Lecture 8: Interventionism
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Interventionism is a capitalistic economic system in which government gets involved to allow free exchange within a framework of laws.
The Christian Worldview and Economics
I. The Problem of Government Intervention
A. Federal Reserve System
A. Definition - Free exchange within a framework of laws.
B. The Ideal vs. The Real World
1. There is no true capitalist economy.
2. The problem is sin.
3. Physiology vs. Pathology
Course: Advanced Worldview Analysis
Now we are ready to pick up and continue that discussion by talking next about interventionism which is that position in the middle of the chart, that few people know about. I told you last week and it bears repeating. That whenever something goes wrong in the American economy, it is really the fault of interventionism. Even though most political and economic liberals in the United States would love to see the American economy way over here, somewhere in socialism, it’s a fact of life that the farthest towards socialism that they can take our economy would be right somewhere on the dividing line between interventionism and socialism. But every time something goes wrong with the American economy, liberals always blame capitalism when the real cause of the problem is liberal intervention with a free market economy. And that's true with unemployment, that's true with recessions, that's true with inflation and we'll say more about that later on.
Now let me give you a definition of interventionism. Interventionism is an economic system in which the State alters the terms of trade to benefit some at the expense of others. Interventionism is an economic system in which the State alters the terms of trade to benefit some at the expense of others. Now have any of you ever heard this definition used with respect of anyone of our other 3 economic systems? Well, let me help you out here. This is the liberal definition of capitalism up here. And usually when liberals are in a bad mood, they want everybody to think that this is what capitalism is and then they condemn capitalism because they say capitalism benefits some at the expense of others. And then as I told you last week, whenever the liberals convinced the public that capitalism has caused whatever economic malaise we have at that moment, they then use that as an excuse to push our country's economy even more in the direction of socialism. They introduce even more interventionist measures.
Now, here are on my chart the major examples of interventionism. Price controls, and statists have gotten so skilled in our nation that we don't know how many price controls are operative at any given time. Price controls, wage controls, tariffs, big thing going on right now in the steel industry, and manipulation of the money supply. Let's see if I have any money in my wallet after visiting the emergency room. Yes, there is a dollar bill. Have you ever looked at an American bill? Next time you look at a bill, you'll notice that the very top, Federal Reserve note. Federal Reserve note. Now, let me tell you a little about the Federal Reserve System because this is the epitome of governmental interventionism. This is perhaps the most significant way in which the American government exercises its interventionist powers over our economy.
This is my little lecture about the Federal Reserve System. 1914 was a very bad year for the United States. 3 bad things happened in 1914. First, was the start of World War 1, even though the United States did not enter World War 1 until 1917, but that was bad. Second bad thing was the adoption of a Federal income tax. That's the year of the IRS. I don't know if they use those letters back then. I’d forgotten what's the highest starting rate for the federal income tax was. I'm going to guess 2%. What a memory! 2-3%. Probably 3% was the highest marginal tax rate back then. But that's how liberals operate. You do it slowly. And do you know what the highest marginal tax rate was until Reagan became President? I think it was in the 90s. Yeah, 90s. Let me tell you about Ingmar Bergman, the Swedish movie director. Sweden, which many Americans associate with paradise. While Bergman was a citizen of Sweden, the highest marginal tax rate in Sweden rose to 105% and that probably would have been the equivalent of... you will become susceptible to that highest marginal tax rate probably if your income exceeded 30,000 dollars a year. Of course that would have been a long time ago. Now some people don't understand what marginal tax rate is. Well, we just had, if you are relatively poor, the highest marginal tax rate up to say, under 20,000 dollars was 15%. Obviously if you earn more than whatever that lower limit was then your marginal tax rate once you exceeded the 15% rate, it would then climb up to 39%. Starting this year, the highest marginal tax rate for the lowest income people is 10% and of course everybody will benefit from that because the first quantity of money that you make this year, no matter what your highest marginal tax rate will be will still be 10% on that. So we'll all get a tax break on that for which we can thank, let's see which political party. I can't remember their name. In the case of Sweden, obviously if it was at 105% of everything you earn, you'd be better off putting a bullet in your brain, I suppose. But that would mean that after you earn let's say what was then 30,000 dollars equivalent, the Swedish government would have taken more than you were making. So no one ever said Bergman was a fool, so he moved to Switzerland. He told Sweden that he wasn't paying them anymore taxes because he was renouncing his Swedish citizenship. OK. Now, the third that happened in 1914 was the formation of the Federal Reserve System. Actually the enabling legislation for the Federal Reserve System was passed in 1913.
Let me tell you who was the designing power behind the Federal Reserve System. All of the wealthiest and most powerful bankers. And business people in the United States. Anybody who thinks that the real purpose of the Federal Reserve System was to help the little guy should call me up tonight and I will sell him the book on Brooklyn Bridge?? This was a power grab by wealthy powerful people, and you know the major justification of the Federal Reserve system. It would eliminate the business cycle. What we would do is we would control and manipulate the money supply and in that way we will never again have periods of boom and bust. We would be able to keep the economy always on an even keel. We would eliminate inflation and all kinds of other things.
