Socialism and capitalism are both fake

An open letter to both post-leftist influencers and finance professionals.

My agents, who are everywhere, have made me aware that I have a small and quite discreet following among the “post-left”—a gaggle of young, difficult intellectuals who, though fully and properly disgusted with the American regime and all its works, might still describe themselves as “socialists” or even “Marxists.”

Look: I love you guys. But this is a cope. You are not really a socialist—just an undercooked nihilist. To make you happy, I will spend half this essay debunking capitalism—confirming the truth you know you know. But you can’t be a socialist.

Socialism isn’t even wrong—it doesn’t even exist. Moreover, today, it can’t exist. And the same is true of capitalism—though for very, very different reasons.

What I’ll do today is to deconstruct socialism historically, and capitalism financially. The problem with socialism is simple and easy to understand. The problem with capitalism is complex by human standards—if simple by financial standards. I do have a very small following among finance professionals, too.

[No, this is not a Gray Mirror chapter per se—though I may turn it into one, or part of one. GM #6.2, alas paywalled, is on its way soon.]

Socialism does not exist and cannot exist

You can’t be a socialist, any more than Internet “Nazis” can be real Nazis. The Party office is no longer issuing cards. They can be fake Nazis, of course—costume Nazis. Which may be better or worse; but for better or worse, is objectively a different thing.

Socialism is not a party, but an idea or an ideal. Yet the socialist ideology still implies conceptual membership in some movement. A solipsistic libertarian makes a kind of sense. A solipsistic socialist makes no sense—just as it makes no sense to be a “Nazi,” in a world where there is neither Party nor Fuehrer.

What is socialism, as a movement? Socialism is a mass movement of the working class to promote the interests of the working class.

If this definition is proper, and if in the real world today there neither is nor can be any movement that matches the definition, there neither is nor can be any such thing as socialism. If there is and can be no such thing as socialism, anyone claiming to be a socialist can only be a fake socialist. Therefore, socialism both is and must be fake.

Most of the “post-left” would buy is, but not must be. What they would say—if I am not caricaturing—is that socialism, once a true working-class movement, has now become something quite different—the official ideology of the “professional-managerial class.” But we have to fix it and make it a working-class movement again, and we can. Right?

Almost but not quite

This “post-left” theory, while almost right—is not right enough. It makes the common mistake of correcting a bogus but official narrative in the present, but not the past.

As Cicero said: he who does not understand the past is doomed to remain a child. So anyone who can persuade you to misunderstand the past can hold you in permanent tutelary bondage—regardless of your intelligence, education, wisdom or experience. You think you know—so you don’t even try to learn.

These “PMC” people are who I have called gentry, or armigers, or Brahmins—nobles, basically. But a clerical nobility, not a military nobility. Not at all unusual in history. They are also the managerial class of James Burnham and the new class of Milovan Djilas. Everyone now can see this culture clearly—and it is also my culture.

It is definitely true that, in 2020, social justice is the official ideology of the “PMC.” It is also true that the “PMC” as we know it is a 20th-century development.

It is by no means true that 20th-century socialism began as a working-class movement. And this fiction is not just a historical curiosity; it means everything for the present.

The first two steps

Socialism sensu lato—including, communism, progressivism, liberalism and all other labels for leftism, none of which can be objectively defined as distinct, either socially or philosophically, from any of the others—always originates as an intellectual cult. Not that there’s anything wrong with that!

As an intellectual cult (since you are reading this, you are already in one—or nearer, at least, for every word you read), its natural believers are detached, disaffected scholars. For better or worse, there are always lots of these. Maybe you are one. So was Pol Pot. So, of course, was Karl Marx. So am I, of course. This is all 19th-century stuff and most people know it, but most people have a weaker understanding of what happens next.

From this original position, socialism (while remaining an intellectual cult) becomes a fashion statement. As a fashion statement, its natural believers are the wealthiest, most sophisticated people in the country—the upper crust of the upper crust, 1% of the 1%. Is it weird that these people would have it in for the 99% of the 1%? Or is it human nature?

The leaders of any socialist movement therefore naturally consist of a mix of the two types: intellectuals and socialites. Of course, the servants of the movement—the large numbers of people who give it power, under a political system which has decided that large numbers of people have an inherent right to power—are just who it claims. (And as is de rigueur, the leaders claim to be the servants of the servants.)

But if “socialism” is the right word for a movement of the working class on behalf of the working class, it cannot be the right word for a movement of the aristocracy on behalf of the working class. These are obviously different things.

Patronage and its thirsty fashion victims

We have a better word for such a movement: patronage. Patronage is the systematic creation and maintenance of economic dependency, in exchange for political power.

