Capitalism, Socialism and Democracy

Re: Harry Binswanger’s post 120429 of 9/13/17

Capitalism, Socialism and Democracy by Joseph A. Schumpeter, 3rd edition.

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Re: Harry Binswanger’s post 120478 of 9/17/17

The most famous aspect of CS&D, first published in 1942, is Schumpeter’s prediction that socialism would replace capitalism and that capitalism will have provided the seeds of its own destruction and will have provided the resources to capitalism’s enemies. (Sound familiar?) A long section is devoted to the rise of the intellectual class, most particularly, in the universities and the media, who are anti-capitalist but who are paid by the proceeds of capitalist economic and financial success. He has a long section that discusses his view of capitalist culture and the internal causes of its decline, but also discusses the economic and financial causes to the extent these can be isolated from other social forces.

He begins his section on socialism asking if it can work, immediately says that there is no logical reason why it can’t and interestingly, answers only one specific critic, Von Mises.

I have to confess I’ve never read the rest of the book. His study of contemporary culture and how it has decayed and morphed into the Progressive-dominated mongrel we have today, and his discussion of Marx, have always held my attention.

From what I have read elsewhere, I don’t know that Schumpeter says anywhere what should be; but I do not believe he was an exponent of socialism by any means. He was the finance minister for Austria, a socialist experiment right after WWI that failed badly. He rejected many of the tenets of Keynesianism, as well as Marxism, but seriously examining and critiquing both, Marx in CS&D.

If I had to guess, I expect to find Schumpeter saying that socialism could be made to work if the rulers/leaders/whatever made rational economic and financial decisions, as Keynesianism supposes they can and will. Peter Drucker, who knew both Keynes and Schumpeter, and studied under Schumpeter, indicates in his article in Forbes that Schumpeter was firmly skeptical of political leadership’s making what could be regarded as rational decisions. Based on what I have read, I would be stunned to find out Schumpeter recommends against free markets. But I doubt he was an exponent of laissez-faire.

Given the headlong rush by some forces in the US to embrace socialism, I thought I should finish this work by a man who is a brilliant analyst and critic, arming myself for battles to come.

This is a difficult, meticulous and closely reasoned book by the man I regard as the greatest economist of the 20th century.

A good place to start, if one is interested, is Drucker’s article, from Forbes, “Keynes and Schumpeter,” still available online.

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Re: Harry Binswanger’s post 120478 of 9/17/17

Schumpeter has four chapters on democracy in a major section, “Socialism and Democracy.” I am quite certain that the presumption is that socialism could only be adopted and implemented in major countries through a political process described as “democratic,” as, apparently, Bernie Sanders will attempt shortly. The vast majorities of countries on earth make at least a pretense at democracy. Look how much of American economic activity is “democratically” directed, directly or indirectly. So the nature and conduct of democracy has to be a major focus of study.

Drucker says that Schumpeter was occasionally a proponent of what he – Schumpeter – regarded as “intelligent monopolies”; I have yet to encounter that in his work, but, again, I doubt Schumpeter was a proponent of laissez-faire.

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Re: Harry Binswanger’s post 120478 of 9/17/17

https://www.forbes.com/2007/10/10/schumpeter-keynes-economics-biz-cz_pd_1011schumpeter.html

This article is by Peter Drucker, who knew both men.

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Re: Byron Price’s post 120885 of 10/19/17

Low interest rates helped, but lax credit standards and aggressive marketing (floating rate gimmicks, etc.) did most of the damage. That and the fact that originators could lay all of the risk off on somebody else, namely you and me. “No matter whether our customers make money or lose money, we here at Duke and Duke get our commission,” and that’s a fact and no lecture please on maintaining liquid markets. That was NOT the goal of Fannie and Freddie. I came into the business in 1980, when the bank I worked for had to live with the low fixed-rate mortgages they made, and municipal bonds they bought, my specialty. It took several years to work out of that, on the bank’s balance sheet. But even in Flint MI the credit losses were few and “walk aways” were virtually unheard of; it took years of Progressive policies to facilitate that.

But…do you mean to imply that the US and Britain’s taxing to pay for the war is the same thing as “Greenspan and Bush’s” keeping interest rates low? Assuming those are both factual, I don’t get the implication. The US government borrowed through the Viet Nam War at historic high rates, with predictably bad results. I know, I was there, and then had to live with the consequences at the bank. Low rates, high rates; the level can exacerbate the consequences, but the level of rates by itself is seldom a major cause.

I am laboring, aren’t I? Some loans should not be made regardless of the level of interest rates.

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Re: Harry Binswanger’s post 120952 of 10/26/17

Well, in order: 

(1)The Government provided an easy out; Fannie and Freddie and greedy investors – investors looking for greater returns than rational standards of credit will justify; “securitization” and sales of “packaged” financial contracts, ultimately to ignorant and/or  “investors” with irrational expectations.

(2) At that time? Because the Progressive Congress, led by Barney Frank, went on a crusade to supply credit to uncreditworthy constituents.

(3) I don’t know what “normal market checks” means for sure. The “market” is thousands, millions of potential buyer/seller/investors, all looking at financial transactions. Most have standards of liquidity and credit, but they are far from identical. Many run in packs, à la the Tulip Trade crowd of so long ago. And, systemic market setbacks are after-the-fact events; the fact that securitized, low-quality auto loans will default and create a junk market for panicked holders is not stopping the business now. Ditto government-backed energy improvement loans, which your plumber can originate and lay off to a securitizer. (see PACE loans if you have the stomach; it is nearly Halloween!)

