Review – From Third World To First: The Singapore Story

From Third World to First: The Singapore Story, 1965-2000

by Lee Kuan Yew, published 2000

Extended Introduction

This book has two parts (well, really, three, but the third part is about 20 pages and isn’t as significant as the other two parts), the first of which is about how Lee Kuan Yew describes the building of political institutions and the development of the economy of Singapore under the leadership of himself and his People’s Action Party over almost four decades, the second of which is a country-by-country exploration of Singapore’s foreign relations or what might best be called the exercise of Lee Kuan Yew’s political power abroad. I have an essay planned which will cover the first part of the book separately, focusing on the economic development of Singapore “from Third World to First” and the related political issues with specific emphasis on the myth of Singapore as an example of free market economics at work. Confusingly for some readers, I will argue both that according to Lee Kuan Yew himself Singapore was not a free market and was not intended to be one, and that despite this most of the credit for Singapore’s amazing economic development over the forty year period observed still belongs to the workings of the free market and not to intelligent central planning and wise stewardship of the economy by protectionist politicians.

Therefore, this review will only cover part of the book, but a still substantial one (pg. 225-660) and one which touches upon enough issues that will be raised in the upcoming essay that the reader should be able to get most of the story. I also plan in this review to meander quite a bit and talk about the things I found most interesting or meaningful, rather than summarizing the themes. I took extensive notes on the used copy I bought, annotating almost every other page. There’s a lot to chew on here and I probably won’t cover it all even between this review and the later essay, but might come back to it and comment on individual issues as my thoughts or interest allow. For those who are so inclined, you may wish to read some personal observations and experiences I had during a recent trip to Singapore, as well as some of the comments I made about Singapore’s history and political story, by reading the earlier posts tagged about Singapore. They may add meaningful context.

The Role of International Affairs in Little Singapore

Imagine I described to you a tiny, natural resourceless island nation situated strategically along a major shipping lane, whose historical role was one of trade entrepot and for whom fluid commercial volumes with every people and country possible were key to its economic survival. What kind of foreign policy would you imagine such a country would conduct? Do you imagine it’d have a standing army, or rely on the goodwill of other nations for its existence? What do you think it’s chief executive would spend most of his time doing and where would he most frequently be found?

According to LKY’s memoirs, though a small country dependent upon trade and commerce, Singapore nonetheless had a big role to play in international politics and was not above taking hostile stances even toward other southeast Asian nations (and even looked on approvingly at various wars in the Middle East!). Establishing a robust Singapore Armed Forces was one of the first priorities of LKY when independence was gained in 1965, reportedly to ward off threats from Malaysia and even Indonesia. And during my reading, I lost count of the number of times various chapters and paragraphs began with LKY meeting with other political and academic elites outside of Singapore.

Rather than adopting a strict foreign policy of peace and goodwill towards all nations, LKY comes across as almost bloodthirsty in his description of Singapore’s role in the Vietnam War, describing American intervention as good and necessary, claiming the Vietnamese regime deserved to be “punished”, first in a cross-border skirmish with China and then by continuing sanctions and non-normalized trade and diplomatic relations between Vietnam and Singapore even a decade after the conflict ended and even going so far as to throw his lot in with the Khmer Rouge to counterbalance the Vietnamese puppet government in Cambodia, describing the decision as one arrived at after having “no choice”! If choice doesn’t play a role in designing policy, what need have we of great leaders like LKY?

And then there is Singapore’s role as arms merchant at various times in various conflicts…

And why was it so important to LKY to get agreements with other countries to host SAF detachments for training in unusual environments? Though we are told that the SAF was created to defend tiny Singapore, the desire to train in environments alien to the tiny tropical island seem to lead logically to one place– interventionism. I doubt LKY planned to militarily dominate the globe, but surely he hoped to have his forces participate in struggles that had nothing to do with the direct defense of the island.

While many of the political tours were related to commitments imposed by being part of the British Commonwealth and its former colonial possessions, there seem to be just too many instances of LKY as a global jetsetter to excuse. Why was this man hobnobbing seemingly everywhere but Singapore?

I don’t know what the meaningful difference is between a currency board and a central bank, but assuming there is one, LKY said that Singapore did not have a central bank because,

a central bank is an easy way out for a finance minister who likes to juggle [his figures] when he has a deficit in his budget. I do not think we should put such a temptation before the finance minister in Singapore.

And yet, we witness numerous examples throughout the book, including episodes in Indonesia, Malaysia, Thailand and the Asian Financial Crisis during which Singapore attempts to “defend” the value of other countries’ exchange rates through currency intervention in Singapore. Why? What excuse could their possibly be for this behavior other than trying to be a “player” in world affairs?

But it’s not all baffling. The book has its charming moments, too, including many glimpses into how world political figures really think and what they say about their regimes and records of governance behind the scenes. Take, for instance, this phallic competition between Indonesia’s Sukarno and Lee Kuan Yew:

[Sukarno] asked, “How big is your population?” “One and a half million,” I replied. He had 100 million. “How many cars do you have?” “About 10,000,” I said. Jakarta had 50,000. I was puzzled but readily conceded that he occupied first place in Southeast Asia in terms of size.

Or, the behavior of Indian officials in the face of new golf balls:

It was a gradual slide in quality of a once elite service [Indian Civil Service], now caught up in the throes of a social and economic revolution which had reduced living standards… they could not buy good (i.e., imported) golf balls because their import was forbidden… Our high commission had advised me to bring several boxes of golf balls to distribute to the committee members of the club. It was depressing to see top brass and civil servants breaking up the packages and taking fistfuls of golf balls to stuff into their golf bags.

Indeed, golf balls were so precious that caddies would dash into any house or rough to find them. Once, at the former Bombay Royal Golf Course in 1965, I sliced my ball into a squatter area [what is a squatter area doing within driving distance of a Royal Golf Course?] and heard the loud clatter as it fell on a zinc roof. My caddie dashed off, I thought to find out who was hurt. But no– a little boy emerged with the golf ball, not to complain of injury but to bargain over the price of the ball.

We also learn of the need to be street-wise when dealing with foreign communist dictatorships looking to play a little development scam on a credulous leader:

In February 1994, I signed the Suzhou Agreement with Vice Premier Li Lanqing in Beijing, witnessed by Premier Li Peng and Prime Minister Goh… the essence of the project was to transfer our knowledge of how to plan, build and administer a comprehensive industrial, commercial and residential park that could attract high-quality foreign investors… Instead of giving SIP their full attention and cooperation as was promised, they used their association with Singapore to promote their own industrial estate, Suzhou New District (SND), undercutting SIP in land and infrastructure costs, which they controlled… It was a chastening experience… For the Suzhou authorities, a signed agreement is an expression of serious and sincere intent, but one that is not necessarily comprehensive and can be altered or reinterpreted with changing circumstances… China has an immensely complex government.

But LKY was something of a shakedown scam artist himself as Singapore was seen as a “developing” but not “developed” economy for some time. After catching some American personnel spying in Singapore,

I told the British commissioner, Lord Selkirk, that we would release these men and their stupidity would not be made public if the Americans gave a hundred million U.S. dollars to the Singapore government for economic development. They offered US$1 million, not to the Singapore government, but to the PAP [LKY’s political party]– an unbelievable insult.