Roman aristocrats—the source of the word patron—measured each others’ status by the number and quality of their clients—the dependents on their aristocratic largess. So did medieval lords with their serfs: the word “lord” is from the Saxon hlaford, which means “giver of bread.” So, of course, did the Southern plantation masters.

It is never to be assumed that the empathy of patron for client, lord for serf, owner for slave, or socialite for coalminer, is inherently bogus. Not at all! It is normally genuine.

Yet there is nothing that forces it to be genuine. Worse, even if it is genuine in intent, nothing forces it to be genuine in effect. And the more distant and abstract any direct relationship is, the weaker are the emotional bonds that could force it to be genuine. The socialite does not come out well in this comparison.

We can say: “socialism,” in the 20th century, is an aristocratic movement which intends to promote the interests of the working class. In the sense of our original definition, of a working-class movement which promotes the interests of the working class, there is not, and never in the 20th century was, any such movement.

This absence does not prove that such a movement could not be born in our century. But it removes the inductive justification for thinking that such a thing is possible.

The final step of socialism’s evolution is the dissemination of aristocratic fashions into the middle classes—social middle classes, intellectual middle classes, financial middle classes. This creates the aspirational “PMC” as we know it.

Like most middle classes (using the term in the current euphemistic sense—as “upper middle class,” meaning really “lower upper class,” 20% of the population at most)—the PMC feels it’s doing well any time it’s aping its betters.

Yet for those betters, the true aristocrats, the motivation of the ideology is at least as much ambition as empathy. Moreover, the ambition tends to drive the empathy out, leaving it as a cold and sterile justification of a Nietzschean need to rule and win—and be the hlaford, the giver of bread. Everyone has seen the ugliness of these people.

You think there must be something else—but no, this is all there is. And this ugliness, too, is aped. Somewhere, right now, in a school or office near you, someone is being humiliated and destroyed, by small, cruel, thirsty souls, for the benefit of the people. Do you have a tear for them? Of course you don’t. You can’t feel anything but power.

Moreover, one of the most common copes among the best people on the left is to feel that while of course this shit exists and is horrible, it does not represent the true spirit of the movement. That true spirit, rather, belongs to them. Their dream is not to slay the dragon—but to recapture that beast, then command it as the rightful owner. Can you see what you’re doing here, kids? And do you think you’re the first people to do it?

Ambition is a natural human emotion. It lives better if it lives openly as itself. If you are drinking a bottle of wine a day, you are not just drinking it for the taste. The actual effect of socialism is always patronage, which always creates power. Whether or not you intend to get high on power—you will. Try to make sure it’s at least real power, and not the sterile, voyeuristic simulacrum of it.

Dependency cannot be separated from authority. If you give some man his daily bread, you are his lord. You may not even require him to work for it—that may be your lordly caprice; your intent may be to benefit him, perhaps feeling that idleness is better than labor; but if tomorrow you change your mind, he has no choice but to dig you a ditch.

Possibly all you want from him is his vote—which is exactly like a Roman politician, bragging about the swarm of clientes on his porch. At least the Roman patron knew his client in person, and often depended on him for service. You own the man not even for his work—but only for his headcount—as a walking statistic. Dehumanize much?

Indian political scientists have a term for this: a votebank. At this point we scrape the bottom of the stale, sordid, inhuman racket of mass patronage that is the only possible endpoint of socialism, and indeed democracy itself, in the 21st century.

As it really was

The alert reader will note that none of these historical assertions have been proven or justified above by historical evidence. True. No one can convince anyone of anything.

If you are interested in this hypothesis, if you believe it possibly could be true but are not already certain of it, perhaps you may find it in your interest to investigate its truth or falsity. I cannot help you investigate its falsity; I know it to be true. Here are some references that can help you convince yourself that it is.

A good way to show that something is fake is to find the real thing, then compare the fake thing to it. For an authentically endogenous American labor movement without intellectual or aristocratic ties, we have to go back before the 20th century. Both the Knights of Labor and its leader, Terence Powderly, have excellent Wikipedia pages. Note also the Rock Springs Massacre.

While labor unions into the 20th century retain leaders with actual labor backgrounds, this once-endogenous labor movement does not evolve into the socialist movement. Rather, it becomes ideologically captured by the socialist movement, whose political program and candidates it soon comes to serve with doglike, unquestioning loyalty. After all, it is the job of the ruling class to rule.

The early ruling class

While most intellectuals know of the 19th-century intellectual stage of that movement, few know what it actually looked like in the early 20th. At this time, its centers were the winter capital and summer capital of the young American aristocracy: Greenwich Village and Provincetown.

