The Turbulence and the Paradox

“I was pretty much out of step with the times,” writes Alan Greenspan in The Age of Turbulence, referring to his political convictions in 1965, employing his fed-speak predilection for understatement. His advocacy of capitalism was indeed “out of step with the times”. Capitalism was such a dirty word in those days that its advocates had to employ redundancies such as “laissez-faire capitalism”, or euphemisms such as “free enterprise”, to even get a hearing. As the economist Ludwig von Mises had described the situation:

“Nothing is more unpopular today than the free market economy, i.e., capitalism. Everything that is considered unsatisfactory in present-day conditions is charged to capitalism. The atheists make capitalism responsible for the survival of Christianity. But the Papal encyclicals blame capitalism for the spread of irreligion and the sins of our contemporaries, and the Protestant churches and sects are no less vigorous in their indictment of capitalistic greed. Friends of peace consider our wars as an offshoot of capitalist imperialism. But the adamant nationalist war mongers of Germany and Italy indicted capitalism for its ‘bourgeois’ pacifism, contrary to human nature and to the inescapable laws of history. Sermonizers accuse capitalism of disrupting the family and fostering licentiousness. But the ‘progressives’ blame capitalism for the preservation of allegedly outdated rules of sexual restraint. Almost all men agree that poverty is an outcome of capitalism. On the other hand many deplore the fact that capitalism, in
catering lavishly to the wishes of people intent on getting more amenities and a better living, promotes a crass materialism. These contradictory accusations of capitalism cancel one another. But the fact remains that there are few people left who would not condemn capitalism altogether.”

Von Mises was writing in 1947, but capitalism’s standing had not improved any by 1965. By then communism dominated Eurasia and was establishing beachheads in Africa and the Americas, and the West was bracing itself for the next domino to fall. The Union of Soviet Socialist Republics was winning the space race, and, if its threats were to be believed, the arms race. And despite the barbed wire and armed guards required to prevent mass migrations from every communist country, socialism had won the ideological debate, and capitalism had lost it.

Socialism, nearly everybody agreed, was the moral system, even if it was sometimes impractical. Capitalism, nearly everybody agreed, was immoral, or at the very best amoral, even if it was sometimes useful as a practical means of achieving moral ends. But in order to be useful, capitalism had to be transformed—and Lord John Maynard Keynes had shown how. Capitalists would be allowed to own their businesses, provided they ran them for the public good—and the state could intervene to ensure they would.

In December 1965, Time magazine featured John Maynard Keynes on its cover, and declared that: “we are all Keynesians now”. Greenspan was not in step: not with those who promoted Keynesianism as a way of advancing socialism, nor with those who promoted Keynesianism as a way of saving capitalism, nor with those who were apologists for capitalism on religious or altruistic grounds.

Since 1953 Greenspan had been a consultant to some of America’s leading corporations, and a correspondent for publications such as Fortune magazine. As a consultant he had applied his inveterate talent for absorbing masses of data, and had developed it into a tool of economic analysis that was to become legendary. As a controversial writer he had made a name for himself beyond the boardrooms. As a critic of the Keynesian presumption that the economy could be managed in order to mould society, he had been out of step with legions of enthusiastic analysts and politicians who purported to be in control of a booming economy—but this would be remembered during the years of inflation, recession, and Keynes-defying “slumpflation” to come.

In 1967 Greenspan was recruited by Richard Nixon’s presidential election campaign as an economic adviser. Nixon was the first of six US presidents Greenspan was destined to advise. As chairman of the Council of Economic Advisers he advised Ford; as chairman of a commission to save the Social Security fund from bankruptcy he advised Reagan, and as chairman of the Federal Reserve board he advised Reagan, Bush, Clinton and Bush (Carter had no use for him). Of these presidents Greenspan rates Nixon and Clinton the smartest, and Ford the most honourable.

The first half of The Age of Turbulence is autobiographical; and such was the author’s career that it reads like an economist’s fairyland adventure story. For two-score years Greenspan watched the play go on from a box-seat: the OPEC oil shock, the Vietnam defeat, the stock market crash, the fall of the Wall, the Cold War victory, the Clinton affairs, the dot-com bubble, the September 11 attack, to name a few highlights; and he contributed a verse or two.

