Martin Armstrong: The Collapse of Socialism

Martin Armstrong takes the kids to school in this wide ranging essay that provides historical background for the situation we are facing today. The historical comparisons he draws are profound and frightening.

I have taken the liberty to edit the essay to streamline its core points because I believe the topic is that important and the arguments are very persuasive. Martin Armstrong is a incredibly learned man and sometimes his writings drift from the main point. I want to make sure the majority of readers can get through this essay without too much trouble. I have made the best efforts not to distort any of Martin’s ideas or alter his basic writing style. However, I have re-arranged part of the essay to make its points clearer. If you would like to read the full, un-edited version of the essay, I have provided a link here to the PDF file. 

Armstrong Economics

The Collapse of Capitalism or is it Socialism?

What does this mean for Government?

There have been plenty of articles asking whether Capitalism is now dead. The problem is the question already presumes an outcome and fails to realize that we are still in the middle of the greatest Economic Transformation in the history of mankind. We are in fact not seeing the collapse of capitalism, but are in the final stage of the death of Socialism.

Governments will rail against the collapse of Socialism because it has been the source of their power – “vote for me and you get something for nothing.”  We are in the final phase – a transition which is taking the form of a “tsunami of spending” to try to make it all better. What we must be concerned about will be who gets blamed when it fails?

Lifting this rock allows the scorpions to surface. It is more akin to opening Pandora’s Box and allowing a swarm of evils to escape and torment mankind. We have no choice but to speak very frankly, for unless we truly understand the nature of events, there is no way to close the box and make it all better. As Saint Jerome said of Rare: “When Rome fell, the Romans were still laughing.” They had no idea of what was taking place and just assumed Rome was impregnable. We can only stop an event if we recognize it is happening.

If we are afraid to ask the correct question, then perhaps we are too biased to comprehend what we have done and take responsibility for our own actions? To paraphrase Edward Gibbon in his memorable epitaph on Rome: We were the capitol of democracy, the citadel of the earth, the terror of tyrants, illustrated by the footsteps of so many triumphs, enriched by the leadership in economic freedom that was the beacon to so many nations. This spectacle, how is it fallen?

The Greatest Economic Transformation

It may seem strange, but we have been undergoing a battle of economic philosophy that transcends so many concepts that unless we step back, we will have difficulty understanding the trend. This battle has often been laced with efforts to control mankind. For within this battle, we will fight religion, politics, scientific innovation and progress spanning technology in all areas, but also issues that include both slavery and labor that all create what has become known as our economy.

Sometimes we are too close to a problem that it is just impossible to see. When man landed on the moon and sent the first pictures of Earth rising, only then could we see what our world truly looked like. We are facing the very same problem. The change that we now see and are debating, is still from the view of a fly on an elephant’s back. We do not know we are even on an elephant or what is an elephant.

Our society is still growing and changing. We are going through puberty where the youth rebels against the parent. The profound change, the Great Economic Transformation, became bluntly visible back in 1989 where the world economy began to change with the fall of Communism. That fundamental change was truly an Economic Transformation wave which is now causing the collapse of socialism in the Western nations. What we are facing is confusing. Nevertheless, if we want to see the elephant, it is time to take flight.

There is a very core structure to the economic society of man. The Industrial Revolution was not just a slogan. It is hard for modern man to look back from where he now stands and comprehend the meaning of “revolution” as it was truly expressed. The way of life prior to the Industrial Revolution remained essentially the same from Greek times, Rome, middle-ages, and the birth of the United States. The word “Economics” was an English translation of a book written by a great mind and a diversified man of tremendous experience – Xenophon (ea 431-350 BC). Xenophon was a brilliant, practical man. He began life early on as the commander of the elite Greek force known as the “Ten Thousand.” Xenophon admired Socrates profoundly, and developed a dislike for extreme democracy for the very crime it had committed by ordering Socrates to be executed for his ideas. Xenophon wrote three works on the subject casting Socrates in a different light than that of Plato – the “Apology” – “Symposium” – “Memorabilia.” Yet in the field of finance and economics, his political work is what the powerful committee on Capital Hill is named after – “Ways and Means” written around 351 BC advocating peace rather than war between the Greek states. But we owe the very word “Economics” to the title of his truly master work – “Oeconanicus” that simply meant in ancient Greek – how to regulate the household. It was a How-To Book for Gentlemen Dummies that explained how to manage your estate from growing crops, managing slaves, and your wife.

