Where's the beef (with capitalism)?

Over at Arm Your Mind for Liberty, a recent article takes issue with capitalism. I read this article with great interest because (I assume) it grew out of a discussion between myself and the author as well as some others regarding capitalism. When I read it, though, I couldn't find that the "beef" is really with capitalism at all. Before going too much further, we should probably start with a (common) definition of capitalism, but I'm not going to attempt to define capitalism in great detail. It seems that if you ask ten different people, you'll get ten different answers about what capitalism means to them as the linked article states:

‘Capitalism’ is a funny word. It means so many different things to so many different people, that it’s become entirely useless as a basis for any kind of rational or constructive communication. [...] Some will mention wage labor, others exploitation and yet others will talk of free trade. But I think the defining feature is the ability to accumulate lots and lots and lots of stuff (capital).

Fair enough. The ability to accumulate lots (and lots and lots) of stuff, or capital, is most assuredly a characteristic of capitalism and, as we will see, the article's main problem with it, so let's focus our attention there. Before we do so, the original article takes a slight detour:

And then, most importantly, [a characteristic of capitalism is] to have a third party protect your ability to control that stuff even when you’re not using it. That third party, of course, is the state (the government). [...] Without this ability to accumulate and have your title to said stuff protected at little to no cost to yourself, things like wage labor, exploitation and managed trade could not happen. These all depend on the power imbalances that stem from the state protecting capitalists’ control of their property.

Whoa, wait just a minute! Now, we're not talking about capitalism any more. We're talking about a state-directed ("managed trade") and state-enforced ("stuff protected at little or no cost to yourself", presumably via taxation on the whole population and "power imbalances" in the form of state-chartered police and enforcement mechanisms) economic system, our current system, what many call crony-capitalism. So, we can already see that the author's problem is not with capitalism, per se, but with crony-capitalism and the state enforcement of it. The author continues by stating that he doesn't "think capitalism would survive without the state".

But we're not talking about capitalism any more. We're talking about the state. The author offers no evidence or theories as to why capitalism cannot or will not exist without a state other than to say, "I don’t think a non-aggressive organization will go to the same lengths as the state to protect property". This is demonstrably false, however:

Just think for a moment about the following:

• Who is responsible for protecting you at most major shopping centers? Ever see a private mall cop? I bet you have.
• How about casinos? Almost all casinos have private armed security.
• What about at the dance club? Ever see a bouncer throw out a belligerent drunk?
• What about at the university? You’d be hard pressed to tell the difference between a public safety officer and a cop. Many universities have private police forces.
• How about warehouses, ports and apartment complexes? It is not uncommon to have private security guards protecting all of those. My apartment complex has its own security.
• Airports used to be entirely protected by private security – and guess what? No one was complaining about being molested. Further, after 9/11, it was the airlines who made real improvements to security by putting in steel cockpit doors and arming the pilots.
• Banks? - Almost all bank cash transfers are dealt with by way of private armored car, and many banks have private armed security as well.

Now I've been drawn into a digression about capitalism on a larger scale. Let's return to the accumulation of stuff in the original article and look at an example provided by the author describing his issue with it: "if someone fences off 1,000 acres of land but consistently uses only 2, I don’t consider that legitimate". This situation draws its basis from the Lockean idea of homesteading, that one becomes an owner of land by "mixing" his labor with it. I'm not going to argue whether fencing 1,000 acres constitutes a mixing of labor. A debate on such a matter is not likely easily resolved.

Instead, what if we arrived at this situation differently, voluntarily? Let's assume two people and call them A and B. Each of them own 501 acres (via legal means, homesteading or otherwise) and farm the entirety of their respective plots. A and B both consume only what they need to survive and sell the rest of their produce into the marketplace. A saves the proceeds from his sales under his mattress while B spends his money on vacations and house keepers and other consumable goods and services. (One has to wonder, at this point, if B has a claim to A's money since storage under A's mattress is not "productive" use in B's mind.) At some point, bad weather conditions befall A and B. A, having saved his money, is able to buy what he needs from the marketplace, but B has nothing. Seeing B's plight, A offers to use some of the rest of his savings to buy 499 acres of B's land. B, needing to feed himself and his family, reluctantly agrees. Now A owns 1,000 acres, and B owns 2. We've arrived at the evil capitalist situation described by the author in the original article, but we've arrived by completely legal and voluntary means.

