Fiat currency — This is paper money as opposed to specie money, such as gold or silver, reflecting an underlying valuable substance. It has no intrinsic value, but instead, its value is declared by the issuing government. Further, the government by declaring its worth, is then free to, of its own volition, change the terms of its value arbitrarily.
Financial Panic – This when a collection of banks run short of money to refund to customers.
Gold — Gold is a constant unit of value, as all that has ever been mined is still present (it can’t be destroyed). The amount is nearly constant, it’s considered valuable, and no other constant or better unit of value has ever been found. It was first used for money by Alexander the Great, and then by the Romans. Isaac Newton influenced the British government to tie the pound to gold, which made the pound stable for 200 years. Alexander Hamilton did the same for the U.S.; President Roosevelt changed the dollar’s ratio to gold, but President Nixon ended the U.S. dollar’s ties to gold. Thus, the “Gold Window” was closed. There is about 165,000 metric tons of gold in the world. At $1,600 per troy ounce, that is $8,487,797,102. If put in a cube, it would measure 67 feet on a side. About 2,500 tons have been produced in recent years, which is about 1.5%.
Government Revenue — The government can only spend what it extracts from the real economy, and spending without market discipline, as a rule, shrinks the amount of economic resources available. Everything paid out by the government is an expense to the economy, since it was first extracted from the real economy.
Illiquid— Getting caught short of funds needed to repay creditors.
Inflation — This refers to prices for goods going “up” when all the necessities and luxuries of life become more expensive. I give this term the seriousness it deserves by devoting a whole chapter to this scourge on wealth and savings, but keep in mind that trying to measure the rate of inflation is a fool’s game. It can’t be done accurately because, with constant turnover and improvement of goods, comparison of prices at one time to goods at a later time is not comparing apples to apples, but apples to oranges.
Insolvent — Bankrupt.
Interest, Rate of — This is a price meant to bring savers together with borrowers for an exchange. When the government distorts this rate, the odds of exchange decrease. The price of credit should be set in free markets. Prices set in free markets maximize the potential for transactions to occur.
Labor Participation Rate — This is the percent of workers working compared to both those looking unsuccessfully for work, and those who would like work, but have given up on looking.
Liquidity — Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art, and collectibles are all relatively illiquid. Money has no meaning except as a means of exchanging goods and services. It is a measure of value.
Liquidate— Wind up the affairs of a company or firm by ascertaining liabilities and apportioning assets.
Phillips Curve— In 1958, A. W. Phillipsanalyzed U.K. wage changes and unemployment rates for the period 1861-1957 and found a negative relationship. Although he was skeptical about the policy implications of his findings, later Keynesian economists Paul Samuelson and Robert Solow postulated a tradeoff between unemployment and inflation, using the Phillips study as empirical justification. Though the logic may be appealing and lead to thinking that high growth will lead to inflation, supply-side economists believe this to be untrue.
Price — Price is set in a free market by considering the dynamic wants and needs of buyers and sellers. Government bureaucrats cannot divine a price that will reflect a constantly changing market. Government regulation of prices frequently leads to scarcity when supply is most needed; think of long gas lines in the ‘70s following price controls. The market is constantly processing price, and no individual or collection of individuals can know even a fraction of information being processed; no one is smarter than the market. Price is determined at a level at which two parties counterbalance each other. (Ludwig von Mises).
Recession and Depression — These refer to a contraction of economic activity. Which term is used depends mainly on the degree of contraction. One way to look at recession is by thinking that if factories produced too many goods and the inventory of goods built up (supply) is more than people want to buy (demand), so then the production of goods is temporarily stopped, and factory workers are let go. When inventories are worked off, workers can be rehired, and production resumed. Depression is more serious—there are too many factories, or hard objects of capital resources and excess factories need to be torn down and replaced. This takes longer than just closing and opening up production lines. A more sophisticated way of looking at the terms is that there is constant turnover, with expensive crude goods always being eliminated and replaced by better and cheaper goods. And for factories that still make wanted goods, but have built up a lot of “fat and bloat.” Wasteful, costly habits and practices are eliminated, so that when production eventually starts up, the factory is now “leaner and meaner,” so more workers are hired, and sales expand. Recessions are “good” in that they foretell of better economic times in the future. Depressions are “bad” as damage is widespread and lasts long term.
Socialism — Socialism is a political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole. In Marxist theory, this is a transitional social state between the overthrow of capitalism and the realization of communism. The sine qua non of socialism is: when society’s planning erects barriers to competition. That is, government’s central planning replaces competition.
Specie Money — Gold and silver coins.
Strong / Weak / Strengthening / Weakening Dollar — Comparison of the currency’s value to the currency of other countries (i.e., if the dollar rises against the pound or other currencies, or the dollar index rises against a basket of currencies, it is said the dollar is getting stronger). In this case, the dollar buys more of the other country’s currency. A policy of a strong U.S. currency helps to keep interest rates low, inflation under control, and U.S. buying power strong. A strong dollar hurts U.S. companies competing for foreign sales. This is why some presidents want a weaker dollar, as this helps U.S. companies increase their exports, but for everyone else in the country, it makes buying foreign goods more expensive. The main drivers of the exchange rate are the differences in economic growth and investment prospects, and these are out of the president’s control. The Central Bank can assist changes by changing interest rates; the higher the interest rate, the higher the tendency for the currency to rise.