He engineered something similar with Japan,

The only important business I raised with Prime Minister Hayato Ikeda was the “blood debt”, a request for compensation for their wartime atrocities… We eventually settled this “blood debt” after independence, in October 1966, for $50 million [serious money for small Singapore when the dollar was worth something!], half in grants and half in loans. I wanted to establish good relations to encourage their industrialists to invest in Singapore.

American race-baiters like Jesse Jackson and Al Sharpton couldn’t have worked a better deal with calls for reparation that would just end up in their own pockets! He even tried the same scam on different terms with the Japanese at a later date, this time playing “Godfather” over a shipping lane:

To get the Japanese to help us, for example, in investing in a petrochemical plant, we had to remind them that their ships passing through the Straits of Malacca would have problems with toll collectors if Singapore were to join the other littoral states, Indonesia and Malaysia.

“Nice open sea lane you got there, it would be a shame if something happened to it,” said in a thick, Germanic Robber Baron accent. The shakedown later continued with “soft loan” subsidies available only to developing nations:

I protested to Fukuda that his officials had spoken of Singapore not as a developing country but as an industrialized one not entitled to soft loans from Japan… We would lose our General Scheme of Preferences (GSP) [like affirmative action for international trading partners who are non-developed countries] and other advantages before we could compete on equal terms.

“Soft loans” are a form of fraud where one entity makes loans to another entity that they never intend to be repaid and usually forgive entirely. It is an outstanding source of graft, especially in corrupt political regimes where outright bribery is outlawed by the lender nation’s laws.

When he isn’t reflecting on his own actions, LKY proves to be a biting and incisive critic and a truthful observer of laws and conditions in other people’s countries. Here he is on the European Economic Community, the predecessor to the EU:

With the other commissioners, I discussed how to avoid manufacturing those products that EEC countries would find sensitive because of persistent high unemployment. I discovered to my dismay that the list was unlimited. Any member country with any influence on Brussels, feeling the slightest pain, could appeal to Brussels for protection and would invariably get it.

This brief anecdote proves three things simultaneously– (1) contrary to propaganda, the EU is a protectionist trading bloc, not a free trading society, (2) there appears to be no nation on Earth that is led by politicians who understand the benefits of free trade, even unilateral free trade and (3) not even trade-dependent Singapore is able to gain a competitive advantage by being a true free trader because it was led by a Keynesian planner-mindset politician-in-chief, LKY, who had his own worries about managing unemployment in his country to risk upsetting bureaucrats in Brussels! Now that is global political power projection for you!!

Here’s another honest and insightful observation from LKY, this time about a faux pas made by an inept American president:

When I was leaving, he gave me a green leather-bound copy of his campaign autobiography [aw gee, what a nice gift, a hastily produced, ghost-written volume of propaganda], Why Not the Best? He had already inscribed it, “To my good friend Lee Kuan Yew. Jimmy Carter.” I was flattered but surprised by my elevation to “good friend” even before he had met me. This must have been a standard practice during his election campaign.

It makes you wonder if Jimmy Cahtah even bothered to sign it himself. If you’re going to piss off a foreign leader on a cheap gesture, spare no expense!

The book is rife with such charming episodes, I could fill the blog up with them. Instead, it’s worth saying something about Lee Kuan Yew’s somewhat confusing and arbitrary arguments for polylogist legal theorizing and the explanations he gave for the success of Singapore’s economic and national development since 1965.

As a polylogist, LKY is a skeptic of the idea of simply importing “progressive” legal principles from one population to another:

the are fundamental differences between East Asian Confucian and Western liberal societies. Confucian societies believe that the individual exists in the context of the family, extended family, friends and wider society, and that the government cannot and should not take over the role of the family. Many in the West believe that the government is capable of fulfilling the obligations of the family when it fails, as with single mothers… freedom could only exist in an orderly state, not when there was contention or anarchy. In Eastern societies, the main objective is to have a well-ordered society so that everyone can enjoy freedom to the maximum [even better if they’re ruled by people like LKY!]… Democracy works where the people have that culture of accommodation and tolerance which makes a minority accept the majority’s right to have its way until the next election, and wait patiently and peacefully for its turn to become the government by persuading more voters to support its views.

And yet, he encouraged China to join as a member of the law-abiding community of nations! How can China, whose authoritarian legal system is ostensibly appropriate for the culture and values of the Chinese, join the law-abiding international community whose laws and customs are foreign and antagonistic to the culture and values of the Chinese? One potential solution is that there exist in every society a set of elite individuals who are not beholden to local political bigotry and historical traditions but can instead transcend them and tap into a more universal logic. But if they can do this for their countries at an international level, why can’t they do this at the “local” level of their domestic politics?

This seems to present some problems for the polylogist approach of LKY, although I think there’s a perfectly simple, but embarrassingly revealing, answer that has something to do with the reality of power and how and why it is exercised in any society which the thoughtful reader can probably surmise with a bit of their own consideration.

I am not a polylogist. I believe there is one, universal human logic that all mature, physically functioning adult minds can understand and employ in their own thinking and communications. That being said, I think LKY is absolutely correct that it is absurd to believe one can foist political principles that were developed over hundreds or thousands of years of combined cultural history onto a population that has never utilized them before, such as using military Keynesianism to deploy democracy in Afghanistan and Iraq, particularly when in so doing the existing political arrangements and power structures are rapidly collapsed or, worse, ignored as if they’re unimpactful.

But more importantly, I think it is naive to expect any political principle, foreign or domestic, to work miracles. For example, believing the process of revealing voter preferences through democratic elections can somehow obviate the need for working within the confines of economic scarcity. Or, to use another example, instituting a vicious socialist dictatorship which doesn’t give a damn about anyone’s preferences, and expecting it to spit out the highest standard of living in the world for its people. So, there is some truth to what LKY is saying on this subject, just not much how he said it.

And how did LKY explain Singapore’s success?

the basic principles that have helped us progress: social cohesion through sharing the benefits of progress, equal opportunities for all, and meritocracy, with the best man or woman for the job, especially as leaders in government

I’d call this a bit of self-aggrandizing delusion. When LKY says “sharing the benefits of progress”, he means that he doesn’t believe the outcomes in a market society are anything but random (he makes this claim in an early section of the book), and that the wealth should be spread around by politicians through things like government housing projects and forced savings accounts. Of course, getting to hand out welfare goodies after an election is a good strategy for winning future elections– some might call this building “social cohesion” to a particular party’s cause, such as LKY’s People’s Action Party.

Similarly, it is pure fudge to claim that you provided equal opportunities for all while running a meritocracy. A meritocracy implies an inequality of opportunity– opportunity goes to those who show merit, having performed well with other opportunities. To give everyone equality of opportunity is not just wasteful, it’s impossible. Does everyone in Singapore have an equal opportunity to be Prime Minister like LKY, or just those who control a well-oiled electoral wealth redistribution machine like the PAP? The double fudge is insisting that government leaders themselves are examples of this meritocracy. Nobody wants to lose their subsidized housing for questioning the merits of their political leaders!

