Marx and Mises sitting in a tree

Of the two von Mises boys, I infinitely prefer Richard to Ludwig. My experience reading Ludwig von Mises is to recoil at each and every page and concept. Yet he did have one view with which I sympathize.

First, a little background. When he was young, Ludwig von Mises wrote a thesis about money that has had an odd career in, of all places, America. Mises was concerned with the fact that, in a perfect free market system, we should have a mechanism that allocates capital very much outside any government diktat, and we should allow the full Darwinian mechanism of selection to operate – failures should not be propped up. Yet, with fractional reserve banking, a snake was set loose in this Eden of Entrepreneurs. Banks could get so big, and they could leverage their assets to such an extent, that instead of nice discrete Darwinian extinctions, we would have mass extinctions. In order to secure themelves, the banks persuaded governments to become insurers of last resort - and at that point, secure from Darwinian morality, banks responded not to the narrow call of survival, but to the rentseekers tremendous trumpet of speculation. In this way, the allocation of capital, instead of being in perfect harmony with the visions of entrepreneurs, was inefficiently skewed to boobytrapped schemes, rigged to pay off to the bank’s management, and to be paid for, when they failed, by the state.

Although the story is longer than this, it about sums up Mises theory.

Now, the first thing we notice about the theory is that all empirical evidence is against it.

Developed economies, with Central banks and bank insurance, were able to loosen up credit not only on the level of business, but also on the level of the individual household. Non-developed countries, on the other hand, lacked that credit capacity. If there is a single determinant of the prospects for development in the twentieth century, it is a developed financial sector. The Soviet Union, de-developing itself, refused to develop a credit system and thus was forced to borrow from abroad and curb even those fields – like computers – in which it had a human capital advantage. It was the lack of credit killed communism as surely as lack of credit (even more than lack of faith in God) drove Raskolnikov to axe the moneylender.

If you read nineteenth century from the economists point of view, you will soon notice that the limits of the worlds of the characters are the limits of their credit lines. That was the world in which Baudelaire and Bloy could find the whole notion of debt diabolical. Not that they were wrong in terms of the general economy – but we live in this world by dickering with the devil.

But there is, still, a core of truth in Mises’s idea. While any developed economy needs a robust credit system, it also needs to put stringent curbs on speculation. Otherwise, the production of real goods and services will soon serve the servants – the speculators – whose only social function is to provide capital for risky enterprises.

Here, then, is where Mises and Marx can join hands: making sure that speculation does not take over industry.

In the U.S., the way speculation has taken over industry is the equities markets. In particular, the discussion of whether the stock of a corporation should, in the aggregate, represent more than its assets was won by the yes side. The progressive Republicans of 1910 were opposed to the idea of what they called watered stock.

I’ve often alluded to the bill, sponsored by Teddy Roosevelt’s partisans in the House and senate, that would have crushed this speculative impetus. To my mind, this is a much more sensible idea than the dissolution of the Federal Bank. It would actually have the same effect – to remove speculative inefficiencies from the economy. I’ve been thinking about this since reading Ian Welsh’s blog.

I made a comment there I will reproduce here:

I’m partial to Theodore Roosevelt’s remedy for curbing the power of the speculators in an economy. The supreme result of Roosevelt’s populism - which went beyond anything else proposed in the U.S. in the 20th century - was a bill , S232, that passed the House in 1911. Here is how it is described by Lawrence Mitchell in the Speculation Economy:

“It would have replaced traditional state corporate finance law by preventing companies from issuing “new stock” for more than the cash value of their assets, addressing both traditional antitrust concerns and newer worries about the stability of the stock market by preventing overcapitalization. But it would have done much more.

S. 232 was designed to restore industry to its primary role in American business, subjugating finance to its service. It would have directed the proceeds of securities issues to industrial progress by preventing corporations from issuing stock except “for the purpose of enlarging or extending the business of such corporation or for improvements or betterments”, and only with the permission of the Secretary of Commerce and Labor. Corporations would only be permitted to issue stock to finance revenue-generating industrial activities rather than finance the ambitions of sellers and promoters. … S. 232 would have restored the industrial business model to American corporate capitalism and prevented the spread of the finance combination from continuing it dominance of American industry.” (137) In Sklar’s account of the Roosevelt era draft, ‘whenever the amount of outstanding stock should exceed the value of assets, the secretary would require the corporation to call in all staock and issue new stock in lieu thereof in an amount not exceeding the value of assets, and each stockholder would be required to surrender the old stock and receive the new issue in an amount proportionate to the old holdings.”

We didn’t put these curbs in place in 1911. Since then, Speculation has become dominant in the U.S. economy. The whole trick of neo-liberalism is to extrude the old social insurance net, which was the great product of the progressive and new deal eras, into the private sphere. In essence, crush the bargaining power of labor, loosen restraints on credit, and tie the median income class directly to the speculative markets.

This has had the effect of creating a politics that is basically about pampering the speculative sector. It is, of course, a disaster for the vast majority of people. And that there was a lively discussion about speculation at all once upon a time - from 1890 to 1914 - has been utterly forgotten. You rarely ever hear a radical nowadays say, why don’t we simply overtunr the system of watered stock? Which, in effect, would mean that if you owned stock in a company, you really owned the company, rather than a financial instrument whose value was solely determined in a secondary market. The simple genius of requiring that the stock would have to equal the outstanding assets, and no more, would shatter the whole system at a blow. It is a system that needs shattering desperately.