“For each separate calculation of the particular branches of one and the same enterprise depends exclusively on the fact that is precisely in market dealings that market prices to be taken as the bases of calculation are formed for all kinds of goods and labor employed. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.”
– “Economic Calculation in the Socialist Commonwealth,” Ludwig von Mises, 1920
Ludwig von Mises conceptually destroyed socialism in his famous paper titled, “Economic Calculation in the Socialist Commonwealth.” He did so by pointing out the central importance of prices to economic activity, which, as Adam Smith famously demonstrated, were the means by which market supply intersected with market demand. Due to the way it eliminated the natural operations of supply and demand, socialism necessarily precluded the production of price information, and thereby rendered the economic calculations required to make decisions about how many goods to produce or what price they should be sold totally inoperable.
This impossibility of economic calculation under socialism was the source of the constant supply shortages seen in the Soviet Union. The central planners were operating in the dark and habitually erred on the side of artificially low prices, thus creating excessive demand for goods that could never be met. And without the information that prices provide concerning demand, the central planners often found themselves investing in the wrong capital goods, producing large quantities of consumer products that no one wanted. The cumulative effect of these constant mismatches of supply and demand was the technological stagnation that so visibly divided Eastern Europe from Western Europe towards the last decade of the 20th century.
The drastic and deleterious effect of price misinformation is why the news of the latest banking scandal, which concerns systematic fraud in the London Interbank Offered Rate, or LIBOR, is so troubling. It is no longer news that most, if not all, of the giant international banks are little more than government-protected criminal organizations that now survive on a combination of direct and indirect theft from the taxpaying public instead of their historical banking activities. But the global economy can survive an amount of financial graft and fraud without too much trouble, just as it can survive a certain level of taxation being skimmed off the top. However, just as tax rates that are too high will reduce economic growth and overall tax revenues, too much criminal activity in the financial sector will cause the entire economic structure to collapse.
The financial sector can be likened to the motor oil in a car engine. It lubricates the complicated interaction of all the moving parts and is required to prevent them from grinding against each other in a damaging way. If the oil is drained out of the engine, sooner or later one part will damage another part, and the engine will seize up and stop running. What the banks and governments have conspired to do is to remove all the beneficial aspects of the financial sector from the economy while turning it into a form of public-private taxation, which is analogous to replacing all the motor oil in an engine with sand and water. The grinding and the damage is already readily apparent, and it is only a matter of time before the entire global economic system ceases to function.
In the chapter of “The Return of the Great Depression” titled “No One Knows Anything,” I illustrated, in some detail, how the economic statistics reported every month by the various government agencies could not possibly be correct. Now, thanks to the $435 million fine imposed on Barclays by the U.S. Commodity Futures Trading Commission and other agencies, we know that the LIBOR, upon which the interest rates for a great many other loans are made, has been based on fraudulent reports for at least the last seven years. This means that the risk assessments made by all of those borrowing and lending money during that time were incorrect, and given that Barclays made a habit of consistently under reporting the interest rates it was paying, indicates that the risk of loan default is higher than the record low interest rates would seem to suggest are the case.
In the same way that socialism prevents economic calculation and forces ignorant guessing that is very likely to be wrong, financial sector fraud on this scale causes incorrect economic calculation absolutely guaranteed to be wrong.
Many of those who defended the bank bailouts of 2008 did so because they believed it was necessary to save capitalism. They were wrong on multiple levels, not the least of which is the erroneous belief that banks are intrinsically capitalist institutions. They are not, and indeed, as the LIBOR scandal demonstrates, they presently pose the single greatest threat to the continued existence of capitalism and free markets in the world today. By defending Wall Street and the financial sector, corrupt politicians like Barack Obama and Mitt Romney are not defending capitalism; they are attacking it.
When the global economy collapses, there will be many asking, “Who killed capitalism?” And the correct answer will be: the large international banks, with the assistance of their short-sighted accomplices in government.
Read Vox Day’s, “The Return of the Great Depression,” a detailed analysis of the economic and monetary policies of the last 40 years that shows why ideologues on both the left and the right were incapable of foreseeing the recent economic calamity.