Sunday, October 5, 2008

Capitalism/Financial Crisis tutorial Part 2

In the first post in this series I explained that capitalism was "invented," or better said, "discovered," on a person by person basis by farmers. I gave you a definition of capitalism that is, rather than using technical terms and theoretical concepts, a statement of how capitalism first arose, and thus should be the constant model for successful understanding and use of capitalism. This definition of capitalism is as follows.

A farming family grows corn for its own survival, since that is what the family and their livestock consumes. This is called "subsistence," which is the bare minimum of necessity that allows the family to survive. When the family reaches a point of stability of production of their "necessary" amount of corn, they may prosper enough to produce more corn than they need, and this extra is called "surplus." Surplus corn is sold in the market for cash. The process by which the surplus is transacted for cash is called "capitalism." The term "supply and demand" is not the same as capitalism, nor is the term "the market," because those are the techniques by which the surplus is produced, priced and successfully sold (or not). Thus those are devices and mechanisms of capitalism, not capitalism itself.

I gave an example of bad decision making in the previous post, where I explain that the ethanol initiative erroneously cut into the subsistence level of corn, rather than focus on producing surplus corn for the express use of ethanol. I chose that example because it's one that received a lot of press plus everyone can understand it. Plus it was an obvious easy step from my "corn" subsistence and surplus definition of capitalism.

Now that you, dear readers, have had a chance to think about my first post on this subject, I want to summarize the error that has crept into modern assumptions about capitalism and also show you another "right out of today's news" example of how to spot the errors and have correct interpretation of statements, perspectives and events instead.

The problem that everyone has with understanding and correctly managing (or laissez faire "allowing" of) capitalism is that they treat the "subsistence" part of the economy and people's lives as if it is the "surplus." That is the great error in contemporary capitalism, and thus it is not true to the spirit of capitalism. Capitalism was never meant to rule subsistence goods and products. Capitalism arose in the global culture whereby individuals and families were able to glean the food and shelter they needed for their own survival with their own hands, so long as they were able bodied and they lived in locations and times when survival was successful. Thus capitalism always referred to surplus products, not subsistence products.

So let's look back to the ethanol disaster model of capitalism done totally wrong. There are two errors. The first is that a product, ethanol, was legislated, rather than coming into development because there was a market demand. Ethanol is an option, not a subsistence essential. Gasoline is, on our modern economy, a subsistence essential. Ethanol is a variation that in theory offered attractive market attributes (domestically produced and allegedly lower emissions). Thus as a non-subsistence product the market should have "demanded" (that is, freely wanted and desired) ethanol, rather than it being legislated as governmental policy.

The second error is that the raw material used in production of ethanol, corn, is a subsistence product, because it is a food that is essential to both humans and livestock, and thus the subsistence level of corn should not have been touched or used by the ethanol "initiative." Surplus corn should have been planned, generated and grown for any ethanol initiative, rather than force a subsistence product, being food and livestock corn, to "go to the market" and allow ethanol producers to exploit subsistence product, thus causing great price and availability instability. As a result "surplus" principles (supply and demand, "the market is always right," and so forth) were forced upon the "subsistence" portion of the equation, which is a grave economic and moral error.

So now whenever you hear someone talk about "supply and demand," "market forces," and "the market is always right," you would be correct and indeed you must insist that those principles apply only to "surplus" product, not "subsistence" product. This is not the same as "price fixing" by the way. I am not saying that subsistence product must be forced to be "affordable." What I am saying is that subsistence product will always be affordable so long as it is not contaminated by the risk that rightly belongs only to the "surplus" side of the capitalism equation.

Therefore, I will give you the first hint of how to think of the mortgage crisis. Housing is, at its basic level, "subsistence," as everyone needs shelter. Housing can be enhanced to be "surplus," in that it can be "more than you need." The economic "masters of the universe" were allowed to force virtually all housing from surplus into subsistence. Only surplus priced (and therefore "risky") housing was offered, and replaced in total the supply of subsistance priced housing. In other words, they raised the prices of all housing to "surplus" levels, and thus put them into the surplus "supply and demand" and "risk" pool, eliminating the supply of "subsistence" low, stable, widely available and safely priced houses. I'm amazed that this disaster survived as long as it did. For twenty years all houses have been deliberately over priced so that people were forced to take "surplus" risk and pay "surplus" prices for what should have been "subsistence" housing. That is not "capitalism," that is looting and immorality. Enabling people who needed subsistence priced housing into surplus priced housing compounded rather than fixed the error, because it allowed all real estate producers, investors and gamblers to maintain surplus housing pricing over the entire economy, forcing the disappearance in total of subsistence priced housing. Thus the "activists" share the blame with the "gamblers," because both colluded to enable that subsistence priced housing disappears and is replaced by surplus priced housing.

I hope this is helpful. I'm sure that is it. In the next post I will show you how to read an opinion piece in a newspaper and identify what part of capitalism (or not) the "experts" are talking about, and the errors (or good points) that they may be making. This will help you to discern the correctness and context of both the "facts" and the experts' "opinions." In future tutorials I will explain how both liberals and conservatives are "wrong," and how they have both forgotten and been herded into an erroneous definition of capitalism.