During the late nineties, a CNBC reporter used to spy on Greenspan as he arrived at the Fed, and zoom his camera in on Greenspan’s briefcase. If it was thin, CNBC argued, the economic forecast was good, if it was bulging it indicated that Greenspan had been studying a lot of data and an interest-rate rise was imminent. Greenspan reveals that the state of his briefcase had more to do with whether he had packed a lunch that day. Weightier than his briefcase were his words—in a long, tortuous speech in 1996 he embedded the words “irrational exuberance”. The next day the two words were emblazoned across newspaper headlines, and so became the catchphrase of the dot-com boom.

The names Greenspan drops add up to a who’s who of the economic world. Even a short list of those he calls good friends includes billionaire investor Warren Buffett, British Prime Minister Gordon Brown, Czechoslovakian president Vaclav Klaus and former Chinese premier Zhu Rongji. Of his teachers, the two that had the greatest impact on Greenspan’s life were his Economics mentor Arthur Burns and the novelist-philosopher Ayn Rand, who, says Greenspan: “expanded my intellectual horizons, challenging me to look beyond economics to understand the behaviour of individuals and societies”.

The second half of The Age of Turbulence is Greenspan’s economic analysis of the state of a new world. In a chapter titled “The Fall of the Wall”, Greenspan describes how astonished Western analysts were to discover how gullibly they had overestimated the potency of the communist economies. The per capita productivity of East Germany, for instance, was not 20 per cent lower than West Germany’s, as had been estimated, but 66 per cent lower. As for the respective productivity of the world’s two superpowers, Greenspan permits himself a moment of exuberance by recording an astounding statistic:

“Throughout the late nineties the [US] economy grew at a better than 4 percent annual rate. That translated to $400 billion or so of prosperity— equal in size to the entire economy of the former Soviet Union—being added to the U.S. economy each year.”

Greenspan relates how Poland’s economic minister, Leszek Balcerowicz, wrenched his country’s bankrupt economy from the hands of central planners and thrust it into the hands of individual Polish citizens. For four decades, the terms of every economic transaction had been prescribed from above, including the price of all goods; but from January 1, 1990, virtually all price controls were lifted. In one “big bang” Poles were freed to buy and sell goods at any price accepted by buyer and seller. Balcerowicz had ruled out a small-step approach towards a market economy, explaining that he had to shock people into making their own decisions. Predictably, prices gyrated upwards. But then the supply of scarce goods began to increase, and prices began to stabilise. “It was a very important day,” explained Balcerowicz in hindsight, when price watchers started yelling, “The price of eggs is falling”. Market forces had begun to work.

The success of Poland’s reforms encouraged Czechoslovakia’s Minister of Finance, Vaclav Klaus, to plan an even more radical program of reforms, which he outlined in an address to a US Federal Reserve conference in 1990. State property would be rapidly transferred into private hands, he explained, vouchers would be issued to every Czech citizen, which they could sell or trade for shares in state-owned enterprises, which could then be traded on a new stock exchange. When Klaus finished his address Greenspan asked him whether he planned to provide a welfare safety net for those who would lose their jobs when state-run enterprises were privatised. Klaus’s answer was terse: “In your country you can afford such luxuries, to succeed we need a clean break from the past. The competitive market is the way to produce wealth, and that’s where we are going to focus.” Greenspan was bemused: “This was the first time in my life that I had ever been rebuked for not sufficiently appreciating the power of free markets. It was a singular experience for an admirer of Ayn Rand.” Klaus went on to become Czechoslovakia’s Prime Minister and then its President.

In a chapter titled “The Choices that Await China”, Greenspan chronicles how:

“[China’s] march to the market began in 1978, when, because of a severe drought, authorities were forced to ease tight administrative controls that had long governed individual farmers’ plots. Under new rules, farmers were allowed to keep a significant part of their produce to consume or sell. The results were startling. Agricultural output rose dramatically, encouraging further deregulation and the development of farm markets. After decades of stagnation, agricultural productivity blossomed.
“Success on the farm encouraged the spread of reforms to industry. Again, a modest easing of constraints produced greater-than-anticipated growth, giving impetus to the arguments of reformers who wished to move more quickly towards a competitive-market template. No advocates ever dared call the new model ‘capitalism’. They used euphemisms like ‘’market socialism’ or, in the famous phrase of Deng, ‘socialism with Chinese characteristics’.”

