Jan 05

The Greatest Irony of Economic History

The Greatest Irony of Economic History

By James Hahn © 2012 and prior.

Much criticism is offered up from time to time about the shortfalls and negative aspects of modern capitalism.  Many would seem to abandon the free market capitalist system of generating and distributing wealth, or at least the productive fruits of the system we call capitalism, for some notion of a socialist economy where all wealth is shared equally, more or less.  It usually winds up being less because of the inherent corruption it brings with it.  Those charged with distributing the wealth equally never seem to get it quite right.  Funny that.  It seems managed economies never quite work out as intended.

But lets take a more circumspect look at the two systems taken to the extreme.  The Marxist model of a socialist economy holds that the wealth producing engines of said economy should belong to the people.  The Marxists called it the means of production.  In practice, this meant that the State should hold such industries, the means of production of goods and or services, i.e. the wealth of the nation, in trust as a surrogate for the people.  Individual ownership was to be eschewed across the board.  The people were deemed inherently corrupt or corruptible and only a select elite of true believers could be capable of managing such industry and the people in any equitable fashion.  The individual and the individual family unit were thus disenfranchised economically in favor of the common good, the collective, the communist way, the manageable masses.

Very idealistic, very noble of intent, some might say, but also very vulnerable in itself to corruption of both the hierarchy and the masses at once.  The same lesson that was learned over 70 years by the Soviets, ironically, was learned by William Bradford, Governor of the Plymouth colony, in much less time during the early 17th century while searching for a solution to the economic problems of the new colony at the Plymouth Plantation.

“For their first two years in Plymouth, the settlers conducted an experiment in communalism. It wasn’t until 1623 that they divided the land into individual plots (with each family working their assigned plot) and could look forward to the kind of bounty that many of us enjoyed yesterday.”

He found that privatizing property and eliminating the mandatory communal dispersal of collective resources with the “no work, no eat” principle derived from the Bible stimulated production and rescued the colony from starvation and ruin. (ironically, this admonishment was also used by Lenin during the early days of the communist revolution and the establishment of the communes.) This epiphany took only about two years to prove. Or so the story goes. The plots were not actually privatized until by individual usage and productivity granted ownership by acknowledgment .

Communists and socialists learn much more slowly due partially to the enabling productive advantages of technologies developed and borrowed from Western societies.  The subjects, already subdued by the authoritarian rule of the Czars and previous oligarchs, seemed more willing to submit to ongoing oppression rather than risk the heavy hand of state authorities. Those that did not, were simply re-educated or liquidated. (some by the millions) But when the State pretends to usurp responsibility for the people it must also usurp corresponding authority over them, for authority cannot be separated from responsibility.  However, such burden requires the establishment of enormous bureaucracy to manage such duty and the people cease to be, or never become, individual agents free to prosper by their own efforts.  Instead they become, or remain, only members of the masses to be managed as liabilities of the State rather than assets of the economy whose talents and efforts are naturally rewarded as their productivity provides.  (The current Chinese model seems to have discovered, for the time being,  a way to frustrate this mechanism while retaining absolute political power.  Time will tell. It may be only an illusion.)

But the rewards for diligent labor and effort in a free society are always uneven.  Some are able to benefit far greater than others.  Is there a remedy in a free economy that has the potential to include everyone in the benefits of the wealth producing engines of the economy as a whole and insure a greater distribution of the fruits of production?  Of the wealth of the Nation?  Yep. It’s called Capitalism. and it works like this.

We must think about it using the same language Marx used to describe his Communist utopia.  The fundamental cornerstone of communist economic theory required that the people should own the wealth of the nation, the means of production.  That wealth was produced by the various essential engines of production including agriculture.  The people then, should own the means of production, not the so called bourgeois capitalists of industry. Carried even further than Marx intended, all private property was to be eliminated and the needs of the people were to be provided directly by the state. The State, then, was to become the surrogate of the people and assume ownership of all production and “wealth” distribution. The consequence, however, was greatly reduced incentive and much lower productivity to be shared.  But there is another way.  And this is the great irony of economic history.

When a small Capitalist company that produces goods and or services, i.e. wealth, desires to expand its business capacity to produce more wealth and greater variety it may go to the people to raise capital for that purpose.  It may apply to the government to issue for sale on a public exchange certificates of ownership in the company or corporation.  The capital raised may then be used for such purpose.   To those of you who have never seen such a certificate of ownership i.e. a stock certificate, I will describe it for you.  (I hope to have a graphic of an actual certificate posted here in the future.)

The Stock Certificate of Public Issue and Individual Ownership. (description)

At the top of the stock certificate is the name of the company or corporation, a means of production of goods and/or services.

On one corner is the name of the individual or individuals who bought and own the certificate of ownership of the company, a means of production of goods and/or services.

On another corner is the number of equity shares of ownership represented by the certificate, a means of production of goods and/or services.

And finally, somewhere on the face of the certificate of ownership of the company, a means of production of goods and/or services is the word “common”. This means that the certificate is the commonly issued instrument of ownership of the company.  That word also means that the owners named on the corner of the stock certificate own the number of equity shares stated on the certificate in common with everyone else who owns common equity shares in that company, a means of production of goods and/or services.  This represents the communal but also individual ownership in this company of those who are entitled collectively but as individuals to share in the wealth that company produces and the value it represents and distributes.

This is the real practice of true economic communism or communalism.  This is the common ownership of the means of production by free individuals participating in a free and open economic system we call Capitalism. And indeed, this is the great irony of economic history.