That being said, I don’t think LKY played NO part in the Singapore success story. There is something to be said for a stable political regime with predictable laws and regulations over a 40+ year period, especially one which tended more toward laissez-faire than most. And clearly, looking around the neighborhood (Malaysia, Indonesia, Vietnam, Cambodia… China) Singapore could’ve had worse political management than it experienced. I just think that the credit due is negative– it’s what LKY and his team didn’t do, that made Singapore great, not what they did do. That, and what they didn’t do relative to what the more eager regimes in neighboring jurisdictions did do over the time period observed. With racial tension in Malaysia, military government in Indonesia, socialist science experiments in India, a devastating civil war in Vietnam and the Great Leap Forward and Cultural Revolution in China, you didn’t have to be all that fast to win this footrace.

By just not getting out of bed and ordering an atrocity each day, LKY virtually guaranteed the investment, development and progress would come to his tiny island nation unimpeded for decades, just like it did. But since there’s no way to run a truly controlled experiment here, there’s no way to know for sure what might’ve happened under a different set of policies, so ultimately it’s Lee Kuan Yew’s word against mine.

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Entrepreneurial Opportunity Cost

I am wondering out loud here: when people attempt to do some kind of modeling of the various opportunity costs of having government provide X, versus having “the market” provide X, do they factor in the opportunity cost of lost entrepreneurial progress inherent in bureaucratic provisioning?

For example, if someone was arguing that the government should control automobile production, is there any calculus attempted that examines the present value of foregone future improvements in automobile production and design that will inherently be included in bureaucratic provisioning?

A further example– the roads and highways we drive on, which have been provisioned by government for decades, haven’t changed all that much. But cars have made huge technological leaps in terms of how they’re designed and built. Cars have entrepreneurs behind them, roads and highways have bureaucrats behind them.

I’m not sure I am articulating my inquiry as coherently as I might like to but there it is nonetheless!

The Rape of Russia

During the 1990s, the countries of the former Soviet Union had a unique historical opportunity to move toward a competitive market economy based on private property rights. After decades of “experimenting” with various degrees of totalitarian socialism, this privatization moment would allow hundreds of millions of people to leap ahead in their standards of living and personal well being while fundamentally transforming their political and social relationships. Instead of an economic “miracle”, the privatization era was characterized by a new structure of cronyism wherein the formerly nationalized wealth of the Soviet Union came to be controlled by a small group of “oligarchs” and the people of the various countries were essentially politically repressed. The worst part is that this economic and political travesty took place with direct involvement by various Western and US-backed institutions and individuals, such as members of an elite advisory team from Harvard University. Below are several resources exploring the theory and experience of privatization in Russia and other former communist nations.

How Harvard Lost Russia [PDF]

We learn about the exploitation of the Russian privatization by members of the Harvard Institute for International Development. We learn a couple of interesting facts about the period: the HIID advisors were not doling out pure, fundamental free market theory about how to create a competitive market economy but instead helped to build a “managed” system directly modeled on the US and other crony systems; and, many of the advisors involved in the HIID project made direct investments in industries they were advising, for personal benefit, in direct contradiction to their employment contracts and the laws of the US and Russia at the time (ie, corruption). Deeply involved in the scandal and a close friend of many of the advisors directly involved, the infamous Larry Summers does not come out looking so good.

Two money quotes:

Judge Woodlock found that, while running the Harvard Institute for International Development’s advisory program in Russia in the early 1990s, Harvard economics professor Shleifer and attorney Ha had conspired to defraud the US government, engaged in self-dealing and violated conflict-of-interest regulations.

and,

Harvard University was in a unique position to exert a powerful influence. Post-Soviet Russia turned to the West for help in rebuilding its economy and filling the vacuum left by communism’s fall. In running Harvard’s Russia Project, Andrei Shleifer and Jonathan Hay had an opportunity to preach the importance of integrity, transparency and fairness in shaping a business culture, to work to enshrine those values in the country’s legal and financial infrastructure. Instead, their personal dealings sent a very different message.

This is a horrible tragedy for post-communist European societies, US and Russian foreign relations and for governance and culture in our own society as Shleifer paid a settlement but received no formal judicial sanction and maintained his tenure and social standing at Harvard and in the wider American economic community after playing the role of a miscreant carpetbagger.

Testimony of Anne Williamson Before the Committee on Banking and Financial Services of the United States House of Representatives, September 21, 1999

Anne Williamson explores “the question of the many billions in capital that fled Russia to Western shores via the Bank of New York and other Western banks.” Claiming that “property is the poor man’s ticket into the game of wealth creation” (a sentiment echoed in Hernando de Soto’s The Mystery of Capital) because “the rich… have their money and their friends to protect their holdings, while the poor must rely upon the law alone,” Williamson observes that Russian economist Larisa Piasheva, building on the theory of Austrian school economist Wilhelm Ropke, had designed a “cold turkey” privatization policy which would’ve invited direct foreign investment in Russia; instead, the Harvard cabal and other Western reformers created a weak, US taxpayer-supported voucher system that relied on Western bank lending and led to widescale corruption.

She makes the further claim that “Communism had evaporated by late 1987, the year in which the Russian people were allowed to hold convertible foreign currencies.” She condemns the entire, Western-organized privatization program as a sham and part of a known political formula:

Sell assistance programs on an alleged “free market” and “humanitarian” basis by awarding government grants to those academics who can be relied upon to supply the intellectual camouflage politicians and journalists then repeat ad nauseum to a distracted public, move the IMF and the World Bank to target, induce target to raise taxes, fine tune target’s central banking operations, encourage borrowing and debt creation through the target’s government and its national banks, allowing IMF lending to pay yields if necessary; induce target to privatize national property while building a flimsy, artificial “infrastructure” for an equities market good enough to attract high risk foreign investors. Once the target nation’s government flounders, step back and watch speculators assert discipline through a run on the target’s currency. The subsequent devaluation delivers, in turn, a flood of cheap imports to American manufacturers and producers.

The finishing touch on the swindle is to confiscate more money from G-7 citizens (the lion’s share from Americans) to pay for what is said to be an “essential” IMF bailout; thereby allowing Uncle Sam’s IMF minions to entrench themselves more deeply in the target government’s. Taxes are raised, the population struggles beneath indebtedness, government funding demands and the inevitable domestic inflation and devaluation delivers. Western neo-colonialists then bully the target over its rapidly compounding debt in order to extract yet more property. Once successful, the world’s insiders then turn around and deliver cheap shares from privatizations and initial public offerings into the maw of U.S. mutual funds and portfolio investors. US taxpayers get hit coming (foreign aid) and going (bailouts) and innocent foreigners’ property is finagled away either from, or on account of, inattentive and corrupt leaderships. The big winners are the world’s increasingly corrupt and cozy governing class, international bureaucracies and global banks.

We would be wise to remember her coronation of currency speculators as “the last disciplinarians in the world’s financial system.

Stanley Fischer’s role in piratizing Russia’s wealth

Reminding us of the dictum that “bad men need nothing more to compass their ends, than that good men should look on and do nothing”, Steve Sailer observes that during the Russian privatization,

Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.

