Monday, September 22, 2008
It is a well-known fact that you can often see similarities between different types of extremist thought, even if the different schools are, in theory, each other’s opposites. Another interesting aspect is that you can often see similarities in the outcome of the implementation of extremist ideas on opposing sides, that had previously been utterly unexpected. The main problem in the American economy today boils down to something rather simple: it is impossible to value assets. This problem is very great, because an economy really can’t function if that is the case. This problem has arisen before, and brought an economic system down, but it might not be where you expected.
The Soviet Union crumbled mainly because its economic system was not working. There are a couple inherent, fundamental flaws with communism. First, the theory of communism requires humans to desire only what they need. We all know that’s never going to happen. Second, if no one has any money (because everything is distributed according to need by the government), how do you put a value on something? Without any sort of bargaining process, the only way to put a value on something is to try to ascertain that value intellectually with vast amounts of information. If one thing is more scarce than something else, it should be worth more, hence gold should be worth more than coal. But what if you desperately need heat and not accessories, then shouldn’t coal be worth more than gold? What are people going to find cool or fashionable ten years from now? How does every piece of merchandise compare in terms of value to every other piece of merchandise? These are some of the questions that a communist government has to answer correctly in order to have a functioning economy, and obviously, it cannot be done. As a result, the government does not know what to produce, how much to produce, or when to produce it, and the whole system crumbles.
Very complex calculations and bets on what will happen in the future has become one of the main features of the American economy. The financial industry has become so powerful, that it has come to be seen as the most important part of the economy. Wall Street is now running parallel to Main Street. The American economy took a radically different path compared to the rest of the western world about 30 years ago. It essentially gave up on creating a mixed economy, where some things in society are broken out of the capitalist equation, such as healthcare, infrastructure and education (usually, these things are considered not to be suited for profitable enterprises). America went down a purely capitalist path, which can arguably be called somewhat anarchistic. As a result of this, the real income of most Americans stagnated, because money was increasingly being funneled to the top of the income brackets. Because humans are selfish, and wants and needs for products and services always increase over time, something had to take the place of the absent increases in real income. What took its place was credit, or more accurately: loans.
An entire industry had to be created in order to provide all these loans, to compensate for the growth in real income that never came. First, America had to borrow the money from abroad, and then spread it out throughout the system. The financial industry eventually came up with different ways to spread all these loans around, so that they didn’t have to take the risk of the loans not being paid back themselves. That was done with the esoteric products such as CDO:s that are now on the lips of ordinary people. That was the key to the whole thing. Once they had figured out how to take risks without really taking risks, they were free to embark on a money-making adventure that knew no limits. This adventure further spread all the borrowed money around, making it appear as if the economy, and ordinary people were doing very well. The need for real income growth, based on real industries, was obliterated. That fact was obviously very convenient for politicians, who no longer needed to work to provide well-being for voters; Wall Street could do that. Now we can see that the American economy has become utterly reliant on Wall Street, and its usage of loans from abroad.
Now, financial companies don’t have any real products for sale, like, for instance, car companies do. The financial industry was not traditionally an industry in its own right, it was merely an outlying facilitator that helped the real economy function, and as such it was still very important. After Wall Street had taken its place as the most important part of the economy, it had to create the illusion that it offered something equally as real as a car or a chair. It needed some way to create huge profits, other than the traditional profits of the financial industry: interest from people who borrowed money from the bank.
The answer came from investment banks, who invested heavily in things they believed would be profitable in the future. This involved constantly betting on anything and everything that could affect the market, mind you with borrowed money. All of a sudden, Wall Street found itself asking the same types of questions that the communist government was asking itself in the beginning of this article. Essentially they were asking: what is going to happen, in detail, to everything in the economy in the future? In addition, they were trying to figure out what all the other traders were thinking, so in order to be successful, you also had to be a masterful psychologist. These questions had to be answered correctly, so that Wall Street firms could be successful, and so that the American economy could depend on Wall Street for overall prosperity.
You can see now that there are great similarities between the communist economic system and the purely capitalist system in the eventual outcome of the philosophies. The same problems face the two systems, and they share the same fate - these calculations can never be solved correctly, so neither system can ever work in the long term.
We can see very clearly today that this capitalist model with Wall Street at its core is crumbling. As of this morning, none of the big investment banks exist anymore. They have either been bought by banks, gone under, or changed their structure to become banks themselves. The financial industry has to get back to basics, and can no longer be an industry in its own right. America has to move to a more mixed economy, with proportional representation in the Congress and Senate and a social safety net for all of its citizens. Otherwise, the downward spiral will only continue.