Again, we Americans, as a free people, can elect voluntarily to participate, along with millions of our fellow sovereign citizens, in the ownership of the means of wealth production and distribution.  We Americans, then, are the true default proletariat practitioners of economic communism. And always have been.  Sort of takes you breath away, don’t it?

That this fundamental and efficient mechanism has not been employed ubiquitously by ALL citizens in favor of artificially contrived Socialist alternatives, such as Social Security, Medicare, State owned or public pension funds, labor unions  and other indirect substitutes for equity ownership have caused enormous burdens on taxpayers and businesses.   Many of these extra equity funding mechanisms will and are failing to accomplish their intent, leaving millions without ownership of any wealth producing assets to sustain them.  The common reason, they rely only on the transfer of earnings from the labor of others. No equity is retained.

I make no apology for the redundant language used herein.  It was purposely employed to imprint on the mind of the reader the essential elements of these ideas.  Capitalism created a mechanism by which any individual that could accumulate some savings could buy equity shares in any publicly traded corporation or an index thereof.  Americans and their governments simply have not taken full advantage of this mechanism.  The duty of the state of a free people is to enhance and facilitate the ability of the individual to exercise responsible authority over himself and protect him from any and all fraudulent aspirations of others.  This includes the facilitation by which the individual and individual family unit can and should accumulate adequate wealth, immune from the fickle vagaries of politicians, to ensure the economic destiny of himself and his family.  As such wealth is passed from generation to generation no public subsidy is required.     theBushwhacker


Examples of growth of a single deposit into an inviolate tax free retirement trust for a newborn child over 65 years:

Note: At present each child born in the United States under our existing entitlement system immediately poses an economic liability to the economy and to the state going forward.  The following proposal converts the newborn child into a economic asset to the nation as he or she grows to retirement age by pre-funding his retirement portfolio and giving the individual ownership of his or her economic destiny using assets of the means of wealth production.

Currently the average Social Security check sent out from the Treasury is about $1000.00 or about $12,000 per year per recipient.  (Since this is an approximate average we must assume that there are many recipients that receive much less than this.)  But all of them will receive it year over year as long as they live.  Here is the alternative.  See if it makes more sense to you than what we are doing now.

For an individual born today a single one time deposit of $12,000 would grow, at the historic rate of the S&P 500 of 8% to $1,785,000 by age 65.  The same deposit at 7.5% would grow to $1,320,000. Both would require no further additions of capital.   Alternatively, if the average rate of return was 8% and the individual contributed an additional $1000 per year at age 65 he or she would be worth $3,780,000 after a total contribution of $72,000 over his or her lifetime. In each case the spouse would be worth a like amount at the same age.  The surviving spouse would inherit all thus maintaining the existing standard of living.  Upon the death of the survivor their progeny would inherit, tax free, the remaining assets into their own inviolate trusts and so on for generations to come.  Their trust would be equity based on ownership of the means of wealth production, not the ownership of the labor of any other party, thus making the child, upon birth, a future economic asset to the economy and his fellow citizens in retirement, rather than an economic liability to be managed by the State.(The above calculations assume reinvestment of dividends.  It should also be noted that productive sector equities tend to increase in value along with inflation, albeit lagging somewhat.  Also, the index fund utilized, while modeled after the S&P 500 should contain both domestic and international dividend paying equities.)

But what about the cost?  At present about four(4) million children are born in the US each year.  4,000,000 X $12,000=$48,000,000,000 (billion) per year of outlay to be repaid by the recipients by any of  one or more methods. e.g. Parents or relatives could reduce or resolve this debt at birth or, as the child enters the age of majority and the productive work force or other service (military?) or the generosity of family, as a very low interest liability against his ongoing Social Security debit etc. with the goal of having completely repaid the obligation to the Treasury by the age of 30.  By this time the system should become self-funded from the return of premiums on the grant.  There are numerous permutations beneficial to the individual as well as a few restrictive regulations that need apply.  However, compare this pre-emptive method and costs to the current growing and ongoing liability we now face and must deal with for many years.

In 2009 there were more than 51 million Americans receiving $672 billion in Social Security benefits.  This number will grow substantially in the next several years.  Currently this amounts to a net ongoing debt obligation liability of nearly $700 billion per year and growing over time will exceed over one trillion dollars a year.   Pre-funding an equity based plan as just described would, over the rest of this century, eliminate this debt obligation and give hope of a decent economic destiny to those who will inherit this burden and eventually remove the people from the servitude of serfdom.  In addition, since his assets would be in equity his expenditures and taxes on retail consumption only would be a net driver of the economy.  The present system requires redundant taxation of the same dollar at several levels. The logical taxation option would be the “Fair Tax” on consumption and elimination of all hidden taxes and all Income Tax systems.

Consider: What would you rather own to protect and ensure your own economic destiny and that of your loved ones?  Would it be equity ownership in the wealth producing engines of our Nation, or the labor of the people who work for those engines of wealth production?  Which would be more compatible with a society of a free people?  The ownership of the means of production as individuals or the labor of each other? You decide!

Think long and hard before reacting with the standard “oh, they will never do that!”  Take a long look in the mirror.  That is “them” looking back at you!  Consider, if we could travel back in time 25 or 30 years and describe what we are experiencing now, who would believe us? Would they respond with “oh, that’ll never happen. They’ll never do that!” The authority is yours.  Use it wisely.

For S&P 500 Data click here> http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html

Financial Calculator

- theBushwhacker

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