When a person observes evil and does not speak out, particularly when he shares proximity to it, we have to question whether he is competent to recognize what he is looking at and whether he might be compromised in being a participant in it in some way.

Stanley Fischer is now the vice chairman of the US Federal Reserve System. He wields incredible power and influence over the US monetary system and economy, not to mention the world’s. The Sailer article explores his questionable judgment of the facts-on-the-ground in Russia, which he had a hand in, and his ethics in seeming to overlook the blatant corruption. The article helps us to remember that politicians of the present have a past, and that past is rarely flattering and seems to be easily forgotten. It also reiterates the theme that a golden opportunity to move Russia and other post-communist countries toward true free market thinking was squandered.

George Reisman’s Capitalism (PDF), pg. 290, “From Socialism to Capitalism: How to Privatize Communist Countries”

So, if corrupt self-dealing and crony managed economies are not the solution for privatizing former socialist regimes, how could it or should it be done? Luckily, there are real free market thinkers who have thought of possible solutions for reform. An extended section from George Reisman’s Capitalism lays out one such approach in detail. I have decided to quote it at length:

The advantages of private ownership of the means of production are so overwhelming that it is actually of secondary importance precisely who the initial private owners are and how their ownership is established. Whatever the specific method or methods of establishing private ownership of the means of production, the institution will function to the benefit of everyone—owners of the means of production and nonowners of the means of production alike. It will do so, however, only to the degree that the individual private owners possess full and secure rights of ownership.

The security of property rights means that the owners must be secure both against the possibility of any form of new confiscation by the state and against successful challenge to their ownership by other private individuals claiming to be the rightful owners. To understand the necessity of the security of property rights, the reader should imagine how his behavior would be affected if he were contemplating buying a home that he could not be certain would be his for very long. He would not be prepared to pay very much for it, and, after he bought it, he would not be prepared to put very much into it. Indeed, his incentive would probably be to let the house run down and even to sell off such things as the appliances for the sake of obtaining cash or other assets that would be more securely his. Without the security of property rights, the situation of all would-be owners of factories, farms, mines, and stores in the present-day socialist countries must be exactly the same. Such owners would be in essentially the same position as the state employees described earlier who were supposed to act as capitalists under “market socialism.” The absolute security of the owners’ property rights is essential if people are to be willing to pay proper prices for the various properties and then to stay on and improve them rather than milk them for whatever they can.

An essential aspect of the rights of ownership is the right freely to buy and sell property. This aspect of property rights is especially important in the transition from socialism to capitalism. The combinations of assets of the various enterprises of socialism and thus the combinations of assets of the enterprises that will initially exist under capitalism will almost certainly need radical change. It will be essential for the market to have the freedom literally to redefine all enterprises by changing the combinations of their assets. This means, there must be the freedom both to break up existing enterprises by selling off their assets in the manner of “corporate raiders” and to combine their assets through such devices as mergers and acquisitions.

As I say, these freedoms are essential. For a major foundation of the efficiency of capitalism—ironically, increasingly overlooked in the supposedly capitalist United States—is the ability to create business firms that possess the right combinations of assets. This ability is essential if firms are to be able to produce the right products by the most efficient methods. It must be present at all times, if the economic system is to be able to adjust to changing conditions. It is acutely necessary in the context of putting right the combinations of assets that a socialist government is likely to have thought appropriate for the various enterprises. It would be essential not only for such things as combining manufacturers with the right parts makers, and retail outlets with the appropriate warehouse facilities, but also for changing the uses made of all kinds of existing factories and land sites.

Nothing less than a radical overhaul of the entire apparatus of production inherited from socialism will be necessary if the economic system is to become efficient. Many factories will have to be closed and such of their assets as are still useable, devoted to production in different locations. Most other factories will have to undergo major changes in what they produce and the methods by which they produce. The output of innumerable factories will have to go to different users. The use that is made of innumerable land sites will have to change. All of this requires the freedom to buy and sell and to breakup and combine the assets of firms.

Along the same lines, the market would need the absolute freedom to hire and fire the managers of enterprises. This freedom too is necessary at all times and acutely necessary in the conditions of a transition from socialism to capitalism. Any managers inherited from socialism are likely to need replacement. Many of the initial managers under capitalism will also need replacement. To be effective, the transition from socialism to capitalism will need to be followed by a fall into obscurity of numerous former top managers and rise from obscurity of numerous new managers. Nothing must be allowed to impede the business takeovers and buyouts that are an essential part of this process.

In addition, of course, there must be the absolute freedom to hire and fire ordinary workers. Socialism is characterized by a massive misallocation of labor, just as it is characterized by massive misallocation of capital. This too must be put right if production is to become efficient.

A vital aspect of the transition from socialism to capitalism, that is implicit in all that has just been said and is clearly called for by the nature of capitalism, is the freedom of every enterprise to enter into the industry of every other enterprise, and, of course, the freedom of everybody to form new enterprises. In other words, the full freedom of competition must exist.

In the light of these requirements, the specific methods of establishing private ownership of the means of production can now be considered.

The simplest and most obvious method is that wherever former owners of property or their descendants are still alive, the properties should be returned to those from whom they were stolen, or to their descendants.

In Eastern Europe, this method is somewhat complicated by the fact that many of the private property owners who were dispossessed by the Communists were themselves beneficiaries of expropriations carried out not long before by the Nazis. Here the solution clearly is to return the properties to the earlier owners dispossessed by the Nazis, or to the descendants of those owners.

To the difficulty of settling claims as between two or more private claimants is added the fact that the method of returning property to former owners becomes less and less adequate, the longer is the period of time during which socialism has existed and the more ruthless were the means employed to establish socialism in the first place. This is because it becomes correspondingly more difficult to locate specific individuals with valid claims to ownership. (In many cases, everyone with a valid claim may simply have been murdered.) The major part of the problem, however, is the fact that as time has passed, numerous new plants and machines have been constructed, which no one can now claim on the basis of property rights existing before the establishment of socialism. These observations are particularly applicable to the former Soviet Union, where socialism existed for over seventy years and where over twenty million people were murdered by the Communist regime. The mass murders committed by the Nazis may pose a similar problem to the location of heirs.

In view of these facts, I propose three methods of privatization. First, as far as possible, property should be returned to those from whom it was stolen, or to their descendants. Second, in the case of agricultural land where it is not possible to locate former owners or their descendants, the land should be made the individual private property of those who now work it. That is, all the collective farms and state farms should be broken up into separate, individual private farms. Formulas could be devised allowing for differences in the amount of land individuals received based on differences in the time they had been compelled to work the land. Those who had suffered such forced labor for a longer period, would receive more of the land than those who had suffered it for a shorter period. Individuals who would otherwise receive parcels of land too small to farm might simply receive cash.

Third, in the case of all other property—factories, mines, shops, and so forth—the appropriate principle would be to place the assets on the open market for competitive bidding. Foreigners should be actively encouraged to participate in this bidding and, indeed, the bidding should be carried on in Western currencies and in gold. Foreigners should have the same full rights of ownership as citizens: they should be allowed to buy and sell property of all kinds, to form companies, and to remit dividend and interest payments to their own countries to whatever extent they wish.