Now, 2 true stories. About 15 years ago, that's the connection with the eliminating inflation and all of the rest. I was watching 60 minutes with Mike, what's his name, Wallace, Mike Wallace. And he was down in, I think he was in Brazil. Because there was enormous inflation in Brazil at that time. I'm certain it's Brazil because they were walking around Rio de Janeiro. The inflation rate in Brazil at that time was 1,000% a year. Wow! That's not standard procedure for Latin American countries, is it? A little bit above. Now, let me illustrate a thousand percent. Let's say on January 1st, you put 1,000 dollar bill under your mattress. Or you put 1,000 dollars in Brazilian money under your mattress. On Dec 31 the purchasing power of that money which started out as 1,000 dollars, the purchasing power has reduced to 100 dollars. Now that's thievery. That's theft. If somebody walked into your house with a gun, and said "I want all of your money", and you said, "I've only got 1,000 dollars", and the guy said, "Well, he felt sorry for you and will he only take 900. He'll only take 900 and leave you 100. That's thievery. Now, who was the thief? It was the Brazilian government. The agent of inflation, listen to me, is always the government. But the purpose of the bureaucrats is to disguise that fact, let me quote Gerald Ford, who's a Republican, in name at least. Gerald Ford, thought, he became President after Richard Nixon because bad things happened to Richard Nixon. He made tapes and the tapes came to light. So Richard Nixon went the way of all flesh. He went back to California. And Gerald Ford became President. and Gerald Ford started passing out wind buttons to every person in America. W-I-N which means Whip Inflation Now. And Gerald Ford honestly believed that the cause of inflation in America was the greedy American citizens who were spending too much money. That's what government always wants people to think that inflation is our fault.
Do you know the real cause of inflation? I'll tell you right now. Inflation is an inevitable consequence of increase in the money supply. That's what causes inflation. If the amount of money circulating in a nation remains constant there could not be inflation. People would naturally shift their objective, they would stop buying this product. They might stop buying as much gasoline as they used to. They might buy less electricity than they used to. But the reason why inflation occurs is because government keeps printing more bills but it's a more sophisticated way of increasing the money supply. One thing that worries me is that we've now had these very low interest rates since September 11, and the economy is beginning to pick up and the Federal Reserve system are already making plans as to when they will start raising the interest rates. Do you understand what caused this decline in the American economy? It was the Federal Reserve System increasing the interest rates, which put the brakes on everything.
Well, I've got to finish my story. After I watched that interesting 60 minutes show with Mike Wallace, I began to look around for what the inflation rate, the cumulative inflation rate was in the United States between 1914 and up till around 1990. And do you know what I discovered? The cumulative inflation rate in the United States between the start of the Federal Reserve System and whatever year it was in which I was doing this research. Anybody want to come up with a number? 1,000%! 1,000%. The same percentage that the Brazilians achieved in 1 year. And don't let that make you feel good, you understand? What happened in Brazil was theft, criminal theft instigated by the Brazilian government. What happened in the United States but it took 76 years to do it was theft, and it was caused by the United States government. So, if your great grandfather had put away 1,000 dollars in his family Bible back in 1914 and you discovered that Bible in 1990 or whatever the year was, his 1,000 dollars would have lost 900 dollars in its purchasing power. So this idea that the Federal Reserve System would keep the American economy on an even keel will prevent us from becoming the victims of inflation. That it will largely eliminate the worst excesses of the business cycle that would produce great depressions and so on.
All of this was a lie. Now, I have 2 chapters in the "Poverty and Wealth" book in which I talked about the Great Depression. I guess I have read a little about that to you the other day. But as my book proves beyond a shadow of doubt, as in the case with all of my books, and all of my arguments, is that the causes of the Great Depression were to be found in the interventionist policies of both Republicans and Democrats after World War 1. And I do not excuse the Republicans. Herbert Hoover. Why's my voice getting so high? Herbert Hoover was as much to blame as Franklin Roosevelt was. The dumb Republican, dumb Republican. They were behaving like Democrats back then. Hoover deserved to get kicked out of the Presidency but who knew who would follow him. OK, that's interventionism. Now, capitalism. Here's a definition of capitalism. Capitalism is a system of voluntary relations, that's freedom within which people exchange freely within a framework of laws that prohibit acts of false, fraud, theft and violations of contract. Now you say, if that's the definition of capitalism, I don't see much capitalism going on in America. Well, you don't see much capitalism going on anywhere in the world. Most systems that people call capitalism are really versions of interventionism.
Now let's go down the list here. It's a system of voluntary relations in which people exchange freely. Now, what do they exchange? Well, usually they exchange money for goods. But sometimes they exchange goods. You've got so much wheat, we've got so much oil, let's exchange. And no money has to change hands here. But notice that these exchanges always must occur in a framework of laws. Now once again, liberals want everybody to believe that capitalism is a system of economic anarchy. Anything goes in capitalism. And of course anything that goes is supposed to benefit the rich and powerful and harm the poor. But actually you cannot have capitalism unless there are laws that forbid certain kinds of behavior.