In a chapter titled “The Tigers and the Elephant”, Greenspan discusses how:

“China’s export-led explosion in economic growth has clearly followed the earlier path of these [Asian] Tigers—particularly Hong Kong, Taiwan, Korea, and Singapore. Their model is simple and effective. The developing nation opens up part or all of its economy to foreign investment to employ a low-wage, but often educated, workforce. Sometimes it is politically easier to set up designated geographical areas such as China’s Special Economic Zones to welcome foreign investment and technology. Critical to this model is that investors receive assurances that, if successful, they will be able to reap the rewards. This requires that property rights be respected by the developing country.”

Even more intriguing than the strides of the Tigers, implies Greenspan, is the tramp of the Elephant:

“Perhaps more than any of the other major countries addressed in this book, India symbolises most powerfully both the productiveness of market capitalism and the stagnation of socialism. India is fast becoming two entities: a rising kernel of world-class modernity within a historic culture that has been for the most part stagnating for generations.”

Among the ideas Gandhi and Nehru inherited from the British was Fabian socialism, which they believed would eliminate the poverty of the many by eliminating the wealth of the few. The result was multi-layers of suffocating regulation administered by the “license raj”. The result was the “Hindu 3 per cent” growth rate, and generation after generation of poverty. A turning point came in 1991, when Leftist Prime Minister Narasimha Rao, to everyone’s surprise, appointed reformist Manmohan Singh as finance minister, whose deregulations gave the economy a breath of freedom. A dynamic new section of the economy leapfrogged twentieth-century manufacturing to grasp twenty-first-century high-tech services; which, in turn, had modernising effects throughout the economy. The regulators still have the Indian economy by the throat, but a loosening of their grip has given it a whiff of freedom, which can be as seductive as the scent of a woman to a blind man. By 2006 India’s real growth rate was 9 per cent, and 250 million people had been lifted out of extreme poverty.

In a chapter titled “The Modes of Capitalism”, Greenspan contemplates the present state of the world:

“While central planning may no longer be a credible form of economic organisation, it is clear that the intellectual battle for its rival—free market capitalism and globalisation—is far from won. For twelve generations, capitalism has achieved one advance after another as standards and quality of living have risen at an unprecedented rate over large parts of the globe. Poverty has been dramatically reduced and life expectancy has more than doubled. The rise in material well-being—a tenfold increase in real per capita income over two centuries—has enabled the earth to support a six-fold increase in population. Yet for many, capitalism still seems difficult to accept, much less fully embrace.”

Greenspan’s book is a finely tuned testament to the triumph of free markets over centrally planned economies. The results of the twentieth century’s experiments were decisive and overwhelming. But this highlights what I consider to be the century’s paradox.

The political paradox of the twentieth century was the triumph of its failed ideology, capitalism, and the failure of its triumphant ideology, socialism. Absolute socialism, such as communism, failed absolutely. Less pure forms of socialism, such as democratic socialism, failed less. Or, to put it another way, the more socialism was contaminated with private enterprise, from Lenin’s “New Economic Policy” of 1921 to Tony Blair’s “New Labour” of 1995, to the “economic conservatism” of post-Whitlam Labor politicians, the more success was achieved in its name. Or, to put it another way, the triumphs of the twentieth century belonged to the ideology that dared not speak its name.

By the end of the century, reality checks had pushed everyone with eyes to see and minds not corrupted by their PhDs to overtly or covertly recognise that if human well-being was the goal, capitalism was the system that delivered. Anyone genuinely concerned with the banishment of famine, the prevention and cure of disease, the relief of poverty, the minimisation of pain and maximisation of pleasure, the opportunities for and of prosperity, the enjoyment of a long life, the freedom to pursue happiness on earth, was pushed by experience to advocate capitalistic rather than socialistic means.

And yet, regardless of how many blessings capitalism bestowed, it was not awarded its rightful place on the moral high ground. And regardless of how many horrors socialism imposed, it was not deposed from its farcical place on that high ground. In this sense capitalism failed and socialism triumphed.

Despite all the evidence of the twentieth century, the Left still feels free to condemn capitalism as evil, albeit as sometimes necessary; and to promote socialism as the ideal, albeit as sometimes impractical.