Active foreign participation in the bidding creates the possibility of the average citizen of the socialist countries deriving an important immediate benefit from privatization. Namely, as the proceeds from the sale of assets came in, each individual citizen could receive his individual share of the proceeds—that is, the proceeds of the government’s sales could be divided up among the citizens. Thus, during the period of liquidation of state assets, the average citizen could receive one or more checks payable in Western currencies. He could use the proceeds to buy essential consumers’ goods that could be imported from the outside world because the means would be present to pay for those imports. This would help to tide him over during the difficult period of transition during which his country’s economic system was being reorganized and he was unemployed or not in a position to earn a significant amount by working. In this way, for the first and only time—in the process of its liquidation—collective ownership of the means of production would turn out to provide some actual benefit to the citizens: in the moment of its being liquidated for Western cash, it would enable them to obtain something of value to their lives.

It should be observed, incidentally, that the benefit to the average citizen would be the greater, the greater was the prospective security of property. Because to the extent that newly acquired property rights were expected to be upheld, the higher would be the prices that foreigners would be prepared to pay for the assets being offered for sale, and thus the greater would be the proceeds accruing to the average citizen of the formerly socialist country. Economic morality would be rewarded. (The ability of foreigners freely to remit dividends and interest payments is an important aspect of this morality and also an important foundation of the foreigners’ willingness to bid up the prices of the assets offered for sale, and thus of the ability of the average citizen of the formerly socialist country immediately to benefit from privatization.)

[…] Once the transition to capitalism was accomplished and the average citizen of the formerly socialist country was in a position to begin saving and investing on a significant scale, not only would he begin to accumulate capital within his own country, but the capital market of the entire world would be open to him, and he could invest abroad just as others had invested in his country. This is an aspect of what can be called capitalist internationalism.

In order to secure the best prices for assets being sold off, a corps of professional auctioneers and brokers should be employed, who would receive a commission based on a percentage of the sales proceeds.

The principle of distributing the proceeds from the sale of assets equally among the citizens could be modified to give greater compensation to victims of labor camps and survivors of those who have been murdered by the Communist regime. However, the primary compensation for such crimes should probably be left until after the transition to capitalism has been completed and it is thus possible to provide more substantial compensation.

There are, of course, other possible methods of establishing private property. One would be simply to make the various existing enterprises the private property of their present managements. Another would be to turn the various enterprises over to their present employees. Obviously, the two methods could be combined, with the present managers receiving a certain percentage of the ownership and the present employees a further percentage. To some extent, these methods are actually in use.

If, following the establishment of private property in these ways, there really was security of property and full rights to buy and sell assets and shares, to hire and fire managers and workers, and to compete in all branches of industry, these methods would ultimately be effective in establishing private ownership of the means of production. As time went on, all the necessary changes could take place, including changes in ownership, which would be effected by the market, and an efficient economic system would emerge. However, the appropriation of enterprises by their Communist-appointed managers will necessarily carry with it the taint of the old regime and all of its injustices, and is likely also to be accompanied by a continued large-scale ability to use political pull, based on previously established relationships with government officials. Thus, private ownership of the means of production begun in this way will be tainted by injustice, past and present, and by corresponding inefficiency. This would be a legitimate source of resentment and would constitute a potential threat to the continuation of such ownership.

Turning the ownership of each establishment over to the workers of that establishment would at best arbitrarily favor some workers over others. Those workers who happened to work in highly capital-intensive industries, such as electric-power production or steel making, would obtain ownership of far more capital than workers who happened to work in less capital-intensive industries, such as clothing factories and restaurants. The same point would apply within each industry, insofar as some plants were more modern and efficient than others. It is very pertinent, of course, that as the result of socialism’s protracted gross inefficiencies, the value of many factories and other productive establishments would turn out to be altogether nonexistent.

The problem of workers benefitting or failing to benefit by virtue of the accidental circumstances of where they worked would also exist in agriculture. The workers of collective farms with abundant, rich soil would receive more than the workers of collective farms with relatively meager, poor soil. In agriculture, however, apart from the return of former owners or their descendants, there does not appear to be an alternative to the workers’ coming to own the land. Of course, the workers on the relatively poorer lands could be given the option of sharing in the proceeds of the sale of other assets rather than accept land they had been forced to work.

To the extent that workplaces do become the property of the workers employed in them, it must be stressed that it is vital that the workers of each plant be free both to sell their ownership shares while keeping their jobs and to leave their jobs while keeping their shares. In this case, ownership and employment would eventually become almost entirely separate, as under capitalism. The ability to hold ownership and employment separately is essential for the free movement of capital and labor between industries. In its absence, workers would be reluctant to leave their employment, because they would then lose their capital, and they would be afraid to admit new workers into their firm or industry, because they would then have to correspondingly dilute their ownership. There would be no possibility of transferring capital from one industry to another, since the workers of the industry from which the capital came would simply lose it. Furthermore, the rapid separation of ownership and employment is necessary to overcome a bias that might otherwise exist against improvements in efficiency if workers as owners were in a position to reject improvements that might cost them their jobs.

Thus, at its worst, turning ownership over to the workers could mean a state of affairs in which the movement of labor and capital between the various branches of industry was made impossible. In addition, it could mean a situation in which the workers of each industry, by virtue of their possession of a monopoly on employment in their industry, were in a position to practice extortion on the rest of the economic system as the price of providing their services. Obviously, these are conditions which should be avoided at all costs.49

Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.

In the absence of the establishment of private ownership of the means of production, all other reform is meaningless. [emphasis added] For example, decontrolling prices without first establishing private ownership of the means of production and its corollary the freedom of competition, simply means giving arbitrary, monopolistic power to lesser government officials in charge of individual industries and enterprises. It is comparable to giving the postmaster general or the local postmaster the right to set postal rates. Without private ownership of the means of production, there can be no market economy or free market. Divorced from private ownership of the means of production, such notions are a contradiction in terms. Nor, of course, can there be lasting or meaningful reform in the political realm.

Conclusion

These articles are shared as evidence of several ideas:

  • Free markets haven’t been tried, not in Russia, not in the US
  • “Free markets” are a convenient and distracting cover term for what is actually corrupt crony systems because it confuses people who understand the value of free markets and it distracts those who hate them
  • “Economists” are often not economists but political agents, and many of them have flawed ethical frameworks
  • Harvard as an institution, specifically, has a record of questionable ethics with regards to the HIID’s involvement in the privatization of Russia
  • Modern US-Russian relations are a lot more complicated than Good, Liberty-Loving America vs. the Former Red Menace
  • Larry Summers is corrupt
  • Stanley Fischer is corrupt
  • The truth is complicated and unpopular and those who are scandalized by it have a strong incentive to cover it up, ignore it or forget about it

More Notes On Mises’s “Socialism”

Notes from Socialism: An Economic and Sociological Analysis by Ludwig von Mises [PDF]
WHAT WAS MISES TALKING ABOUT?
Why did Mises write this book?

Mises was attempting a scientific analysis of the socialist program as a philosophical and economic doctrine. Up until this point in the development of ideas (1922), most writings on socialism concerned themselves with ideological propaganda and sloganeering, with socialist supporters actively trying to prevent people from a scientific examination of social problems and the socialist response. Mises wanted to explain: what is socialism? how does it compare to capitalism? what claims does socialism make about society? are they true? what can we expect the world to look like under a socialist order?

