounds pretty good, right?

Best of all, they seem to have figured out there is no parliamentary road to [their version of] socialism’.  Perhaps that is why they ‘oppose all forms of oppression’. It all seems to be a cry for less government, acknowledging that government is by definition ‘rule of the many by the few’. Instead, there should be rule by the many – true democracy.

Oddly enough, Socialist Alternative seems to advocate bringing this about by establishing a different form of government – precisely the evil they decry! And it’s not a simple mistake they are making.

Their website bemoans the failed attempts at establishing socialism all around the world. But their calls are exactly the same as the ones that began in those nations and ended in despotism. Do you see a trend?

Why don’t they just oppose big government and leave it at that? Why don’t they just favour individuals organising themselves voluntarily, without coercing others with the law? If they don’t wake up to the oppressive nature of government-induced socialism, every socialist revolution will resemble the last.

We think we spotted where the group of anti-oppressive socialists went wrong. Despite most of Socialist Alternative’s ‘general principles’ and views being seemingly anti-government, they still revert to the old socialist economic theories. There is an inherent contradiction in being Marxist –  which Socialist Alternative claims to be – and being anti-government. A centrally planned economy where the majority decides is even more ridiculous than a centrally planned economy where an elected few make the decisions. Apart from that, Marxism simply doesn’t work or make sense.

For example, Marxists believe all workers are exploited by definition, as fair pay would imply profit is impossible. If each worker was paid the value of what they produce, the employer couldn’t make a profit. This is wrong on a so many levels it’s laughable.

Why the employer is considered to do no work is a mystery. After all he has:

  • organised his employees in a way that produces something
  • organised the capital needed
  • delayed his consumption to produce savings needed to create capital
  • taken the risk of losing that capital
  • most important of all, he has had the foresight of spotting an opportunity to serve customers.

Profit is the reward for doing each of these things. Take profit away and none of them are done. None of the benefits—to the employer, to the worker, and to the customer—ever materialise. For a taste of how this ends, just take a look at the news about the ban on cattle exports:

‘We haven’t had cattle sales since October and we can’t afford to buy the diesel to pump water for the cattle or to generate power for us,’ a cattle farmer was quoted as saying in The Australian.

We have responsibilities with the banks; we have employees; we have thousands of animals in our care, and Julia Gillard has put us in a position where these animals will die the most horrific deaths if we don’t shoot them.’ Just imagine the environmental catastrophe of having mass cattle culls!

The whole article is a fascinating read. You have to remind yourself that it’s not about the Soviet Union 50 years ago. It’s Australia today. And the Australian government has thoughtlessly and quickly destroyed a thriving business by acting emotionally and interposing itself between two willing parties to a transaction. This is otherwise known as central economic planning.

A slightly more sophisticated point about the fallacy of Marxism and central economic planning is that the absence of profit makes it impossible to determine what should be produced, how, where, by whom, for whom and to what amount.

Prices and profit coordinate all these activities in a capitalist system. In a socialist system of central planning, where profits are banned (the Soviet Union quickly realised the impossibility of not having prices when mass starvation ensued), how would planners answer these questions? How would they ensure that goods were produced in a way that yielded a benefit (inputs less than outputs)?

That’s a trick question. Only individuals know what they want. So all allocations of goods and services by a planner would be wrong by definition. Value is an entirely subjective issue. One person cannot decide it for another.

Once you realise that prices and profits are the signals that allow the most efficient production of goods and services possible, you will begin to understand the insidious effects of inflation. Inflation distorts prices and thus distorts individual calculations of what price is appropriate. Inflation makes price information misleading and downright dangerous.

But don’t worry; Australian television’s investigative journalists are on the case. They just don’t seem to realise it. Quite frankly, the likes of A Current Affair and Today Tonight are a source of constant amusement. At least the ads are. Who can bear the actual content?

One of the programs advertised its latest investigation into the shocking increase in the cost of living. Someone’s regular grocery bill had jumped by about $20 in a matter of years. But the blame  is never placed where it actually belongs. The blame doesn’t belong with a greedy businessman or profiteer. It belongs with the central planner and his close cousin, the central banker who controls the price of money.

The idea that private institutions would suddenly make more profit by charging customers more, as Australian TV journalists like to claim, is very odd. Unless the government has granted them a monopoly, or restricted competition in some other way, there is no way for a company to continuously earn abnormal returns. Competition and consumer choice prohibit such a situation from lasting long.

So a consistent increase in price must be due to inflation. You know, that government statistic calculated by the government, reported by the government to determine the government’s performance. Do you see a conflict of interest?

(For those of you who don’t think the Reserve Bank of Australia is a regulatory institution, consider that it was created by legislation, is governed by legislation and has the regulatory role of meddling with the economy.)