What does this have to do with the Industrial Revolution? Everything! Life as society knew it was completely different before the 19th century. The same economic model had existed for thousands of years around a self contained farm-like enclave. The Romans called them “villa” and we call them “plantations.” This is how society operated. Villa were independent estates that were virtually self-sufficient. The work force was composed of slaves purchased after battle in ancient times, or serfs in the middle-ages, or imported African slaves. The King of England had even used the criminal laws to create labor. Any misdemeanor allowed the King to sell someone as a laborer for a certain period. Instead of prison, you were sent, at first, to America. When the American Revolution began, the destination changed to Australia.

During the 3rd century AD, money became rare following a hyper-inflation. This caused tremendous hoarding and an economic contraction strengthening the villa model. The Roman Emperor Diocletion (284-305 AD) tried, to revive the empire like Ronald Reagan & Margaret Thatcher, and created many of the practices still employed today. To be able to collect taxes, passports were created and people could not move without permission. To tackle inflation, he substituted wage and price controls as did Richard Nixon. He redesigned the entire monetary system, i.e. Bretton Woods 1944.

When Rome fell after 476 AD, the concept of the villa prevailed. Life survived because of this self-contained economic model. This evolved into feudalism during the 9th and 15th centuries due to the increase in population and the inability to acquire wealth to establish a villa. Towns would form and the landlord became the nobility. Castles were constructed because of the lack of security. Charlemagne (742-814) began to reconstruct the old Roman Empire. This economic model received its first major shock that not even the fall of Rome had inflicted. The Black Plague in the 13th-14th Centuries killed about 1/3rd of the population making labor scarce and causing landlords to start to pay wages in addition to a percentage of the crop and free housing. Yet, predominantly, the economy was still agrarian and the model was still the villa.

In Russia, the seeds of the 1917 Revolution were sowed during the reign of Ivan IV (the Terrible)(1530-84), when he confiscated lands of his enemies to give to his supporters. Ivan found the lands worthless once the serfs fled. He then decreed that the serfs would be bound to the land for life in order to maintain its value. He essentially made all Russians living on farms slaves of the state. This eventually created the pool of discontent that fueled into the bonfire of Revolution years later.

Of course in the United States, the slavery issue was recognized as wrong and a real problem, especially after the language written by Thomas Jefferson in the Declaration of Independence. This issue dominated early politics, and perhaps came to a head when the Supreme Court showed it was indeed, as Judge Posner refers to it, the “Political Court.” In 1857, the Supreme Court held that blacks were just property in the case of Dread Scott, who sued for his freedom when his master traveled to a state that did not allow slavery. The Civil War was not fought over racism. It was fought over the collapse of the economic system of labor. Racism emerged more so as a bitter response by the South attaching blame for their demise to the freedom of the slaves.

We can see that slavery was a very ancient practice as outlined by Xenophon in “Oeconanicus.” It was how the villa model maintained its economic viability for thousands of years. In Roman & Greek times, the economy was 90% agrarian. However, that declined to 70% in the 1870s, 40% in 1929, and finally 3% by 1980. It has been this villa model that was undergoing the Great Economic Transformation to the Industrial Revolution.

The Great Economic Transformation has been the growth of society through progress and technologies. We have been evolving even in our understanding of economics, since the nature of the economy is in fact changing with each passing year. We must look at this transformation and understand that as the changes in labor have taken place, everything else in our world also changes. Had it not been for the Black Death, there would never have been a shortage in labor giving birth to wages that led to payroll taxes.

The Battle Lines

Before we wage further, we have to explore what caused the battle between communism and capitalism. We can attribute this to Karl Marx (1818-1883) but this does not explain why Marx came to the conclusions that he did and set in motion decades of geopolitical conflicts that has cost the lives of countless millions! 