And here are the 4 kinds of things that are forbidden in a capitalist system. Force is wrong. Fraud is wrong. Theft is wrong and violations of contract are wrong. Now why are they wrong? Because they inhibit people's freedom. You're not really entering nto a free exchange if someone is forcing you to do it. You're not really entering into a capitalistic exchange if the person with whom you are exchanging is lying to you, if he is committing fraud. Or if he is stealing, or if he is going to violate the contracts that are involved. So, there should be no surprise about why there have to be laws and why capitalism is not economic anarchy. There are rules and obviously and if there are rules, then there has to be at least a minimal government in order to make sure that those rules are observed and obeyed. Now, I'm going to come back to capitalism, and I'm going to give you a simple definition in a few minutes.
But I want now to put back my little chart of capitalism, socialism and I want to relate that to a couple of questions we left hanging at the end of the last class. I really do keep my promises. Now I'm looking on my chart at what theoretically is a place on the chart where capitalism overlaps with interventionism. You can get an economic system here in which you can't tell perhaps whether it's a loose form of interventionism or a semi statist form of capitalism. In my book I argued thusly??? That you will never find anywhere in the world today and probably nowhere in the world in the past you will never find an economic system that goes more towards capitalism than right about in here. This borderline between capitalism and interventionism. Therefore I'm telling you that there probably is not and there never has been and there never will be a truly capitalist economy anywhere in the world on this planet. Until maybe when we get to heaven. And since there won't be any money in heaven. Now, why is that the case. Here is my theory.
Incidentally, let me identify the nations of the world that probably got closest here for a brief time, closest to a genuine market economy. They were the nations of Southeast Asia a few years ago. Let me tick off their names-Hong Kong, Taiwan, Singapore, Malaysia and then something happened. Here's why when an economy gets here, something happens to the people who have been running the economy. They don't want to give up their privileges. They don't want to give up their power. But as long as a nation's economy continues to move in the direction of a free market enterprise, their holdings are suddenly jeopardized. Because all of a sudden new entrepreneurs in a truly free market system can zoom right past them and can take over their share of the market. So what happens? The greedy men and women who for whatever reasons, managed to achieved success and preeminence, all of a sudden began to look to government to protect their privileges. And they begin to move back in the direction of the interventionism.
Now, notice what I am telling you. The reason why we do not have, and never have had, and never will have on this planet a genuine free market system is sin. Wow! I never thought I'd hear a capitalist say that. Well, you just did. It's sin. It's like a strong rubber band. People stretch it out then it snaps back and we're back in the middle of interventionism. Think of what we said when we looked at politics. What we want is a political system and an economic system in which bad people can do the least amount of harm. And what is that in economics. It means to spread economic power as widely as you can. Give everybody a piece of private property. Because private property means that you have power over something at least. If the whole country goes to hell, at least you've got a plot of land in which you can feed your family. Keep bad people from doing more harm than they have to. Let me verbalize an objection that many people make to the position that I hold.
They say, "Nash, you're unfair. And the reason you are unfair is because you are defending an economic system that you admit does not exist in the real world. You're defending an economic system that you insist is an ideal and you are comparing it to a real system in a real world. Now, because the socialists have a real system in a real world, is it fair for you to kick them around because there is so much graft, corruption and evil in that system when of course you can fantasize about a form of capitalism in which there is no evil. Watch my answer to this. And I'll give Chuck van Eden?? my economics tutor credit for the answer. He said when somebody raises that question you got to draw the distinction between 2 words. The first word is physiology. And the 2nd word is pathology. Here's a definition of physiology. Physiology is the study of how a healthy human body ought to exist, where every organ in the body is functioning properly, every organ in the body is healthy, every part of the body is healthy. That's physiology. That's what you study in a physiology textbook.
What is pathology? This is the study of disease of the things that go wrong with a healthy body. Now, you cannot have pathology unless you first have physiology. If you start with pathology you'll never know what a healthy body ought to be. If you just look at my body you'll never know what a healthy body should be. Start at the top of my head. And somehow you get the point there. This is not the way God created men, with nothing on their head. OK, now, when I'm talking about capitalism, I'm talking about physiology. How an economic system ought to behave. But what we end up with interventionism and socialism is pathology. That's when an economic system is sick, is corrupt. Now how does that distinction help you? I think that's a great distinction.
So, my theory is that the closer any economy comes to this place on the continuum, the closer we get to a genuine free market system, the better the economy of that nation will be. And the farther away we get from this physiology, the worse that economy will be. Until you end up in this rats nest of hyper socialism. You should read soon the last couple of sentences in my book "Poverty and Wealth" page 199. This book then has 2 important messages. Christians who want to help the poor need capitalism. Rational economic activity is quite simply impossible apart from the market system. BUT-and let all friends of a market system heed, capitalism needs Christianity. The west continuing movement in the direction of secularism and humanism holds disturbing implications for economic life. I told you last time how much hope I had for Russia back in 1991, 1992, but the most important lesson the Russians forgot was that capitalism presupposes morality. A moral law and there will be no capitalism in Russia until Russia becomes a moral country, until there's a moral law that controls the actions of the people living in that nation.
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