To read about the kinds of people who were involved in this early bohemian world (if you’re in a hurry, just click “Early Life”), read about John Reed or Walter Lippmann or Lincoln Steffens; or about the women, like Mabel Dodge or Mary Heaton Vorse or even Gertrude Stein; or the institutions, like the Intercollegiate Socialist Society. Or watch the realistic if hagiographic 80s movie Reds, with Warren Beatty as John Reed.

As you click around these pages, imagine teleporting any of these people directly to Burning Man. You’ll realize that, except for their clothes, they would fit in perfectly. That’s because they’re the same social class—although not the same economic class. Well, not always. Now, try to imagine Terence Powderly at Mabel Dodge’s salon. If Terence Powderly was alive today, he’d drive a jacked-up F150 with Trump stickers.

And in fact, the DSA is arguably the legitimate organizational successor of the ISS. And strangely, it has exactly the same kinds of members—mostly not as rich, though.

The bohemians of that age weren’t always rich, either. They were rich, or brilliant—but more often than not, both. Despite the enormous damage they did to the world, they had good intentions and they also did some good.

This is what “socialism,” in the lives of those now living, is. It is an aristocratic and oligarchic ideology of patronage. It has never been anything else. Vanity, status and ambition are central to its appeal. While it sometimes does good things, nothing forces it to do good things—and everything tempts it to seem good, rather than being good. With what results, we see.

And it looks nothing like a working-class movement to promote working-class interests—like the Knights of Labor, who promoted working-class interests by… massacring the Chinese competition. Not that you would want to identify with that. In any case, it was 150 years ago—in an America more alien to us than any country today.

So much for “socialism.” It is certainly possible to imagine a tradition of government for the good of the working class, and all other classes as well. But such a tradition would have to be a new one; it would have to focus on results, not goals; and it could not sully itself, morally or intellectually, by any connection to 20th-century “socialism,” or anything else fake.

Like capitalism…

Capitalism does not exist and cannot exist

The definition of capitalism is a free market in capital. [Uncomfortably long pause here—maybe till someone in the audience snickers.]

No—really. Capitalism is not just “having companies that make stuff.” East Germany had companies that made stuff. Capitalism is “having a free market in capital.”

Raise your hand if you think we have a free market in capital. If you didn’t raise your hand, go find a pen and paper and write down two dates. The first date is the last year we had a free market in capital. The second date is the next year we will have one.

If you can, try this exercise in a roomful of finance professionals. I predict that your results will be all over the map. (If the room is big enough, the first date may go back to the Bank of Amsterdam.) What this tells you is that no one has any goddamn idea.

Whatever we actually do have, it is to capitalism—a free market in capital—as the Delta Quadrant is to the Federation. We barely have any idea how we got here. We have no idea at all how to get back. In fact, we suspect it’s impossible—which it is.

Here is a very brief summary of the US financial system. It works by losing money. Because the dollar is the global reserve currency, it can lose as much as it wants. It loses money in lots of ways, but mainly by giving free money to rich people.

Here is a slightly longer summary. The US financial system works by manipulating interest rates to increase asset prices. For many decades, the Fed manipulated only short-term interest rates, and let the “bond vigilantes” set long-term interest rates. This was not a free market in capital, but it was closer—and that old bond market created real fiscal accountability, even for the United States. The bond vigilantes, needless to say, have gone wherever the Vigilance Commission disappeared to.

Now the Fed buys $120B of Treasuries a month, setting the 10-year risk-free discount rate below 1%. The price of a capital asset is a function of this number. If the rate is 0, the present value of a constant and permanent revenue stream is infinite. Managing interest rates means manipulating the price of capital. So there is nothing remotely “natural” about the perpetual rise of the stock market and the housing market. Cut off the heroin-steroid drip, and you’ll see what these assets are really “worth.”

Asset-price inflation is a regressive stimulus—it’s logically equivalent to giving vast amounts of helicopter money to the rich. It’s pure “trickle-down economics.” Can we even call it—antisocialism? Also, there is a plain English word for a “perma-stimulus.”

The US economy is fully addicted to this incredibly fucked-up regressive stimulus, which is far less effective in producing spending than progressive stimulus—giving free money to non-rich people. It also creates far less utility, because the marginal utility of a dollar to a rich person is much lower.

This is not capitalism. This is a Simpsons caricature of capitalism. Any reasonable person, seeing this system for what it is, would find it horrendous. But no reasonable person can think of any way to rescue it. There is no way—at least, no reasonable way.