We must understand that from the school of Physiocrats, who believed that all wealth was created only by nature, we end up with the runaway idea that man can create utopia – the imaginary world where man could live indefinitely under the perfect plan. This idea was sparked by Sir Thomas More in 1516 that created a whole class of thinkers who believed in this Utopian world was possible. Sir Thomas More (1478-1535) was a major influence and contributed to what we now face today under Socialism.

Marx railed against the change from the agrarian society to the industrial revolution. He did not see the State as the issue. What he saw was that this new economic model would lead to paid workers in factories who would be exploited to make a profit for the employer. Marx saw this “new” economic model as changing the world taking people from the traditional farm and turning them into consumers of products manufactured. However, he believed that their employers would be so greedy, they would decline to pay the worker. Eventually this new system would collapse because the greed of the employer would suppress the income of the laborer, and that would result in the collapse of this new evil experiment – industrial capitalism.

The battle begun by Marx between his Utopian ideal of communism vs. capitalism is not over. The Communistic system transfers power to the state, as does Socialism. This has sanctioned the power of a central government at the expense of the economic freedom of Capitalism. What we are really saying when we ask whether Capitalism is dead, is should we abandon freedom and run behind the walls of the castle since the state is the modern day landlord? Do we reverse this Great Economic Transformation, or understand what is going on for just once?

American Labor

Marx began a class-warfare that could yet tare the very fabric of our society to shreds. The beginning of the end of the labor union movement was marked seventy two years after the first real labor riot that took place on May 4th, 1886 known as the Haymarket Riot. The Taft-Hartley Labor Act of 1947 was designed to take away the power of the unions. By the 1960s, the unions were cast in the light as being evil and controlled by organized crime after the Jimmy Hoffa incident. This critical shift in perception curtailed the union movement after just one 72 year political cycle.

The collapse of General Motors is the collapse of the last vestige of Marxism – the labor unions. The foreign auto-manufacturers have set up shop in the South where the labor laws were far more favorable to create non-union work forces that have been quite successful. The foreign car manufacturers have demonstrated that unions are a bad idea. The union movements had their points from the outset. But working conditions should have been attacked in a political context (democracy). Unions assumed the mantle of communism creating confrontation and transferred the power from management to labor. It did not solve the problems and only became like a drunk who then had the keys to the liquor store – self-destructive.

The reason why unions were a bad experiment was because they merely turned the employer into a slave and altered the free markets that was contrary to the nature of mankind. Historically, when the crops failed in an agrarian model, people simply migrated. The Philistines of the Bible were most likely Greeks who migrated due to crop failures at the First Heroic Age. Invasions of the Goths, Germans, and even Attila the Hun were all caused by the “grass is greener” on the other-side belief. Unions just promoted increased wages rather than increased skills, diminishing the individual motivation to learn new skills and migrate between jobs. This is the same reason why communism died. Creating a system where one-size-fits-all, promotes a decline in human growth that is then manifest within the economic decline.

We have to understand, that the fatal flaw in Communism was to diminish the essence of mankind. They say necessity is the mother of all invention. That is so true. If we try to create utopia, we destroy the very engine that creates progress.  Do not for one minute think that a labor union is any different that the communistic model. It is not. Where in a normal economic model, to earn more one improves his skills, the Communistic model promotes advances income without improvement in skills.

This union labor system stymied natural economic progress and created much damage to the benefits of the Industrial Revolution. This is the fatal flaw that had led to the destruction of American jobs. It froze the natural economic evolution and began a trend toward transferring jobs overseas. The trend was only accelerated by the imposition of the payroll tax that essentially increased the cost of labor. Historically, mankind migrated in an agrarian society. This very same trend still takes place today. However, instead of the work force migrating to better lands, the communistic model reversed the roles and caused the employer to migrate. What government did not notice, was this trend was not caused by the “greed” of the employer, but by the Invisible Hand of Adam Smith. Labor demanded the highest wages with the lowest productivity, and consumers demanded the lowest price with the highest reliability. The employer migrated to survive. Throughout history, human nature has never migrated for no reason. Migrations take place when prodded by the fickle finger of necessity.

