Not only in Europe and recently in Brazil but also in the United States, political elections have become ideological clashes. The campaigns are not only about the next government but also about a choice between different political cultures. Although the great debate concerns no longer the choice between communism and capitalism, the key question remains: whether society should move to more state intervention or to a market economy. This way, the traditional question of socialism or capitalism is still on the table.
Interventionism
Populist interventionism is the most widespread economic system of our time. The countries differ in degrees in terms of whether their government is less or more active in practicing interventionism. Money is under the control of the state. The state mingles in economic transactions through taxation and regulation. While some sectors are more under state control than others, the consequence of interventionism is visible: the sectors with the persistent crises — such as internal and external security, health care, old-age provision, education, money, and finance — are those that are under the most comprehensive governmental control. A vast apparatus of subsidies sustains the defense industry, part of the automobile sector, the pharmaceuticals companies, large parts of agriculture, and educational institutions.
The interventionists unite with special interest groups, who cloak their specific concerns as a common good. Under interventionism, market competition is perverted into a struggle for subsidies and bailouts. The winners are no longer those who best contribute to the growth of the economy and serve the consumers; those who receive the largest share have the best political contacts. In the end, no one is better off. In the long run, everyone is paying the price when the economy falters, including those who got a big share from the government when the economy was still flourishing.
There is a tendency to choose interventionism and move onto the road to socialism without considering which consequences will follow from this choice. Emotions and prejudices are behind the attractiveness of socialism. The socialists dream of a society where righteousness and prosperity rule together with equality of all while they prepare the path for the opposite.
The loss of reason prepares the path for the creed of the socialist utopia. Socialization during adolescence reinforces the biological disposition for socialism because children and youngsters live under the quasi-socialist systems of the family, the school, and the university until they are grown up; they often remain under the socialist spell for the rest of their lives. The longer these pre-adult periods last, the deeper becomes the socialist mentality ingrained into the psyche and minds of the young.
To break free from the socialist faith requires an act of reason, or one will stay captive. One of the first steps to get deliverance from the socialist faith is the rational insight that it’s not redistribution that helps the poor, but economic growth and free capitalism. The path to prosperity is not redistribution but productivity.
Fallacy of Redistribution
Modern democracy suffers from the contradiction that while most citizens mistrust the politicians and the state, and want fewer taxes and less state control, each voter is eager to use their vote in such a way as to get the largest piece of the cake. Such a system is neither democratic nor capitalist; it is corrupt as it produces a political game in which every single voter tries to betray all other voters. The principle of modern democracy is that while the voters try to cheat one another in getting a free lunch, the political establishment deceives all the voters.
Ironically, it was the success of capitalism that created the socialist expectation of a world without scarcity. The capitalist experience showed that a prosperous world was no longer a utopian fantasy. The early socialists were convinced that socialism would increase the productivity of capitalism not despite but because of the equality of distribution under socialism. In the socialist paradise, one could have a greater material abundance than under capitalism along with the eradication of injustices and discriminations.
The driving motif of the early socialist movement was idealism. Today, the drive is materialistic. The state should become the great provider, be it of public transportation, an old-age pension, guaranteed minimum income, free education, or health care of the highest standards for all. The modern state socialists do not recognize that the more comprehensive the welfare state becomes, the more the beneficiaries themselves must pay for what they get.
The wealthy persons of society will care for the poor if redistribution remains small and if the circle of the needy is well-defined. This is the case with voluntary charity. Yet when the state expands into the welfare state, the beneficiaries of the social transfers must de facto assume the costs themselves for what they seem to get free from the state. The more the general population falls into the grip of the welfare state, the more diffuse the definition of need becomes and the larger the number of the contributors will grow. In the end, all pay more than they get.
If the redistribution in modern capitalism does not work, some seem to ponder, only imposing full socialism will solve the problem of injustice. These socialists believe that they are good-hearted when they advocate socialism, yet they do not know that they speak in favor of an inhumane regime whose first victims would probably be themselves.
The Ideological Battle Continues
While the socialism of the Soviet pattern is not the dominant ideology of our time, the anti-capitalist mentality is still virulent, and this ideology is all over in the media, the schools, and the universities. The great error of the modern socialists, like that of their predecessors, is to believe that poverty originates from capitalism.