What the heck is Mises saying?

Some people find Mises’s writing confusing. He uses big words (“panegyrists”) and archaic or seemingly obscure references (quotes in Latin, nods to long-extinct philosophical schools). Mises possessed a Classical education like many educated Europeans of his time. He saw himself as part of a grand intellectual tradition and sought to make his own contribution to a shared Western civilization that had taken over two millennia to develop. He saw himself as a scientist of social phenomena responding to important debates and schools of thought of his era. He was often speaking TO a particular person, school or idea which was well-known and publicly debated in his day. Finally, he is a systems-builder. He always starts with a foundation, then adds a block, adds a block, adds a block. At the end one finds oneself standing atop an intellectual skyscraper they didn’t realize they were building when they started reading.

What are the biggest ideas in “Socialism” (Chapters 1-4)?

If you remember only a few things from the first hundred pages of Socialism, remember these quotes and try to think about their significance:

The word Capitalism expresses, for our age, the sum of all evil. Even the opponents of Socialism are dominated by socialist ideas.

To drink coffee I do not need to own a coffee plantation in Brazil, an ocean steamer, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table. Sufficient that others own these means of production and employ them for me.

If the State takes the power of disposal from the owner piecemeal, by extending its influence over production… then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State.

What is “Liberalism”?

Mises’s Liberalism stood for the essential social principle of a social order built on respect for private property rights and contractual negotiation of social conflicts. In other words, peace abroad, freedom at home and an economic system consisting of nothing more than “consumer sovereignty” over the productive process and voluntary exchange within the confines of the marketplace. This was once an intellectual project of thinkers of all nations and ethnicities participating in “Western civilization”. Today, Liberalism lives on most strongly in the ideas of the Libertarian movement, which was originally a mostly American project ironically kick-started in large part by the publishing of Mises’s “Human Action” in 1949. Today, socialists have co-opted the Liberal name, having rightfully seen it as valuable due to its old popularity and intellectual prestige.

What is Socialism?

The demands of the socialist program have changed over time but they have come to settle, as Mises said, on the idea of “a policy which aims at placing the means of production in the hands of the State.” It is the antithesis of the private property order of Mises’s much-cherished Liberalism, and diametrically opposed to the “consumer sovereignty” of the marketplace, replacing it with production, organization and exchange according to the “will of the people.” But how, and why, could these two concepts be different? That is the heart of Mises’s book-length analysis. According to Mises, Socialism is Utopian by nature. It promises to deliver a perfect economic, political and social environment where all inequalities and disputes are resolved forever and the end of history, in the sense of a constantly-evolving, ever better social order, arrives.

Do Liberalism and Socialism have conflicting ends?

No! And this is the most fascinating part of the analysis. Socialist propaganda strives endlessly to create contrast between the goals of Liberalism and the goals of Socialism. And while it is true that Liberalism does not share all the concerns of Socialism (mostly because it has deemed these concerns to be impossible or nonsensical), the goal of both is to raise the material standard of living of humanity as a whole. The only thing that differs is the means chosen to secure those ends. But it is that choice which ultimately makes all the difference.