Let's assume that A, having just bought the land and exhausting much of his savings, does not have the capacity to expand his farming operations into his newly acquired 499 acres. When the weather improves, does B have a legal right to reacquire the land, via homesteading? What if B had kept the land but sold his farming equipment to A to pay for his food? Now that B is incapable of farming his land (and has no reasonable prospects for doing so since he has no farming equipment and no savings with which to buy any), can A also freely acquire B's land under the homesteading principle?

The author of the original article seems to think so: "If someone needed land and had a solid intention to use it to sustain his life, I would support that person in any attempt to homestead a reasonable parcel out of the 1,000 acres". B, in our example, has every "intention to use [the land] to sustain his life" as well as others'. The author goes so far as to suggest that force is an appropriate means to affect this outcome:

In a stateless society, people would be freer to rise up against people who attempt to control more property than they actually use. Acting in concert, great numbers of people could, in the worst case, purchase arms, form a defense force and fight capitalists on a more level playing field. Squatters, worker-owned cooperatives and similar direct actors would take control of more of the capitalists’ property. In the process, their power would be eaten away.

In fact, A has saved B's life as well as his family's, and in return B should have the right to use violent force to take back from A what was voluntarily given/traded (by B himself!) to A? What the author is suggesting is either a clear violation of the non-aggression principle or will require a state, with a legal monopoly on the use of violence, to forcibly give A's land to B.

The only other argument in favor of what the original author is suggesting hinges on the word "reasonable". Perhaps 1,000 acres is an "unreasonable" amount. Much like the hypothetical debate about homesteading to which I alluded earlier, a common definition of what is "reasonable" is not easily resolved. As an example, here are a bunch of pro-gun people on a pro-gun forum disagreeing about what "reasonable" gun laws would look like. At any rate, the example I gave above works with any sized parcel of land. In fact it becomes even more difficult to reason out on a smaller scale. Consider if A and B each owned two acres and A bought 1 acre from B. A is in a much better position to farm an additional 1 acre than he is an additional 499. What if A incrementally continues the process, voluntarily acquiring parcels from C, D, E, etc. in a similar manner? When does the amount of land that A owns become "unreasonable"? Does the situation change if A rents the land back to B, C, D, E, etc.? Who makes that decision and who enforces it? What authority does this entity have when A can show that his property was acquired legally? None, according to the author of the original article: "If a person prospers legitimately, I have no basis to challenge any accumulation of wealth." Wait, what? Does B have a claim to A's legitimate accumulation of wealth (in the form land) or not?

In short, capitalism, true capitalism, is not an economic system that is imposed on anyone. It is an economic system that arises from, or rather is the result of, voluntary interactions in a truly free society. In fact, the economic system proposed in the original article is not only incoherent but, in the author's own words, requires violent enforcement. I suggest that the author's "beef" is not with capitalism but with a free and voluntary society.

That triple-A credit rating

Despite a debt deal, the US federal government still faces a downgrade of its credit rating. In my opinion, rating the creditworthiness of a government is all political theater. However, during the course of discussion, I've noticed a curious argument being made with regard to the possible downgrade:

Behind all too many of market moves in government debt of late has been a report from one of the major credit ratings agencies. S&P is the biggest and arguably the most influential, fast followed by Moody's Investor Service and then their smaller rival, Fitch Ratings. In national capitals, they are alternately vilified by politicians or held out as just arbiters for denouncing government profligacy. 

Yet there is an overwhelming irony in their new-found prominence. These are the same firms that many blame as prime instigators of the 2007-2008 credit crisis for freely giving out top ratings to ultimately worthless structured mortgage products, allowing the credit bubble to form. Now they sit in judgment of the countries that had to ruin their public balance sheets to prevent financial collapse by saving the banks shattered by those bad instruments once blessed by the agencies. 

"The ratings agencies failed the world economy in spades in the past," said Lord Peter Levene, chairman of the Lloyd's of London insurance market and a former senior adviser to the British finance ministry. 

"Their track record has not exactly been stellar."

The argument seems to be that because the ratings agencies all "missed" the financial collapse in rating junk financial instruments as AAA, then their credibility in this matter is nil. I don't follow this line of reasoning for a couple of reasons:

1. The main issue that people seem to have with the credit rating agencies is that they waited too long to warn the investing public about the looming financial catastrophe that struck in 2007-2008 and issue downgrades. Shouldn't those people now be applauding these same agencies for trying to correct their failures by getting out ahead of possible new problems?
   