Supply-Side Economics — The concept of supply and demand and how they relate to each other is the basis of economics. One tends to equal the other and vice-versa. From the time of FDR’s administration up to the beginning of the Reagan administration, Keynes’s theory prevailed; which was that to stimulate the economy in economic slumps, the remedy was for the government to spend money by deficit spending. Putting more money into the economy thus increased the demand. To counter that thinking, economists influencing President Reagan thought it made more sense to stimulate the economy by reducing barriers to economic growth, which was basically reducing taxes so that investors and entrepreneurs had more money to invest, thereby creating more jobs and reducing regulations, which made it easier for investors to operate. The name chosen for this approach to growing the economy became known as “supply-side economics.”
PART TWO - ECONOMIC GROWTH AND PROSPERITY
7 - ECONOMIC MOBILITY
Most of us believe that economic progress improving from one generation to the next is inevitable, and the larger countries, like the U.S., have a superior system that has delivered the “promise of America.” Further, most of us also believe that our country’s progress has t
he best record world-wide. But is this true? Next, I present an essay byFrank Buckley that challenges this commonly held belief. Frank Buckley is a Foundation Professor at Scalia Law School at George Mason University, where he has taught since 1989. Previously, he was a visiting Olin Fellow at the University of Chicago Law School, and has also taught at McGill Law School, the Sorbonne, and Sciences Po in Paris. He received his B.A. from McGill University and his L.L.M. from Harvard University. He is a senior editor of The American Spectator and the author of several books, including The Once and Future King: The Rise of Crown Government in America and The Way Back: Restoring the Promise of America.
The following is adapted from a speech delivered on July 11, 2016, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C., as part of the AWC Family Foundation Lecture series.
Reprinted by permission from Imprimis, a publication of Hillsdale College:
In the CommunistManifesto, Marx and Engels wrote that “the history of all hitherto existing societies is the history of class struggles.” Today the story of American politics is the story of class struggles. It wasn’t supposed to be that way. We didn’t think we were divided into different classes. Neither did Marx.
America was an exception to Marx’s theory of social progress. By that theory, societies were supposed to move from feudalism to capitalism to communism. But the America of the 1850s, the most capitalistic society around, was not turning communist. Marx had an explanation for that. “True enough, the classes already exist,” he wrote of the United States, but they “are in constant flux and reflux, constantly changing their elements and yielding them up to one another.” In other words, when you have economic and social mobility, you don’t go communist.
That this country in which some imagine we still live, Horatio Alger’s America – a country defined by the promise that whoever you are, you have the same choice as anyone else to rise, with pluck, industry, and talent. But they are wrong. The U.S. today lags behind many of its First World rivals in terms of mobility. A class society has inserted itself within the folds of what once was a classless country, and a dominant New Class –as social critic Christopher Lasch called it – has pulled up the ladder of social advancement behind it.
One can measure these things empirically by comparing the correlation between the earnings of fathers and sons. Pew’s Economic Mobility Project ranks Britain at 0.5, which means that if a father earns £100,000 more than the median, his son will earn £50,000 more than the average member of his cohort. That’s pretty aristocratic. On the other end of the scale, the most economically mobile society is Denmark, was a correlation of 0.15. The US is at 0.47, almost as immobile as Britain.
A complacent Republican establishment denies this change has occurred. If they don’t get it, however, American voters do. For the first time, Americans don’t believe their children will be as well off as they have been. They see an economy that’s stalled, one in which jobs are moving offshore. In the first decade of this century, U.S. multinationals shed 2.9 million U.S. jobs while increasing employment overseas by 2.4 million. General Electric provides a striking example. Jeffrey Immelt became the company’s CEO in 2001, with the mission to advance stock price. He did this in part by reducing GE’s U.S. workforce by 34,000 jobs. During the same period, the company added 25,000 jobs overseas. Ironically, President Obama chose Immelt to head his Jobs Council.
According to establishment Republicans, none of this can be helped. We are losing middle class jobs because of the move to a high-tech world that creates jobs fora cognitive elite and destroys them for everyone else. But that doesn’t describe what’s happening. We are losing middle-class jobs, but lower -class jobs are expanding. Automation is changing the way we make cars, but the rich still need their maids and gardeners. Middle-class jobs are also lost as a result of regulatory and environmental barriers, especially in the energy sector. And the skills-based technological change argument is entirely implausible: countries that beat us hands down on mobility are just as technologically advanced. Folks in Denmark aren’t exactly living in the stone age.
This is why voters across the spectrum began to demand radical change. What did the Republican elite offer in response? At a time of maximal crisis they have been content with minimal goals, like Mitt Romney’s 59-point plan in 2012. How many Americans remember even one of those points? What we remember instead is Romney’s 47% of Americans being takers. That was Romney’s way of recognizing the class divide – and in the election, Americans took notice and paid him back with interest.