Despite all the evidence of the twentieth century the Right can only defend capitalism as a means to a redeeming end, albeit a sometimes shabby means; and can only condemn socialism as impractical, albeit as sometimes well intentioned.

This, I submit, is a travesty. How can the economist’s most practical tool, capitalism, not be the moralist’s ideal?

The practicality of a tool is judged in relation to the goal to be achieved. If the goal is selfless sacrifice to society as dictated by the proletariat, or submission to the state as embodied by the Fuehrer’s will, or equality of outcome regardless of input, or God’s kingdom as revealed in scripture, or the pre-human ecological balance of the planet, then capitalism is not the practical tool for the job—quite the contrary. The triumph of capitalism as a tool for delivering human well-being will impress only those who genuinely hold human well-being on earth as their goal.

But even among those who genuinely applaud capitalism’s practicality in delivering earthly human values there is a residual expectation that socialism will return as a renewed force. In “A Conversation with Geoffrey Blainey”, in the October 2006 issue of Quadrant, our most distinguished living historian was prodded into an assessment that capitalism had been “an enormously productive force” and a better bet than communism. And yet Blainey predicted that communism “will be resurrected” sometime in the next fifty years, by intellectuals, followed by the idealistic young.

I asked a Russian immigrant about his experiences of communist life. After describing some dismal and harrowing aspects which reminded me of the movie The Lives of Others, and discussing the appalling ignorance of young Australians as to what communism was about, he sighed and ventured that people will always return to socialism, in search of a “shining ideal”. In an eloquently logical and factually unassailable defence of capitalism presented in a debate at Melbourne University (published in the summer edition of Policy), Peter Saunders conceded that:

“Capitalism lacks romantic appeal. It does not set the pulse racing in a way that opposing ideologies like socialism, fascism, or environmentalism can. It does not stir the blood, for it identifies no dragons to slay. It offers no grand vision of the future, for in an open market system the future is shaped not by the imposition of utopian blueprints, but by billions of individuals pursuing their own preferences. Capitalism can justifiably boast that it is excellent at delivering the goods, but this fails to impress in countries like Australia that have come to take affluence for granted. It is quite the opposite with socialism. Where capitalism delivers but cannot inspire, socialism inspires despite never having delivered.”

And yet there is nothing about socialism that is inherently more romantic, blood-stirring or inspiring than capitalism. Capitalism carries the romance of liberty, the blood-stirring drama of creative enterprise, the inspiration of unlimited progress. What it doesn’t carry is the pseudo-romance of emotional licence, the mesmerising inspiration of mass rallies and protests, or the literally blood-stirring power to impose the allegedly moral life on everybody at the expense of their property and liberty.

The reason capitalism is considered unromantic and uninspiring is that it has traditionally been presented as an amoral tool or necessary evil, rather than a moral ideal. The problem with this approach is that morality sooner or later trumps practicality. The practical effects of capitalism may be acknowledged, but moral ideals are something else entirely. And yet capitalism represents a revolutionary, modern, scientific, rational yet romantic ideal that arose out of the Enlightenment. This, however, puts it at odds with traditional moralities which came down to us as commandments from revealers or injunctions from leaders—and which Marx simply co-opted and secularised. (For all his condemnation of religion, Marx’s “from each according to his ability to each according to his needs” is just a materialist’s version of “love thy neighbour as thyself”.) In particular, it was the altruistic precept that the interests of individuals here and now are subordinate to the interests of collectives of the future that undermined the moral standing of capitalism.

The reason capitalism triumphed as a practical tool for the delivery of earthly human values was that it is based on human nature. Consequently, only a morality based on human nature can properly justify and defend it.

A morality based on human nature leads to a political system that protects human beings’ primary means of survival—their rational productivity. Humans survive and thrive by thinking rationally and acting accordingly to produce pro-life values—but rational thought is carried out by individuals, they can act on their judgments only if they are free, and they can produce pro-life values only if their right to what they produce is protected from the wielders of force.

A political system based on human nature will guarantee every individual the right to act freely, provided he does not infringe on the right of others to do likewise. Every participant in a capitalist economy uses his mind and acts on his judgment within the sphere of his opportunities, interest and influence. Every transaction in the vast and complex network of producers, service providers, employers, employees, consumers and investors is voluntary, so it will only take place if both parties expect to be better off after the transaction than before it.