2. If credit rating agencies tend to overrate financial instruments, an assumption that seems to underlie the argument, then shouldn't people take it very seriously when an agency actually does issue a downgrade?

You can't have it both ways. You can't simultaneously decry the agencies for missing the financial collapse in 2007-2008 and then point at that incompetence as a criticism for downgrading a financial instrument that everyone agrees is in trouble.

Gresham's law, extended by force

A few weeks ago, a man by the name of Bernard von NotHaus was in the news. If you Google the phrase "unique form of terrorism", you can read all about him. In short, he minted coins in a variety of metals and offered to "exchange" them for Federal Reserve Notes -- those pieces of paper you carry around in your wallet, usually referred to as "money". (His original site is here, but Wikipedia is probably the best place to start if you want to know more.) In 2007, the government arrested Mr. von NotHaus and charged him with a number of crimes amounting to "counterfeiting". He wasn't actually minting pennies, nickels, etc.; he was simply minting coins in denominations similar to U.S. currency that the government claims bears too close of a resemblance to official U.S curency. The government accused him of trying to "replace" the official currency of the U.S. He was eventually convicted of these "crimes", with the government going so far as to declare him a terrorist, and his case is now on appeal.

This whole episode seemed to me to be an interesting application of Gresham's law. Gresham's law is the idea that "bad" money chases out "good" money. What that means is that if there are both "bad" and "good" money in an economy, the good money will eventually disappear from that economy. Since anything could be money (as Lew Rockwell points out: shoes, shells, flash drives, or books) and people can assign whatever value they want to that money, how do we define good vs. bad? That's where the government comes in. Instead of the people assigning value to their money, the government has assumed that role (and the authority to occupy that role). Thus, Gresham's law is more accurately stated as (looking again to Wikipedia): bad money drives out good if their exchange rate is set by law.

Let me give you a personal example of how this is so. Just last week, I was cleaning up one of the bedrooms in my home when I came upon a container full of coins. They weren't particularly special in any way; it was just the type of accumulation that occurs when you come home at the end of the night and toss the change in your pocket into a jar. Thinking I might come across some rare coins -- I was hoping for some old pre-1964 silver coins -- I decided to sort through them. I happened to know that pennies used to be made of copper and nickels, of all things, of nickel and copper. A quick Internet search turned up the fact that pennies were made out of copper up until 1982 and that nickels are still made out of copper and nickel. It also revealed that copper pennies are currently worth approximately 3 cents each and nickels about 6 cents. These coins are worth more as metal than the value given to them on their face. You can probably guess what happened next. I put all of the nickels and pre-1982 pennies into a separate pile. The rest are slated to go off to the local Coinstar machine.

Let me give you another, more obvious example. Let's say the government issues two one ounce coins, one in silver and one in gold, and stamps $50 on their respective faces so that each can be exchanged for $50 in goods. Would you spend the silver coin or the gold coin? Hopefully, you answered, "silver". At current spot prices, an ounce of silver is worth just under $40 while an ounce of gold is a bit over $1,400. When a monetary unit's face value exceeds its intrinsic value, as the silver does in the example, it is "bad" money. It will be spent, i.e. stay in circulation, as the spender believes he/she is getting a "deal" since the seller is forced by law to value the unit greater than the worth that would otherwise be assigned to it by the "market". Gold, whose intrinsic value exceeds its face value in the example, would leave circulation as people would hoard it and/or try to sell it for its intrinsic worth (i.e. they could obtain it for $50 but sell it for almost 30 times as much). This would likely remain true so long as the gold's intrinsic worth exceeds the face value, no matter how slight that excess might be. Even if gold was intrinsically worth less than its face value but still more than the silver, you would still find the silver to be in much greater circulation than the gold for the reasons explained previously.

So, what does all of this have to do with Mr. von NotHaus's situation? Let's first (try to) understand exactly what it was he was doing. To the best of my understanding, a silver Liberty Dollar one-ounce coin would be minted with some denomination on it, let's say $10. It would be produced so long as the intrinsic value of the silver in the coin remained under $10 as denominated in official U.S. currency and sold/exchanged for $10 in official U.S. currency. When the intrinsic value of the coin exceeded $10 (in U.S. currency, due to inflation of the U.S. dollar), Mr. von NotHaus would mint one-ounce silver coins with $20 stamped on their faces (and sell them for the $20 in U.S. currency). He would also exchange existing $10 coins for $20 coins. Based on the previous paragraph and definition(s), Mr. von NotHaus was actually creating his own form of "bad" money, with one important difference. There was a limit to how bad his money would get.