History has shown that socialism exists as tyranny. With the choice of interventionism and socialism, economic stagnation comes, while the decision for a free market economy leads to economic progress. Theory and history confirm that socialism is inseparable from stagnation and oppression while capitalism is more productive the freer it is.
A look at the experiences with Communist rule makes the diagnosis unambiguous. Yet popular discontent runs against the capitalist economic order. There is a widespread illusion that one could have both the wealth of capitalism and the supposed socialist equality and justice.
The modern state has a structure that is very different from the original ideas of classical liberalism, and in some respects it is the opposite. Instead of having less state, liberal democracy comes with more intervention; instead of more individual liberty, the current system has extended its control over the individual. The majority voting system in place leads to interventionism, and from there, socialism is only a step away. Democracy does not protect against folly or tyranny.
Conclusion
History does not have an inevitable path of development, but there are economic laws. The decision of this or that version of the economic system is free, but the consequences are not free to choose. Freedom refers to the choice of institutions, not to their consequences.
In this sense, there is a power of ideas, and at the same time, there is the impotence of ideas in the face of facts. There are situations where, as the saying goes, one cannot change things anymore. Before the wrong decision was made, the path was open as the options were laid on the table. A different choice could have evaded the problems that have surfaced now as a consequence of the wrong decision, and the course of history would have gone in another direction.
The alternatives are clear: on the one hand, free capitalism as an economic order that brings personal liberty and overall prosperity, and, on the other hand, the socialist command economy, leading to poverty and oppression. The 21st century will belong to those nations that choose the path to free capitalism.
Antony Mueller
Antony P. Mueller is a professor of economics at the Federal University UFS in Brazil where he is also a researcher at the Center of Applied Economics, and Senior Fellow of the American Institute for Economic Research. Antony Mueller earned his doctorate in economics summa cum laude from the University of Erlangen-Nuremberg, Germany. He was a Fulbright Scholar in the United States and a visiting professor at the Universidad Francisco Marroquin (UFM) in Guatemala as well as a member of the German academic exchange program DAAD. Antony Mueller has recently published the book “Beyond the State and Politics. Capitalism for the New Millennium”.
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We Don’t Know What We Don’t Know
Humans have evolved successfully for a number of reasons, but one of the core attributes that has enabled us to thrive is our ability to spot patterns. Trading on the basis of financial charts, following trends in leading economic indicators, and connecting the dots between progressive qualitative events represent just a few of the ways in which economists harness and capitalize upon the existence of patterns. Patterns are ubiquitous throughout daily life, extend far beyond the economic/financial world, and influence the lives of countless individuals every day.
Individuals and organizations alike continuously seek out patterns across data sets, often seeking to establish a narrative (or dispel one). The tendency to do so arises even if no overarching narrative yet exists, and that in turn highlights one of the most important facets of how new value is created: the inclination to capitalize upon uncertainties.
Human beings have survived, evolved, and flourished beyond essentially all other life on this planet owing in no small part to our ability to detect and anticipate patterns. But while that unique ability provided the foundations for agriculture, settlement, metalworking, mining, commerce, medicine, technological development, and a host of other activities that are unique to humankind, it also leaves us with a distinct blind spot where regularities either aren’t present or lead us to narratives different from what is in fact unfolding. (Apophenia describes a condition whereby patterns are derived from unrelated objects or information; pareidolia refers to obscure or uncertain information or data being viewed as clear or definitive.)
Some ideas, not least of which are some of the most important ones, seem particularly immune to pattern analysis.
Innovation Breaks the Pattern
The idea of innovation or disruptive innovation (creative destruction) is so widely repeated that it has literally become a cliche, but even with this repetition many organizations struggle to consistently harness innovation. Although Clayton Christensen is often credited with (or blamed for) searing the necessity of innovation into the minds of management teams across the world, innovation nevertheless arises that resists distinct, discernable patterns.
There is a scene in The Social Network (2011) that depicts early discussions among founders regarding what would ultimately become Facebook. In one, whether or not to pursue advertising is debated on the grounds that it may sterilize or cheapen the user experience. Whether or not that exchange actually took place, the answer from the more experienced tech mentor — “You don’t even know what the thing is yet” — is a revealing insight that even many innovators don’t anticipate. A product or service may, even in its minimum viable product form, display or embody a degree of nagging ambiguity.
