We have established that the objectives of today’s social democrats are little different in principal from those of the fascists in the interwar years. But this modifies our analysis from that of Ludwig von Mises in 1920, who wrote an important essay titled “Economic Calculation in the Socialist Commonwealth”[i], which sparked what became known as the socialist calculation debate. Mises demonstrated why public ownership of the means of production was bound to fail. Central to his argument was the state’s inability to make the calculations necessary to allocate the means of production, a function which can only be attempted successfully by independent entrepreneurs putting their own resources on the line.

Today’s institutional socialism is now fascist instead of being on the Marxist lines which were debated between Mises and socialist economists a century ago. The failure of Marxist socialism was for the reasons Mises predicted. It must still apply today to that portion of a socialist economy that relates to government spending which is not redistributed in the form of welfare payments or put out to private sector contracts by means of competitive tender. What then remains of government expenditure will lack the basis of economic calculation, which cannot be performed. But welfare distributions and government contracts raise a separate issue, the distortion of an economy by state-directed spending into spending that would not otherwise occur, and the wasteful use of all forms of capital which would otherwise be deployed more efficiently by private enterprise.

Economic activities that remain under free market principles, whereby entrepreneurs seek to profit by anticipating the needs and wants of consumers successfully, are now heavily regulated and restricted. State bureaucrats effectively control the forms and characteristics of goods and services offered by producers. They claim to protect the consumer from unscrupulous capitalist profiteers. Sometimes, regulations imposed by the state succeed in this objective, but it is wrong to argue that free markets would not have matched or even provided higher standards of product than those framed by the state’s regulatory regime, because it is manifestly in every producers’ interest to produce the best product for the market, unless, that is, the state regulator protects the producer from competition. This is too often the case.

Why bureaucracy fails and free markets succeed

Who pays for it all?

An economy run by the state owning the means of production cannot succeed because it cannot calculate. It can only resort to force, evidenced by the masses killed by the Soviets and Chinese communists in their attempts to get Marxist socialism to stick. Now that that form of socialism has been exposed by its failures, modern socialism is in a halfway house of some remnants of state ownership coupled with fascist control and regulation over private production.

It is not difficult to see why contemporary economies are struggling under these burdens, and we do not need to resort to empirical evidence to assist with an explanation. But with modern economies overburdened by economic inefficiencies arising from state-directed malinvestment of scarce capital, they are heading for the same general failure experienced by the Soviets. A similar collapse of our socialistic governments has only been deferred so far by the partial existence of markets. But as an economic policy, increasing rates of wealth transfer from producers and consumers through taxation to sustain the socialistic state has finally run out of road.

Cries to soak the rich by even higher taxes are failing to convince the wider public that that is a course to be followed. Now that we are in the grip of the Covid-19 crisis, ordinary people know that the ending of government support schemes cannot be replaced with higher taxes to recoup lost government revenue, without crashing the economy. It is only the bureaucrats in government offices, secure in their jobs and pensions acting as unthinking functionaries, who miss this vital point. There can only be one desperate solution, the one understood by central bankers who reaffirm they will print whatever it takes to fund government deficits.

When socialists run out of people to rob of their wealth by overt taxation, they inflate. In modern times it has been a process that dates back to the depression in the 1930s. This fascist social construct has now been evolving for eighty-seven years in America, if we take Franklin Roosevelt’s socialising policies and his ban on owning gold as a starting point — even longer than the Soviet experiment which started with the foundation of the Soviet Union in 1922 and ended with the collapse of the Berlin Wall in 1989.

Over the last forty years, the US economy has been financialised; that is to say economic resources have shifted from the non-financial economy to the financial. It is the consequence of the financial reforms in the 1980s, when London underwent its big-bang and America abandoned the Glass Steagall Act, which had banned retail banks from investment banking activities. Through the combination of these events banks took over all financial activities, including market making in securities, commodities and derivatives, using bank credit expansion to apply virtually unlimited capital resources to these functions. Being licensed by governments, it has become an extension of statist control over prices, with the benefit that through their banking agents governments could use the expansion of broad money supply to finance government spending and spread the wealth effect through rising stock markets, while suppressing commodity prices by increasing their synthetic supply.