Notes – “Socialism” Chps. I-III

Notes from Socialism: An Economic and Sociological Analysis by Ludwig von Mises [PDF]
  1. Introduction
  2. Chapter I, Ownership
    1. the nature of ownership
      1. the economic concept of ownership has to do with “having”, that is making use of the benefits of a particular good, whereas the legal concept of ownership has to do with whom the benefits rightfully belong to
      2. consumption goods can only be owned, economically speaking, privately on an individual basis
      3. production goods can have joint ownership in a legal sense, but it is the ultimate consumers of the output of production goods who own them economically because they are the ones who enjoy their benefits, in a division of labor society
      4. in an autarkic society, the user can also be the owner of the production goods because all output serves to benefit him, but in a division of labor society the user of the production goods decisions are guided by the demands of end consumers who have economic ownership of them
    2. violence and contract
      1. all economic ownership derives from occupation and violence
      2. all legal titles followed back in time must originate in appropriation of common goods
      3. law arises when society comes together to recognize current ownership with legal title, thus ending the war of all against all
      4. law and the State can not be traced back to contracts, they came into being in conditions of lawlessness and the absence of contract
      5. “economic action demands stable conditions”; long-term productive processes can not exist in conditions of violence; peace is the aim of law, which allows for long-term economic action
      6. law defends property in the interests of peace-making; all violence is aimed at property of one form or another
      7. “Law cannot have begot itself of itself… in complaining that Law is nothing more or less than legalized injustice, one fails to perceive that it could only be otherwise if it had existed from the very beginning” (consider Proudhon’s “Property is theft”, how can one define theft in the absence of property?)
      8. Law set to formalize a set of conditions which were then existing, and from which standpoint all future actions were to be judged
      9. “Law did not leap into life as something perfect and complete. For thousands of years it has grown and it is still growing. The age of its maturity, the age of impregnable peace, may never arrive.”
      10. three types of law, in order of economic importance
        1. Private Law: regulates behavior between individuals
        2. Public Law: regulates behavior between individuals and community/State
        3. International Law: regulates behavior between communities/States
      11. today, the principle of violence has been completely abandoned in Private Law; violent revolution is slowly being abandoned as a principle of Public Law and International Law is still in large part governed by the principle of arbitrary violence
    3. the theory of violence and the theory of contract
      1. liberalism, the principle of contract/Law dictating human society, takes time to develop and is the realization of a conscious effort guiding social life
      2. “All anti-liberal social theories must necessarily remain fragments or arrive at the most absurd conclusions”
      3. critics charge Liberalism with focusing only on earthly delights; it is an empty charge because Liberalism admits this; Liberalism promises nothing besides abundant material commodities, it doesn’t concern itself with The Greatest Secret of Man
      4. urban settlement is an outgrowth of the division of labor/exchange society promised by Liberalism
      5. Social philosophy must be earned with effort; immigration waves from country to town have often threatened to upset Liberal social order because immigrants are slow to adopt new modes of thinking (country bumpkins)
      6. many Liberal civilizations have been ruined not from without by barbarians, but from within by seeming-citizens
      7. theories based on struggle as the motive power for society deny a role for social cooperation, yet social cooperation is the essence of social theory
      8. the strongest argument of imperialism is the idea that each country should have ownership over the essential means of production (economic nationalism); but if this principle were true, that one can not derive economic benefit from goods one does not legally possess, then why shouldn’t EVERY man possess these essential means of production for himself?
      9. imperialism and socialism agree in their criticism of liberal property rights/ownership, but socialism seeks to divise a closed system of a future social order which imperialism could not
    4. collective ownership of the means of production
      1. the intent of early reforms of property rights was to provide equality in the distribution of wealth
      2. a railway, a rolling mill, a machine factory can not be distributed; equal ownership principle has been abandoned in favor of the idea of social (State) ownership of the means of production
      3. “Our whole civilization rests on the fact that men have always succeeded in beating off the attack of the re-distributors” lest economic regression take hold
      4. this new idea for socialism is shaped by the private property order, it could not have occurred in its absence and it is a compromise of socialist philosophy because it realizes abandoning the social division of labor would totally destroy man’s economic life as we know it
      5. in this sense, socialism IS a consequence of the liberal social order
      6. socialism claims for itself a grandiose enterprise; it can not be thrust aside with one critical word but deserves a full response
    5. theories of the evolution of property
      1. it is an old political trick to try to found your ideal in a “Golden Age” of the long ago, since corrupted
      2. Liberalism stresses the important development and “evolution” of civilization caused by private property in the means of production; Marxism plays to the idea that private property was an evolution, but a corrupt form
      3. the historical record of private and “public” property is mixed and not certain, the idea of founding a theory of property rights on timeless history is flawed and untenable
      4. regardless of the historical question, it is a separate problem to demonstrate that rational agriculture and other forms of economic development could be carried out in the absence of private property as an institution
  3. Chapter II, Socialism
    1. the State and economic activity
      1. “the aim of socialism is to transfer the means of production from private ownership to the ownership or organized society, to the State”
      2. limitation of the rights of owners as well as formal transference is a means of socialization (ie, regulation)
      3. piecemeal socialization via regulation leaves the owner in position of owning an empty title, with true ownership/property rights resting in the State
      4. Socialism and Liberalism have the same ends, but they choose different means for attaining them
    2. the “fundamental rights” of socialist theory
      1. culture is the true safeguard of rights, not legal formalities; numerous nations have legal guarantees of rights but culture is not widespread enough to support their consistent application
      2. most of the time the economic rights dictated by socialism are for sloganeering purposes, or to act as a critique of the existing order; they don’t consider whether institutiing them legally is enough to change the social order and take this idea for granted so far as they believe in it
      3. three fundamental socialist rights:
        1. the right to the full produce of labor
          1. this can only be had in a competitive process of buying and selling which dictates to each element (labor, capital and land) its respective value based off the subjective theory of value
          2. this idea has always come to logical ruin and so the compromise is the idea of abolishing all “unearned” income via means of state control of the means of production
        2. the right to existence
          1. the idea of guaranteeing minimum existence was achieved in most communities by means of charity long ago, and is thus a harmless idea
          2. what socialists actually mean is that every individual have their needs met based on the means available in the community, before  the less urgent wants of others are met
          3. the impossibility of judging the urgency of needs objectively means in practice this is simply a call for equitable distribution of society’s total wealth; “no one should starve while some have more than enough”
          4. it is an idea fundamentally incompatible with the concept of private ownership because it will demand collective ownership in order to be realized
        3. the right to work
          1. the idea here is that people have the right to a job they enjoy that provides them a minimum level of subsistence with regards to their wants
          2. it owes heritage to the idea that Nature was superabundant and everyone could fulfill his needs easily in this primitive state and so to “buy” man’s cooperation with society, which denies him this superabundance, some compensation must be made
          3. it ignores that Nature is full of hardship and man enters into society because it is more productive, not less
          4. unemployment is caused by economic change, and where it is not hindered by regulation it is a transitory affair
          5. socialism, too, would need the ability to move labor to its most highly valued role; the idea of guaranteeing people a minimum income in their chosen work is absurd and ignores the demands of economic change
      4. these 3 rights could be larger or smaller in number and today have been superseded by the idea of socialization of the means of production
    3. collectivism and Socialism
      1. society is only possible to the extent that the individual finds his ego and will strengthened by participating in the collective; the idea of a combat between the collective and the individual was false and a red herring used by collectivists interested in protecting the interests of various ruling classes
      2. collectivism rests on a teleological problem, that is it purports to explain human action based on a purpose served rather than individual causes
      3. collectivism posits the State as a God directing society toward a higher purpose; it assumes a war of all against all exists in society and individuals must be forced against their better interests to move in the direction of their divine purpose; that no peaceful social organization is possible
      4. science of society begins by removing this dualism and with it the need for gods and heroes; human action in social cooperation can be explained by the simple idea that man sees more benefit in cooperating than he would achieve left on his own
      5. collectivist philosophy is barren in terms of producing economic theory; it wasn’t until the “German mind” was freed of the collectivist philosophy of the State that pathbreakers like Menger, Bohm-Bawerk and Wieser were able to make important contributions to economic science
      6. collectivists refer to the social will but can not consistently explain its origins, which are based on individual political, religious or national convictions
      7. collectivism is political, not scientific; it teaches judgments of value
      8. collectivism tends to be closer to the world philosophy of socialism but even some collectivists have advocated private property in the means of production (socialism != collectivism)
  4. Chapter III, The Social Order and The Political Constitution
    1. the policy of violence and the policy of contract
      1. in a state of nature, “the Law of the Stronger”, the negation of law, exists; no peace, a truce at best
      2. society grew out of the smallest associations agreeing to keep the peace and expanded outward from there
      3. the policy of contract has nearly fully captured questions revolving around property, but political domination is still determined by the ancient means of arms, although this too is beginning to come under a set of rules
      4. in response, the nature of war has come under the influence of “Just Cause”, the policy of naked aggression tending to attract powerful anti-coalitions
      5. Liberal social policy teaches that war is harmful to the conqueror and the conquered; society is built through peace; peace is the father of all things
      6. Liberalism’s aim at protecting property, and avoiding war, are expressions of the same principle of peace
    2. the social function of democracy
      1. the highest political principle of Liberalism is self-determination of people
      2. for Liberalism, democracy performs functions that men are not prepared to do without
      3. many claim the aim of democracy is to select political leaders, but there is no inherent reason why democracy should choose better leaders than any other form of government
      4. the true function of democracy is to make peace, to avoid violent revolutions; persons and systems in the government of non-democratic states can only be changed by violence
      5. democracy attempts to economize on the loss of life and property, the interruption of economic activity, which comes with political revolution by bringing the will of the state in accordance with the will of the majority; it is a policy of internal pacifism to complement external pacifism of the Liberal order
      6. history bears out the truth of this function when looking at the relative stability of the English social order since the 17th century versus the instability and violence of the monarchies of Russia, Prussia, Germany and France
      7. democracy seeks to extirpate revolution; in this sense Marxism is anti-democratic; “Liberalism wants success at the smallest price”
      8. direct democracy is not necessary as long as the principle of the will of the state conforming with the will of the majority is attained
      9. democracy should be carried out by professional politicians so long as they represent the will of the majority
      10. there is no difference between the unlimited will of the democratic state and the unlimited will of the autocrat; both rest on the notion of a state based in pure political might
      11. it is a formal mistake with grand consequences when a legislator believes he is free from material considerations because all law emanates from his will; he is not above the natural conditions of social life
      12. “Democracy without liberalism is a hollow form”
    3. the ideal of equality
      1. it is said that socialism necessarily grows out of democracy because democracy requires equality to function
      2. the principle of equality of all before the Law is an essential peacemaking principle because without it people have common interest in subverting the law and ending the peace to get what they want
      3. another reason for equality before the law is to ensure that the ablest producers are ably legally to come to possess the means of production, which has outstanding benefits for all of society
      4. all democracies have foundered on the spirit of pitting the poor against the rich, people who are unequal in material means despite being equal in legal means (supposedly)
      5. the idea of equality arising from a pro rata distribution of the national income is not inherently democratic and should be judged on the basis of its own effects, not as a principle of democracy
    4. Democracy and social-democracy
      1. the idea of democracy and socialism being wedded intellectually comes from the followers of Hegel who believed in the idea of social evolution; because democracy and socialism both were arrived at thorough political and economic “progress”, they were deemed to be compatible
      2. “Democracy is the means toward the realization of socialism, and socialism is the means toward the realization of democracy”
      3. the other idea was that socialism would bring paradise on earth, so it seemed odd if this paradise offered anything less than the “best” political circumstances as well
      4. people ultimately diverged on whether or not it was okay to deviate from the principles of democracy on the way to socialism, ie, the dictatorship of the proletariat
      5. Marxism as word fetishism: revolution meaning development, destroying the contrast between evolution and revolution
      6. Marxism does not offer liberal political rights once it is in power, it only asks of them when it is out of power, as a propaganda tool
      7. Liberalism demands democracy always and at once because it is the only means of peaceful political development in society
      8. The Bolshevist revolution revealed the inherent violence of the socialist program, unintentionally
    5. the political constitution of socialist communities
      1. if the socialist paradise is given, the question remains as to who shall govern “the will of the people” and direct the productive process
      2. the history of socialist communities — Pharoahic Egypt, the Inca, Jesuit State of Paraguay, and the writings of Plato and St. Simon — are all distinctly authoritarian in nature
      3. socialism foresees a social peace made through a permanent regime with unchanging rules and policies; the peace of the graveyard (same with the economic system!)
      4. Liberalism seeks a peace which is maintained with respect to man’s yearning for change
  5. The Social Order and The Family
    1. Socialism and the sexual problem
      1. socialism promises universal happiness in love by doing away with private property in relationships
      2. socialism’s critique of “capitalist” sexual relations starts from the premise that a Utopian Golden Age existed in history and sexual relations have degenerated from that point to the current capitalist paradigm
    2. man and woman in the age of violence
      1. “unlimited rule of the male characterizes family relations where the principle of violence dominates” (see: Mafia families)
      2. in this situation, woman is an economic good that man has and makes use of; she is the servant of man because man has the power and and thus the rights
      3. the man can divorce the woman, but she can not do the same to him
      4. love is the anti-thesis of this system because it involves “overvaluing” the object, woman is a queen, rather than a slave
      5. love creates conflicts in this system only from the point of view of the man, who can not stand his property (woman) being possessed by another
    3. marriage under the influence of the idea of contract
      1. capitalism is blamed for bringing money marriages and prostitution and sexual excess; before this love was pure
      2. polygamy tends to accompany the principle of violence because women are property and men wish to acquire as many as they can defend
      3. as women came to possess property and wealth and marriage with them granted access to that property, clear delineation between legitimate and illegitimate connection and succession developed, that is, contract
      4. the idea of contract breaks the rule of the male and makes the wife a partner with equal rights
      5. women were freed from men for the first time when their rights were legally enforceable as contracts
    4. the problems of married life
      1. modern contractual marriage involves conditions by which marriage and love are united; it is morally justified only when love is involved
      2. most of the problems of married life come from the fact that it is a contract for life yet biological passions and even philosophical love may be of limited duration
      3. these problems are internal in nature, not external; they’re due to individual psychology, not the capitalist social order
      4. the feminist movement claimed that marriage forced women to sacrifice their personality and the only solution was abolition of the institution
      5. women are faced with a unique choice: to spend the best years of their lives as mothers, or pursuing their personalities, but rarely both
      6. so long as feminism desires for woman the legal freedom to develop according to her own will, it is a partner of Liberalism
      7. to the extent feminism seeks to reform institutions in an attempt to reform unalterable facts of nature, it is a child of Socialism
    5. free love
      1. socialism aims for free love by abolishing economic necessity and social institutions which previously hampered relations between the sexes
      2. sex is less of a burden for man because the nature of the act for him is less demanding; for women it brings with it the risk of child birth which can be a sincere distraction from her inner development
    6. prostitution
      1. prostitution goes back to ancient society and is a vestige of old morals, not new
      2. women prostitute themselves for different reasons, only one of which is money
      3. capitalism loves peace, yet militarism is one of the primary “patrons” of prostitution
      4. in a society of equal means the economic motives for prostitution may dwindle, but there is no reason to believe other new social sources would not arise in their place