Many products that are now household names were originally invented for different — sometimes very different — purposes: Coca-Cola, Listerine, Play-Doh, bubble wrap, the microwave, Rogaine, and perhaps most famously, Viagra. The simple truth is that there is no crystal ball available to any product-development specialist, scientist, or marketer that can predict just what use cases will be embraced by the marketplace. Additionally, even long-established innovations continue to find applications far beyond their original intent or focus.
While looking backward provides foundation and context, it is equally important to look forward; and nowhere is this truer at present than in the rapidly changing blockchain and cryptoasset sector, which continues to experience growing pains and rising skepticism.
The Blockchain Innovation
Blockchain and cryptocurrencies may be occupying the tech business (and, owing to the Libra initiative, political) headlines, but it is highly likely that we are nowhere near the end state or full realization of the use of these technologies. It is fundamentally impossible to forecast with any accuracy which of a myriad of known, unknown, and possibly unknowable use cases will rise to the surface as the crypto ecosystem (and, critically, the world around it) develops. Stepping back from the seemingly endless debates between maximalists, competitionists, and proponents of increased centralization provides much-needed context. Blockchain only entered the lexicon in 2008; authoritative prognosticating as to its fate would be as fraught with futility as attempting to definitively forecast the next 35 years of personal computing back in 1985.
The evolution of Bitcoin and other cryptocurrencies has seized the narrative among market participants, institutional investors, and newer innovators because these currencies conform to the patterns and cycles of disruptive innovation and bear similarities to historically established frameworks. The idea that crypto will improve and possibly disrupt fiat currency with a purportedly superior technological solution is drawn from the narrative of the author of the original white paper and most, if not all, of the early adopters and users; and indeed, new products and services that improve upon incumbents often result in disruption. Yet as comforting as that assessment may be, its simplicity is its undoing.
Cryptoassets may be the blockchain application that most frequently comes to mind, but there are several other facets of the technology that potentially could have a larger impact. Crypto wallets (hot, cold, or paper) were designed with the storage of cryptocurrencies in mind, but that is not predictive of what use case will ultimately prevail. Securely storing data is not limited to crypto-related data; health care records, property information, and credit card and other financial information represent just a few of the digital treasure troves in need of more secure and decentralized storage. It would be a fascinating (and not an unprecedented) twist to look forward years or decades to find that cryptocurrencies were only the sideshow in what was (is) an unintended, largely undetected evolutionary process toward better and more decentralized data storage and sharing apps.
Taking it a step further, is it too far-fetched to see a future in which creators, aggregators, and users of digital media or information are compensated? Strange though this might seem, that is exactly what the Brave browser is attempting with a combination of blockchain and native platform tokens. Intellectual property has taken many forms with the rise of YouTube and other distributors, but the monetization of original content normally still remains under the control of a central host or platform. What if a blockchain-augmented social platform and network could enable the compensation of creators directly without the restrictions, limits, and bureaucracy of a centralized entity? Google (which owns and controls YouTube) has a plan to start charging for previously free content that is illustrative of how centralized control over content and data manifests.
Takeaways
Forecasts of demise or supremacy, whether in the blockchain/crypto space or any other, are essentially always premature and miss both the nuance and randomness of the innovation and adoption process. Innovation rarely follows a straight path, and more often it follows no distinct pathway at all. The uses (intended and unintended), successes, and failures of ideas are determined step-by-step via the individuals and organizations that develop, disseminate, and use the products; and that, despite parallels drawn to historical examples, tends strongly toward unconscious, methodless, and at times counterintuitive advancement.
Innovation rarely (and despite all appearances) follows a pre-ordained path, but rather it progresses in fits and starts, inevitably and invariably bending to the feedback and the will of the marketplace; and we are all better off for it.
Sean Stein Smith
Sean Stein Smith is a Visiting Research Fellow at the American Institute for Economic Research, focusing on blockchain, cryptoassets, and the economic impact of these technologies. He is an Assistant Professor at the City University of New York (Lehman College), serves on the Advisory Board of Wall Street Blockchain Alliance, where he also chairs the Accounting Working Group, and chairs the Emerging Technology Interest Group of the New Jersey Society of CPAs. His research has been quoted in dozens of scholarly and practitioner publications, and he is a regular speaker at accounting and technology conferences. Follow him on Twitter.
Peter C. Earle
Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.