The cost of this financialisation has been economic stagnation in non-financial activities, with the production of goods exported to the savings-driven economies of Eastern Asia, while the banks have become dependent on financial speculation for their profits. They are now failing in their original mandate to sustain non-financial businesses.

As well as its normal cyclical failures, the banking system now faces the consequences of the failure of socialism itself, from which they have benefited in the past through the socialisation of money through the inflation of bank credit.

Covid-19 and its lockdowns have exposed the fragility of the whole system, bankrupting businesses and making the banks reluctant to lend, preferring to call in their loans. Any independent observer of economic developments can only come to one logical conclusion: financing economic expansion by bank credit has finally come to an end, and widespread bank failures are becoming impossible to avoid. The inflation of money as a means of financing the state now falls increasingly on central banks, even without a banking crisis. And here it is worth noting that US dollar bank credit is a current multiple of M1 money supply of 3.4 times[iii].

Figure 1 shows how US dollar M1, principally currency and demand deposits, has increased at three progressively greater rates of growth since the 1980s: a steady rate until the Lehman crisis, a significantly faster pace since then, and finally a nearly vertical rate since last March, all indicated by the arrowed lines.

We now must consider how inflationary financing will progress in the absence of bank credit being made available to the non-financial private sector. Bank lending to the private non-financial sector is currently $11 trillion[iv], twice the M1 figure, giving us an indication of how narrow money must increase from its current accelerated rate if the Fed is to prevent an imminent economic slump in the non-financial economy. And that is before we consider another important factor which requires inflationary financing, the maintenance of the financial asset bubble which is central to the illusion that all is well.

The magnitude of central bank monetary inflation yet to come is far greater than hitherto and therefore bound to radically undermine the dollar’s purchasing power. In turn the US Government’s finances will be undermined by the quantity of dollars required and the effect on dollar interest rates. Other nations are in a far worse position, and like the USSR in the late 1980s are rapidly running out of options.

Epilogue

This analysis has exposed the failings of government intervention in free markets. Predictably, the increasing burden of government intervention on any economy will cause it to underperform, detracting from the primary function of free markets, which is to satisfy the needs and wants of consumers.

Consumers consume because they are employed, specialising in their labour to maximise their output and therefore their ability to buy the things they need and want. But over the decades, consumers have become increasingly dependent on governments, either to employ them as bureaucrats, officials in nationalised education and health systems, or to guarantee their employment through regulations. They benefit most from free markets but lack an understanding and sympathy for them. The loss of free markets and their vilification by socialists is likely to ensure that when the current international socialist regime fails, free markets will be blamed.

We appear to be rapidly approaching that point of failure. We can see from the chart in Figure 1 how narrow money supply has already accelerated in three phases, and how the failure of bank credit expansion will lead to an even greater debasement of the currency. And that is likely to be the most optimistic outcome, assuming bank failures will be strictly limited instead of systemically widespread. The statists’ dependency on inflationary financing is set to increase to the point where all confidence in fiat currencies will be lost.

We have made comparisons with the failure of the USSR after sixty-seven years, noting that the current fascistic socialising model has already run for eighty-seven. When the USSR failed, there was a better economic model for which the Soviets could refer. The standard of living and plentiful supplies of food and consumer goods in Western shops were a ready comparison with Soviet misery and it was relative economic freedom that had delivered. Our failure will not have that comparison. Instead, it is likely that statists will point towards another economic model in the hope of continuing with state control.

It will be a muddle that lasts for as long as governments in their bankruptcy try to maintain control over economic events. We will need as many people as possible to explain to the politicians that the way to national wealth is not through socialism but by free markets and small government.