Communism, when implemented as a government policy, lasted only one 72 year political cycle. In 1917, we find the Russian Revolution and Sun Yat-sen set up the rival government in China at Guangzhou as the Nationalists. Seventy-two years later, Tinennamins Square in 1989 was followed about five months later by the fall of the Berlin Wall. These changes were economically driven. The stagnation of the human spirit led to the steady decline in productivity. This is the same trend we have seen in the American labor unions.

What we must understand is that only when people lose their security, then and only then do we see political unrest. Just as humans did not migrate without reason, all political unrest is unleashed following economic implosions. As we shall see, the collapse of the Mississippi Bubble set in motion a irresponsible government policy regarding the money supply – the invention of paper money. This collapse of a European-wide speculative boom in 1720, set the stage for the great wave of revolutions that toppled the last vestige of Feudalism – Monarchy. It was not just the American Revolution, with its slogan, “No Taxation Without Representation,” but also 72 years later we come to 1792 and the overthrow of the French monarchy.

Understanding the Mississippi Bubble and the French Bailout that set in motion the Age of Revolution

At first, you might ask: Why look at something from 1720? Well, the answer is simple. The French Government was in part responsible for the Mississippi Bubble and contributed to its exponential rise at the end. The Government had to then bailout the mess and, to pay for it, implemented higher taxes. This is not so different from current events.

The Mississippi Bubble was a financial scheme not so different from the wild un-backed derivatives created by AIG and others. The scheme was at first engineered by John Law, an early economic theorist, who was friend with the Duke d’Orleans. In 1716, John Law founded Banque Generale, with the authority to issue notes that were the earliest form of paper currency. The following year, he founded Compagnie d’Occident (“Company of the West”) with the exclusive deal to develop the new French territories in the Mississippi River valley. This enterprise began to monopolize the tobacco and African slave trade as well. By 1719, he then formed the “Compagnie des Indes” that was essentially just renaming the “Company of the West” with a complete monopoly over all French trade. This new entity also assumed the powers as if it were a Roman governorship, with the power to both collect taxes and to coin money. This operation in essence assumed control of both the trade and finances of the French government.

It was this link and exclusive power with the French government and the vast expansion of unlimited profits in the New world, that created the image of the best possible investment. The public was naive. But they were also exploring how capital could be used to actually work and make more money. This was a novel idea for since the fall of Rome, during the Middle-Ages, there was no national organized state that promoted international investment. It was akin to the fall of Communism and the interest in investing in a new world of private investment in China and Russia.

It was this expectation of potential profits that created perhaps what may still remain as the wildest speculative boom in history. Between the discovery of America in 1492 and 1700, the majority of investment was professional or solely by the state. There was no opportunity for the public to get involved on a speculative nature. So this was the first true experience of allowing the public to participate is the new frontier. As this cycle unfolded, its duration would be 224 years from the discovery to the bust that set in motion Revolution. The shares of the lead enterprise, Companie de Indes, rose from 500 livres to 18,000. By 1719, 625,000 shares had been issued. This boom gave rise to the term “millionaire.” The boom was so profound, Compagnie de Indes was merged thereafter with Banque GeIlerale and the scheme was expanded to retire the national debt of France by exchanging shares for the bonds.

This led to a monumental speculative bubble that spread throughout Europe. A similar theme played out in England with the South Sea Company. The The South Sea Bubble transformed into a scheme to retire the national debt of England in return for shares. That entire incident occurred between late 1711 and late August 1720.  The last stages of the speculative boom saw the shares rise from 128 1/2 pence to 1,000 between January and August 1720.

Back in France, the “Compagnie de Indes” was so successful without really producing profits that the French government began to get involved. The French government began to issue paper money itself. This was a form of derivative for the money was widely accepted only because it was convertible into shares of this new company. The vast economic expansion was fueled by the unlimited issue of paper currency between late 1719 and the fateful time of the year – September/October 1720.