But what makes inflation so insidious? Most economists would contend that higher prices are the cure for higher prices. That is a witty way of saying that demand is pushing up prices, which is signalling to producers to produce more. Once they do, prices will return back to normal. The price is the way the consumers communicate with the producers (and entrepreneurs). If that price is meddled with by inflation-creating central bankers, then those signals are distorted. This creates a misallocation of resources in the economy. Eventually this is exposed by an economic crisis.

Of course, every now and again the effects of inflation slap everyone in the face in more obvious ways. Our favourite is always the one where issuing low denominations of currency becomes too expensive. Business Day reports the Royal Mint wants to stop issuing five-cent coins. ‘The government has received a confidential brief that shows it costs more than five cents to make each coin because of rising commodity prices.’

The endless irony of that sentence never ceases to amuse your editor. Does anyone really think commodity prices are too high to produce five cents? Obviously the value of money is what has changed. And the cause of that is the government creating inflation. Less than 20 years ago the Australian one and two-cent coins suffered the same fate as the five cent is threatened with now. How long will the 10-cent piece last?

Did you think we managed to complete an entire Weekend Daily Reckoning without mentioning Greece? Here’s a fun fact we hope those protesters in Greece are aware of:

Greek social security funds hold nearly two-thirds of their liquid assets in government bonds. Thus, any default would undermine these funds’ ability to meet their obligations to pay promised health and pension benefits.’

Charles  Kadlec in Wednesday’s edition of The Daily Reckoning.

Nick Hubble
Daily Reckoning Australia Weekend

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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Comments

  1. Amazing article Nick. Your weekend wrap ups are always the highlight of my Saturdays. This is a particular valuable write-up, and it reiterates one of the critical points I have been at pains to articulate recently over at thepunch.com.au about the true nature of profits, which are really nothing less than a vital form of communication that aggregates and synthesizes all knowledge across the scope of a market and signals to its participants how they may most valuably serve one another’s interests and needs.

    Thanks again Nick, I enjoyed this post immensely.

    Reply
  2. I do wonder in the case of Australia and grocery prices if it is not at least in part due to the Woolworth/Coles duopoly. Of course it is also in part due to government over regulation.
    With that said I think “cost of living pressures” are imagined by many Australians or at least they are living lifestyles they cannot afford and out of some sense of entitlement refuse to accept their responsibility to live more within their means.

    Reply
  3. “With that said I think “cost of living pressures” are imagined by many Australians”
    I guess they are Dan since poor people in China and such are surviving on much less to prop the west, but that said the cost of government is needlessly high (here and everywhere) and probably weighs heavily.
    Much smaller governments are necessary. Hopefully that’s where the future will take us. I’ll keep my hopes up and expectations low.

    Great article Nick.

    Reply
  4. Why is it the that someone who isn’t prepared to bath but is prepared to attend a rally seems to carry more political clout the productive members of society?

    Wentworth
    July 5, 2011
    Reply
  5. Clever words but twisted message. The largest planned economy in the world was never the Soviet Union but has always been the Industrial Military Complex of the US. Trillions of dollars wasted on the production of those real ‘value add’ products – weapons. In our so called ‘free market’ system a vast misallocation of resources – probably the largest misallocation of resources in human history.

    Government is not as inefficient as people think when compared to the bureaucracies of the large transnationals who are able to manipulate and control markets to cover their costs – the issue with respect to public expenditure is what we spend the monies on as public expenditure decisions are distorted by vested interests. The private sector would have not built our integrated power system, roads, provided universal health care, the educational system, etc.

    There is no such thing as a free market. All markets are regulated and/or planned, or subject to influence to some degree or another and it is naive to think otherwise. The vast and destructive interference of the banks has resulted in massive misallocation of resources as commodity prices are manipulated rather than being subject to the impact of real physical events on supply – the investment banks create their own commission opportunities. The massive bubbles that have occurred around the world with respect to housing are also a massive misallocation a waste of scarce resources.

    Classical and Neo-Classical economics is scam underpinned by some clever mathematics to make it appear to the naive and unknowing that it means something. The naive can carry on believing in the simpleton notion of supply and demand and hidden hand clears markets. The system of capitalism is inefficient and highly manipulated. It is just that it has taken a couple of hundred years to be confronted by the illusion of the market and the reality and influence of a global plutocracy.

    Reply
  6. Most people have a poor understanding of profit. Profit is merely the price of risk. Business aim unless in a monopoly is to make the least profit necessary to maintain market share are remain in business. Let’s say hypothetically that business’s make no profit and distribute all earnings to employees. what would happen if a large unexpected expence arose or a new competitor? If workers feel they are being exploited they can always go into business for themselves. They are no longer serfs

    Debt Consolidation Nation
    July 6, 2011
    Reply

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