The Infinite Regression Investment Philosophy

Courtesy of the 2012 FRMO Letter to Shareholders [PDF]:

If one were to look at the 100 US public companies with the largest defined benefit pension plans, one would find the likes of Exxon Mobil, General Electric, Pepsi, Verizon and UPS. As of the end of 2011, using these largest 100 as a proxy, American companies recorded perhaps the largest underfunded status ever, certainly within the past dozen years, both in dollar and percentage terms. And this follows a helpful three years of double-digit annualized returns on their plan assets.

Moreover, there is much reason to expect this position to worsen. The discount rates they use to determine the present value of all their future estimated pension obligations is about 3 times higher, at an average 4.8%, than it should be, since we know the average investment grade bond yield today to be about 1.3%. This means that the obligations are actually far larger than currently presented in these companies’ financial statements. Moreover, these pension plans, on average, still presume to earn almost 8% on their plan assets. Yet, over 40% of the plan assets are invested in bonds. Assuming, as one must, that 40% of these pension plan assets will earn 1.3% at best, then those bond portfolios, all else equal, can contribute only 0.5% to the return of the entire plan assets. This leaves the remaining 60%, most of which is invested in equities, to produce the balance of the 8% expected return, which means the balance must produce about a 13% return every year.

First, one is hard pressed to suggest that this reality will come to pass, so that one should expect much larger funding deficits in the coming years and, it follows, much larger contributions to those pension plans, which in turn must detract from shareholder earnings and earnings growth. That pending reality, though, is less interesting than this one: that these companies, by dint of their investment philosophy and practice, place the major portion of their equity assets in the S&P 500 (and other indices representing essentially the same, largest companies in the US), in order to attempt to earn the highest risk-adjusted expected returns. Yet the S&P 500 to a significant degree is composed of the set of companies with the largest pension plans, which are problematic as described above– these companies are investing in themselves for future returns to restore their pension plans, even as they themselves are problematic because of these pension plans. But this is their formulaic process, and the tools by which this process is measured and implemented are these self-same indices.

This is Free Lunch-thinking.

By the way, value investor Geoff Gannon (much beloved on this site) has written a lot about Dun & Bradstreet, a company with an underfunded pension liability sword hanging over its neck. He makes the case for why this is not something to worry about with DNB but I have to say it’s the one thing making me hesitate about jumping in to an otherwise compelling franchise opportunity.

In general, I try to avoid companies with employee pension plans, at least the defined benefit variety. They may be “private” and “voluntary” but to me they smack of socialism-lite. They’re uneconomic and based upon absurd assumptions and unrealistic expectations. They are, like Social Security, promises that can’t be kept and must eventually be broken.

The trouble is, shareholders will almost always be sacrificed first because we exist in a culture today that penalizes capital and sees the equity holder as a villain and cheat.