If anyone anywhere along the production-to-consumption line can improve the efficiency or productivity of any step he will improve his profit or market share accordingly; if he rests on his laurels, he may lose it to a more efficient or productive competitor. Consequently, the more efficient or productive the individual, the more influence he will have within the network, due to the greater service he can offer, the greater buying and hiring power he may acquire, and the greater ability he may have to persuade and inspire. In this way, the capitalist system is geared towards ceaseless improvement of its wealth-creating efficiency and productivity.

A capitalist economy delivers the goods by releasing the dynamic power of the human mind to solve the problems of human survival. Conversely, systems of compulsion, where the dictator or central planner or elected politicians decide on the actions required, and the rest may act only within the parameters so imposed, loses that power. The more the compulsion and control and state ownership, the more power the economy loses.

If human life on earth is the standard, a political system that protects the human means of life sustaining wealth creation has to be evaluated as morally good. But to defend it morally, it is important that the causal sequence of wealth creation be understood and honoured. A moral system does not try to guarantee life-sustaining wealth (as the communists amply demonstrated, it can’t); it protects every human’s liberty so they can produce or earn life-sustaining wealth.

The consequence of ignoring, or attempting to reverse, the causal sequence involved in an economy was illustrated in the November 2007 Quadrant editorial. Without implying any necessary agreement between that editorial and this article, I quote:

“It is easy to legislate for a minimum wage … but the results will be unlikely to bring about a social utopia—on the contrary, there will be either overt or hidden unemployment.
“Of course, the good Christian knows what to do next: legislate for job security at the same time. Again, the result will be what we have seen in countries like France, where such legislation exists: an intractable and growing pool of unemployed, forming an underclass. Christians know what to do about that—let us create jobs for those who find difficulty getting into the regular workforce, and pay wages out of general tax revenue. Again, the result will be much the same as a massive increase in social welfare payments, as well as the creation of yet another problem: a large pool of government employees with nothing useful to do. There will also be increasing resistance from those in real jobs and paying heavier and heavier taxes.”

The above was presented to illustrate the folly of public policy makers who don’t understand economic ramifications. But the folly is rooted in the presumption that policy makers can and should circumvent the causal sequence of wealth creation and use the force of law to impose an effect they consider morally desirable. They may well appreciate the productivity of capitalism, but as long as their appreciation is limited to its practicality as a tool, their morality will trump it. They will soon conclude that when in doubt due to the complexity of the dismal science they must enact policy that can at least be seen to have its heartfelt intention in the right place.

“We simply don’t have to choose between Friedrich von Hayek and Leonid Brezhnev,” declared Kevin Rudd a few weeks ago, we can move beyond the “straitjacket” of such “paradigms”, our “reforming centre” government can impose just the right controls that will curtail carbon dioxide emission but not productivity, and allow the capitalists just enough freedom to produce the wealth socialists need to redistribute to “working families”. But the PM is wrong. We simply do have to choose between centrally planned dictatorship and economic freedom. Controls create dislocations and breed more controls, freedoms create opportunities and demands for more freedoms, and in any mix it is the freedom part that improves our ability to live on earth and the dictatorship part that diminishes it. It is the freedom part that is moral and the dictatorship part that is immoral.

If Christians, or anyone else, believe the poor should be given a helping hand, they are at liberty to give it. But by what right do they propose that the government use force to take the wealth produced by others and give that? Or to dictate the terms of economic transactions beyond banning force (theft or fraud or breach of contract)? As the twentieth century in general, and the horrors of communism and fascism in particular amply demonstrated, socialism is not merely impractical but immoral—immoral by a code based on human nature.

Capitalism, I submit, must be recognised not only as a practical tool, but as a moral ideal. If human life on earth is the standard, a moral system of government must protect every individual’s right to life, liberty, pursuit of happiness, and property, from criminals and foreign aggressors and from the government itself.

The political paradox of the twentieth century reflected an old dichotomy between practicality and morality—but there is no such dichotomy between practicality and a rational morality. There is no dichotomy between capitalism and what Ayn Rand called “a philosophy for living on earth”.