The linkage between the speculative shares and the government finances created a bust that became the closest thing to a financial mushroom cloud. The bear market collapse was so significant, that by December 1720, John Law had to flee France. The collapse was fierce because there were no market-makers, middle-men, or a mature two-sided market. The concept of puts and calls had developed in the earlier speculative bubble known as the Tulipmania (1634-1637) in Netherlands. But that panic did not involve a debt crisis or the government issuing derivative forms of money convertible into stock shares. The lack of sophisticated market functions led to a one-sided collapse in both the South Sea Bubble and the Mississippi Bubble within three months. The English shares collapsed from 1,000 to 124 by December 1720 though the company did survive until 1853.

It was the collapse in debt that devastated the economy. The French government was forced into a bailout assuming all the debts of the company, and then, to pay for their own folly, began to raise taxes. That set in motion the resentment that led to the French Revolution.

The French Bailout The Revolution (The Bonfire of Discontent)

The involvement of the French government in the speculative boom, also placed the focus of responsibility for it upon the King. The raising of taxes to pay for the bailout set in motion the French Revolution fueling the bonfire of discontent. The Revolution began with the storming of the jail, Bastille Day (7/14/1789) as it is remembered today. This led the king to flee to his palace at Versailles in October 1789, which the people later stormed on June 20th, 1792. At trial, they referred to the King now as “Citizen Capet” and tried him for treason on December 1792. He was executed on January 21, 1793 followed later that year by his wife, Marie-Antoinette. The First Republic was declared on September 21, 1792. This citizen government simply failed until Napoleon took power in 1799 and eventually crowned himself emperor in 1804.

Consequently, it was the direct involvement of the French Crown and its very costly bailout that resulted in raising taxes and oppressing the people that led to the collapse of the French economy and ended with a Revolution.  Looking at government to bailout the follies of the Investment Banks is a dangerous course of action. It shifts the burden to the Government and raises the risk of political instability in the long-run should the Government fail to reverse the trend.  What if we end in hyper-inflation? The massive monetary printing and funding of debts could drive interest rates higher, which will compete with the common man and destroy his ability to survive economically. If we then turn to higher taxes to make those who did not cause the crisis pay for it (letting the investment bankers off the hook once again), how can we justify this vast transfer of wealth?

It Is Always Debt That Destroys The Best Plans and Foundations of Mankind!

The debt crisis is always distinguished from the mere speculative bubble. The Tulipmania did not change the course of history as did the Bubble of 1720. Likewise, the excessive borrowing by Spain and the desperate attempt to invade England to payoff those debts with its Armada in 1588, resulted in the collapse of Spain taking with it Italy, who was its banker. In the end, Spain and Italy lost their ability to be any sort of a world power. It is always debt that destroys a nation. It destroyed even Rome.

What we must understand is that we have been evolving as an economy for a very long time. Communism and Socialism are a mere blip on a screen. Governments’ stepping up to bailout the crisis raises concern.  For had we just let the Investment Bankers fail and stood behind the public deposits 100% in Commercial Banks, we would have been better-off. Sometimes, it is honestly best to let the free markets sort out the weak from the strong, because it is quite frankly, far too complicated to anticipate correctly – this is why Communism also failed.

Marx railed against the coming of the Industrial Revolution. He saw evil and was blind to the evolution of the economy as a whole. We are still caught-up in the philosophy of Marx. Phase One was the collapse of Communism. Phase Two, will be the collapse of socialism – state promises that are unfunded yet seek to still create the world of Marxism to a lesser degree. There is not much difference between the state taking title to the land, or allowing you to keep the title but dictate how it is to be used. Labor can no longer migrate, only capital.

The Communistic/Socialistic theory of Marx is collapsing. Our socialistic life may be coming to an end because our promises exceed our resources. This bailout is likely to push the government over the edge. If we cannot see how we make the same mistakes over and over again, what hope do we have? We can survive as a society only when we open our eyes. If we cannot do that, then we may be headed into a new dark age of feudalism with the break-up of organized states. We have to stop the debt and insane taxes before it is too late once again. We are in the last death throes of Marx’s ideas of Communism/Socialism. He railed against the Great Economic Transformation, because he remained just a fly on an elephant’s back. We can survive if we are rational and objective. We need to restructure or we will lose it all.

Martin A. Armstrong December 11th 2008

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