Let me explain this with another example. Let's say that you have a $10 bill (official U.S. currency) and a $10 Liberty Dollar which, for the sake of argument, is accepted at the stores at which you shop. Let's further assume that the food you'll eat today costs $10. Now, let's say that you stick both the coin and the bill under your mattress and wait some amount of time, during which the dollar inflates due to the Federal Reserve's money printing processes. You dig your coin and your bill out from under the mattress and go to the store only to find that the $10 worth of food you want to buy now costs $20. The $10 bill will only buy you half of what you want. On the other hand, Mr. von NotHaus will exchange your $10 Liberty Dollar coin for a $20 version, and you can buy all of your food.

As I mentioned before, Mr. von NotHaus's Liberty Dollar is still "bad" money since its face value would always exceed its intrinsic worth. However, at the point at which it becomes "good" money, the holder would actually be able to exchange it for more "bad" money, i.e. when a $10 piece's intrinsic worth becomes worth, say, $12, it could be exchanged for a $20 piece, a much better option than selling the coin for $12. In this way, while "bad" by our earlier definition, this money is a "better" option than the official U.S. currency which always loses value over time.

If the Liberty Dollar was "better", wouldn't it have eventually been naturally forced out by the market via Gresham's law? It's hard to say; that's (unfortunately) the way markets are. Markets are made up of individual actors, or people. People may have seen the Liberty Dollar as a better preserver of their wealth since it could be exchanged for greater denominations as the U.S. dollar fell in value. Had that been the case, the Liberty Dollar may have taken off. And this would not necessarily have been a violation of Gresham's law. It turns out that "good" and "bad" money (under Gresham's law) can only be compared when their values are both fixed by (the same) law. While von NotHaus may be creating "bad" money in an absolute sense, it would likely have been viewed as "better" than the current U.S. currency. Since the exchange rates of both monetary units are not set/fixed by (the same) law, it may have been possible for the "better/good" money to chase out the "bad".

Thus, the U.S. government extended Gresham's law by force. If another monetary system -- one not controlled by the federal government -- took off, the federal government's ability to print money to pay off its debt and fund its operations would have been severely limited, if not outright destroyed. I'm not sure exactly how to sum up the idea that challenges to a government-created fiat money system will be put down with force in a neat "law" like Gresham's, but if you have any ideas, feel free to share them in the comments.

***

Lew Rockwell wrote about this particular issue and had a few choice quotes:

A nation that is confident about its money’s future would not fear currency competition. A nation with a dying money uses every possible means to crush the competition.

and

[...] when the dollar became all paper, there has been a sense that its viability needs the backing of federal guns in order to thrive. This attitude is inconsistent with freedom. The right of private coinage is an essential part of free enterprise. Currency competition, especially in a digital age, is something that every country needs.

***

Bill Rounds also wrote about this issue. I think he makes a good case that Mr. von NotHaus drew the ire of the federal government, not necessarily by competing with the government, but by making his coins look a little too similar to real U.S. currency. He points out:

There are all kinds of alternate currencies in circulation in the US. Ithaca Hours, Potomacs, gift certificates, and Chuck E. Cheese tokens can all be used to barter and transact instead of legal tender coins and bills.

None of those coins have been or are being forced out of existence by the federal government. Arguably, they aren't trying to compete with the government, either, though.

It's not clear to me, from what I've read, that Mr. von NotHaus intended to defraud people or imply that his coins were legal tender or official U.S. currency. From what I can tell, he was simply trying to give them the same value as U.S. currency to make them easy to understand and trade. In the end, I have to agree with Lew Rockwell when he points out that the U.S. Constitution nowhere prohibits private coinage and even points out that it was commonplace during the settling of the West. Mr. Rounds even acknowledges that the law is, at best, nonsensical:

[...] the state of monetary law is almost nonsensical. Court opinions, federal statutes and the Constitution are logically inconsistent with one another.

***

Finally, I hope that the example I gave of a $10 Liberty Dollar round being exchangeable for a $20 round as the U.S. dollar depreciates drives home the idea of the inflation tax. By depreciating the dollar, the government is essentially stealing money from people who hold cash. This is why our economy is driven by consumption instead of saving. If your dollar is worth less tomorrow than today, then it makes sense to spend it instead of saving it.