[Marxism] Is the bailout "Marxist"?

[Louis Proyect]

(As soon as I get a chance, I am going to refute this bullshit about 
Henry Paulson's "socialist" measures.)

http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx
Marx’s Proposal Number Five seems to be the leading motivation for those 
backing the Wall Street bailout

By Martin Masse

In his Communist Manifesto, published in 1848, Karl Marx proposed 10 
measures to be implemented after the proletariat takes power, with the 
aim of centralizing all instruments of production in the hands of the 
state. Proposal Number Five was to bring about the “centralization of 
credit in the banks of the state, by means of a national bank with state 
capital and an exclusive monopoly.”

If he were to rise from the dead today, Marx might be delighted to 
discover that most economists and financial commentators, including many 
who claim to favour the free market, agree with him.

Indeed, analysts at the Heritage and Cato Institute, and commentators in 
The Wall Street Journal and on this very page, have made declarations in 
favour of the massive “injection of liquidities” engineered by central 
banks in recent months, the government takeover of giant financial 
institutions, as well as the still stalled US$700-billion bailout 
package. Some of the same voices were calling for similar interventions 
following the burst of the dot-com bubble in 2001.

“Whatever happened to the modern followers of my free-market opponents?” 
Marx would likely wonder.

At first glance, anyone who understands economics can see that there is 
something wrong with this picture. The taxes that will need to be levied 
to finance this package may keep some firms alive, but they will siphon 
off capital, kill jobs and make businesses less productive elsewhere. 
Increasing the money supply is no different. It is an invisible tax that 
redistributes resources to debtors and those who made unwise investments.

So why throw this sound free-market analysis overboard as soon as there 
is some downturn in the markets?

The rationale for intervening always seems to centre on the fear of 
reliving the Great Depression. If we let too many institutions fail 
because of insolvency, we are being told, there is a risk of a general 
collapse of financial markets, with the subsequent drying up of credit 
and the catastrophic effects this would have on all sectors of 
production. This opinion, shared by Ben Bernanke, Henry Paulson and most 
of the right-wing political and financial establishments, is based on 
Milton Friedman’s thesis that the Fed aggravated the Depression by not 
pumping enough money into the financial system following the market 
crash of 1929.

It sounds libertarian enough. The misguided policies of the Fed, a 
government creature, and bad government regulation are held responsible 
for the crisis. The need to respond to this emergency and keep markets 
running overrides concerns about taxing and inflating the money supply. 
This is supposed to contrast with the left-wing Keynesian approach, 
whose solutions are strangely very similar despite a different view of 
the causes.

But there is another approach that  doesn’t compromise with free-market 
principles and coherently explains why we constantly get into these 
bubble situations followed by a crash. It is centered on Marx’s Proposal 
Number Five: government control of capital.

For decades, Austrian School economists have warned against the dire 
consequences of having a central banking system based on fiat money, 
money that is not grounded on any commodity like gold and can easily be 
manipulated. In addition to its obvious disadvantages (price inflation, 
debasement of the currency, etc.), easy credit and artificially low 
interest rates send wrong signals to investors and exacerbate business 
cycles.

Not only is the central bank constantly creating money out of thin air, 
but the fractional reserve system allows financial institutions to 
increase credit many times over. When money creation is sustained, a 
financial bubble begins to feed on itself, higher prices allowing the 
owners of inflated titles to spend and borrow more, leading to more 
credit creation and to even higher prices.

As prices get distorted, malinvestments, or investments that should not 
have been made under normal market conditions, accumulate. Despite this, 
financial institutions have an incentive to join this frenzy of 
irresponsible lending, or else they will lose market shares to 
competitors. With “liquidities” in overabundance, more and more risky 
decisions are made to increase yields and leveraging reaches dangerous 
levels.

During that manic phase, everybody seems to believe that the boom will 
go on. Only the Austrians warn that it cannot last forever, as Friedrich 
Hayek and Ludwig von Mises did before the 1929 crash, and as their 
followers have done for the past several years.

Now, what should be done when that pyramidal scheme starts crashing to 
the floor, because of a series of cascading failures or concern from the 
central bank that inflation is getting out of control? It’s obvious that 
credit will shrink, because everyone will want to get out of risky 
businesses, to call back loans and to put their money in safe places. 
Malinvestments have to be liquidated; prices have to come down to 
realistic levels; and resources stuck in unproductive uses have to be 
freed and moved to sectors that have real demand. Only then will capital 
again become available for productive investments.

Friedmanites, who have no conception of malinvestments and never raise 
any issue with the boom, also cannot understand why it inevitably leads 
to a crash.

They only see the drying up of credit and blame the Fed for not 
injecting massive enough amounts of liquidities to prevent it.

But central banks and governments cannot transform unprofitable 
investments into profitable ones. They cannot force institutions to 
increase lending when they are so exposed. This is why calls for 
throwing more money at the problem are so totally misguided. Injections 
of liquidities started more than a year ago and have had no effect in 
preventing the situation from getting worse. Such measures can only 
delay the market correction and turn what should be a quick recession 
into a prolonged one.

Friedman — who, contrary to popular perception, was not a foe of 
monetary inflation, but simply wanted to keep it under better control in 
normal circumstances — was wrong about the Fed not intervening during 
the Depression. It tried repeatedly to inflate but credit still went 
down for various reasons. This is a key difference in interpretation 
between the Austrian and Chicago schools.

As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable 
liquidation of the maladjustments brought about by the boom during the 
last three years, all conceivable means have been used to prevent that 
readjustment from taking place; and one of these means, which has been 
repeatedly tried though without success, from the earliest to the most 
recent stages of depression, has been this deliberate policy of credit 
expansion. ... To combat the depression by a forced credit expansion is 
to attempt to cure the evil by the very means which brought it about ...”

The confusion of Chicago school economics on monetary issues is so 
profound as to lead its adherents today to support the largest 
government grab of private capital in world history. By adding their 
voices to those on the left, these confused free-marketeers are not 
helping to “save capitalism”, but contributing to its destruction.


Martin Masse is publisher of the libertarian webzine Le Québécois Libre 
and a former advisor to Industry minister Maxime Bernier.