(4) The originators could lay off the risk by selling the loans to government agencies which then sold off the loans to Wall Street securitizers, who then sold the securitized loans to banks, pension funds, mutual funds, trusts, foundations…

(5) Some people agreed to that because they wanted to be players (see Adam Smith, The Money Game), some because they thought they were smart enough to appraise the deals, some because they had irrational expectations and some because they were stupid. Many who played and came out OK set standards, checked credits and double-checked the statistical modeling and some – like us – eventually backed out when they/we realized how overbought the market was.

(6) Having spent five years in commercial lending and twenty-five years in the bond market, in all facets, I can tell you that some groups of individuals acting in association, known as a business, in fact acy in irrational and immoral ways. Some are so corrupt it strains credulity. Some do even deliberately victimize people. A telephone answering service owner I knew sought out single mothers desperate for any paycheck, all of which bounced on Friday nights so he could play the float over the weekend. A financial adviser I knew helped plan a $20MM bond issue backing a “festival market place,” helped promote the project and market the bonds told me he had a personal tax play invested betting that the project would fail and that the bonds would be resold at heavy discounts, which took two years to happen.

Rationality might well “rule” a free market, on average, in the long run. The average results might mirror those predicted by some theory. But I can tell you unequivocally that there are a large number of irrational and incompetent players out there, at all levels, and it will always be so.

What (I think) we agree on is that government and governance is on the side of the greedy, irrational and incompetent just now, and has been for some time.

I owe, my self-imposed debt, my thoughts on how we combat the group-think you describe. It involves an expansion of a major facet of the development in “Atlas Shrugged.”

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There are people who are so driven to get or increase wealth that they will knowingly exploit the ignorance, irrationality or corruption of other people; who are willing to commit immoral acts to gain wealth they could not gain otherwise. Those people are described as greedy, as the word is popularly used. They want something they did not earn.

I understand the other issues you raise and coercion was certainly a major cause. Certainly the damage was so widespread because of the government element.

With respect, I am sure you know that people in private business, intent on making money, go to government officials and propose new “business” that will be mutually profitable, politically and financially. A congressman here in Michigan’s son owns an “energy company” that is a big player in PACE Loans. I sat, in May, and listened to a pitch to my son-in-law of a solar package to go along with the roof on his new home. The guy could get him a loan at the rate of 10% for 72 months. He would get tax credits and get to write off the interest. The guy never asked if they had taxable income sufficient to use the credits and write off and never talked about payback periods. Not to mention my son-in-law could probably get a loan at 5% from his credit union. You can say caveat emptor and I agree with that. Would Midas Mulligan make a loan like that?

You get the Wall Street Journal. I’ll look for the titles of their pieces on PACE loans if you wish.

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Re: Harry Binswanger’s post 121002 of 10/30/17

I understand – and agree with and accept your clarifications and remarks. It’s the same issue as with “selfish.” We mean rational self-interest. Acting in a fashion most people would characterize as greedy is not in our rational self-interest. The desire to maximize our success is in our rational self-interest.

I struggle with speaking to and writing for other people, who mean, for example, by greedy, the behavior I described above. Calling the telephone answering service guy irrational does not inform the listener, because once the matter is explained, if I get the chance, most listeners would respond, “Oh, you mean he is greedy.” “Irrational” needs to be explained; “greedy” does not need to be explained in common usage.

My attempt to stay living in the world has been to find substitutes for words like that. I do not use “we” the way it is commonly used (at least I try very hard to avoid it) and will substitute “some people” or “irrational people” or some similar word or phrase. It is great fun to answer someone who starts with “Our children deserve…” with “In the first place, MY children are Matthew and Amanda and I have no others.”

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Re: Harry Binswanger’s post 121002 of 10/30/17

I am rereading Ayn Rand’s “The Art of Non Fiction Writing” and in fact am covering the chapter on knowing one’s audience. Seems I need to pay close attention to that advice. I have areas of question with respect to Objectivism, although I accept the fundamental premises as stated by Rand. I surely don’t need to create differences with carelessness.

I don’t find any satisfaction in knowingly using words where I know perfectly well people mean something different from what I do, or, more often the case, hadn’t thought about the possibility of a confusion on meanings. Most people are not so hostile or malevolent as to deserve what we used to call the 4X4 treatment. THX.

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Re: Richard Ranville Jr.’s post 121010 of 11/1/17

I am reading CSD and have Schumpeter’s History of Economic Analysis as a companion, and also Prophet of Innovation, a recent biography of Schumpeter.

An interesting note is that Schumpeter participated in a class led by none other than Eugen von Böhm-Bawerk. The class had four other students, one of whom was Ludwig von Mises. My recollection is Von Mises was, perhaps still is, an influential economist with Objectivists. It will be interesting to look for parallels going forward and to see where, if much at all, Schumpeter departs from the main Austrian line. His biographer says Schumpeter set as an early goal to write an economics based almost exclusively on mathematics and hard science, but eventually included law, history and the new, at that time, fields of sociology, psychology and political science in his economics. Both CSD and the History, his last works, show that richer structure.

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