Since 2012, establishment Republicans have continued to be less than concerned for the plight of ordinary Americans. Sure, they want economic growth, but it doesn’t seem to matter into whose pockets the money flows. There are even the “conservative” pundits who offer pious hope that drug-addicted Trump supporters will hurry up and die. That’s one way to ameliorate the class struggle, but it doesn’t exactly endear anyone to the establishment.
The southern writer Flannery O’Connor once attended a dinner party in New York given for her and liberal intellectual Mary McCarthy. At one point the issue of Catholicism came up, and McCarthy offered the opinion that the Eucharist is “just a symbol,” albeit “a pretty one.” O’Connor, a pious Catholic, bristled: “well, if it’s just a symbol, the hell with it.” Likewise, the principles held up as sacrosanct by establishment Republicans might logically unassailable, derived like theorems from a set of axioms based on a pure theory of natural rights. But if I don’t see them making people better off, I say to Hell with them. And so do the voters this year. What the establishment Republicans should ask themselves is Anton Chigurh’s question in No Country for Old Men: if you followed your principles, and your principles brought you to this, what good are your principles?
Had Marx been asked what would happen to America if it ever became economically immobile, we know what his answer would be: Bernie Sanders, Hillary Clinton, and Donald Trump. The anger expressed by the voters in 2016—their support for candidates far outside the traditional political class—has little parallel in American history. We are accustomed to protest movements on the Left, but the wholesale repudiation of the establishment on the Right is something new. All that was solid has melted into air, and what is taking its place is a kind of right-wing Marxism, scornful of Washington power breakers and sneering pundits and repelled by America’s immobile, class-ridden society.
Establishment Republicans came up with the “right-wing Marxist” label when House Speaker John Boehner was deposed, and the label stuck when it had the ring of truth. So it is with the right-wing Marxist. He’s right-wing because he seeks to return to America of economic mobility. He has seen how broken education and immigration systems, the decline of the rule of law, and the rise of a supercharged regulatory state serve as barriers to economic improvement. And he is a Marxist to the extent that he sees our current politics as the politics of class struggle, with an insurgent middle class that seeks to surmount the barriers to mobility erected by an aristocratic New Class. In his passion, he also is a revolutionary. He has little time for a Republican elite that smirks at his heroes—heroes who communicate through their brashness and rudeness the fact that our country is in a crisis. To his more polite critics, the right-wing Marxist says: we’re not so nice as you!
The right-wing Marxist notes the establishment Republicans who decry crony capitalism are often surrounded by lobbyists and funded by the Chamber of Commerce. He is unpersuaded when they argue that government subsidies are needed for their friends. He does not believe that the federal bailouts of the 2008 2012 TARP program and the Federal Reserve’s zero-interest and quantitative easing policies were justified. He sees that they doubled the size of public debt over an eight-year period, and that our experiment in consumer protection for billionaires took the oxygen out of the economy and produced a jobless Wall Street recovery.
The right-wing Marxist vision of the good society i
s not so very different from that of the JFK-era liberal; it is a vision of a society where all have the opportunity to rise, where people are judged by the content of their character, and where class distinctions are a thing of the past. For the right-wing Marxist, the best way to reach the goal of a good society is through free markets, open competition, and the removal of wasteful government barriers.
Readers of Umberto Eco’s The Name of the Rose will have encountered the word palimpsest, used to describe a manuscript in which one text has been written over another, and in which traces of the original remain. So it is with Canada, a country that beats the U.S. hands down on economic mobility. Canada has a reputation of being more liberal than the U.S., but in reality, it is more conservative because its liberal policies are written over a page of deep conservatism.
Whereas the U.S. comes in at a highly immobile 0.47 on the Pew mobility scale, Canada is at 0.19, very close to Denmark’s 0.15. What is further remarkable about Canada is that the difference is mostly at the top and bottom of the distribution. Between the tenth and the 90th deciles there isn’t much difference between the two countries. The differences are the bottom and top 10%, where the poorest parents raise the poorest kids and the richest parents raise the richest kids.
For parents of the top US decile, 46% of their kids will end up in the top two deciles and only 2% in the bottom decile. The members of the top decile comprise a New Class of lawyers, academics, trust-fund babies, and media types—a group that wields undue influence in both political parties and dominates our culture. These are the people who said yes, there is an immigration crisis—but it’s caused by our failure to give illegals a pathway to citizenship!
There’s a top 10% in Canada, of course, but these children are far more likely to descend into the middle or lower classes. There is also a bottom 10%, but its children are far more likely to rise to the top. The country of opportunity, the country we’ve imagined ourselves to be, isn’t dead—it moved to Canada, a country that ranks higher than the U.S. on measures of economic freedom. Yes, Canada has its much-vaunted Medicare system, but cross-border differences in healthcare don’t explain the mobility levels. And when you add it all up, America has a more generous welfare system than Canada or just about anywhere else. To explain Canada’s higher mobility levels, one has to turn to differences in education systems, immigration laws, regulatory burdens, the rule of law, and corruption—on all of which counts, Canada is a more conservative country.
Return to Capitalism Page 7