Again we have presented an argument without substantiation. Let’s work through this in more detail—since even most finance professionals struggle a bit with these ideas—using the classic 19th-century methods of “literary economics.” Mathfags BTFO. (Hey mathfags: you gave us this monster. Or at least, you didn’t complain about it, did you?)

And if the point is insufficiently made, we’ll reiterate it by designing a transformation from this monster to a free market in capital. This transformation will not be possible—which is why capitalism does not exist, and cannot exist.

A praxeologically equivalent transformation

Praxeology, the philosophy of motivation, is jargon from Austrian economics. In the thought-experiments below, a praxeologically equivalent transformation is any change in the financial system that leaves everyone’s motivation substantially unchanged.

For example, a stock split is perfectly equivalent. You log on to your brokerage and see your position. It has changed, though you did not change it. You have twice as many shares at half the price.

If a company you have stock in is bought by another company, or bought out for cash, at the current market price (though it’s usually higher), something has changed a little. But neither of these events changes your personal net worth. Therefore, neither of these events changes your motivation to buy a Porsche.

The same would be true if you logged on and saw that all your positions had been closed out for cash. Perhaps you are no longer betting on assets you want exposure to. That’s annoying—but again, your net worth hasn’t changed. Your spending profile does not actually change. So nothing, really, has happened.

Therefore, we can construct a praxeologically equivalent transformation across the whole US economy in which everyone’s personal net worth is cashed the fuck out.

The Fed buys all financial and financialized (eg, housing) assets. Even your home equity turns into cash, and your mortgage payment is now your rent. Your bank account is now your Fed account, and if you owed any debt—you owe it to the Fed. This is stranger than the above examples, but still fairly sound in its equivalence.

The gambling dollar

Since this simplifying lens is equivalent, we can look through it at any time; and we can look at it across time. We can even imagine a version of the Fed account that lets citizens “invest” with the Fed.

Instead of their balance being fixed, static dollars, citizens can put their money in “gambling dollars”—which expand and contract according to performance metrics of various East German-style state enterprises, rather like a ‘90s style tracking stock.

Of course, since the Fed now owns all the stock, it owns all the companies. But it could even go farther and let you gamble on football, movies, politicians, or horses. And of course, since it is in America’s interest to force everyone who wants to save to gamble, gambling is positive-sum—this is how the regressive stimulus launders its nasty cash.

Welcome to Uncle Sam’s Casino Economy! At Uncle Sam’s, the only way to lose is not to gamble. But while Sam would run a popular casino indeed, strangely, many citizens have no interest in adding speculative information to the market—because they have no information, and are not in fact speculators or even gamblers.

The solution is “index dollars” which gamble on everything—presumably including all the teams, movies, politicians and horses. The “investors” receive generous returns for adding zero signal to the market. This is obviously retarded.

This is “capitalism”—an obviously ridiculous financial system, but whose incentive structure is equivalent to the financial system we have now. If the two systems could somehow be swapped out overnight, everything would keep operating normally.

Mainly by giving free money to rich people

How important to the “economy” is this regressive stimulus? Well, how big is it? Thankfully, our friends at the Fed have prepared a handy chart.

We can see that between Q1 2016 and Q1 2020, a normally good time for stonks, the total personal net worth of Americans increases from $106T to $127T. This loss, of about 5 trillion a year, is more than 5x the fiscal deficit. And between Q1 2020 and Q3 2020, as the interest-rate pedal is really pushed to the metal, this number leaps up to $140T. This loss is more than 4x the fiscal stimulus.

So yes: the regressive stimulus is huge. Of course, it has to be—because it works so badly. As a reductio ad absurdum, imagine that we gave all $13 trillion to Jeff Bezos. This would generate very little consumer spending at all—and, of course, consumer spending is business revenue, which both employs Americans and drives P/E ratios. We are starting to see which of these effects is more important.

Remedial accounting for finance professionals

But—how are these losses? They’re not losses! They’re gains! Lol.

This line of thinking always reminds me of the slightly dim Todd Solondz character who gets hired as a strikebreaker. Then a picket line shows up and calls her a “scab.” She’s like: “I’m not a scab! I’m a strikebreaker!”

Even if we forego the transformation, of course increases in stock prices are losses. As anyone who has looked at a balance sheet is aware, equity is a liability, just like debt. The valuation of a company is a function of the profit stream it is expected to generate. When its stock goes up, the amount of cash it is expected to generate goes up. This can be very stressful for the company—just like having too much debt.

And with the transformation, there is no difference between Jeff Bezos’ Amazon stock going up by $200B, and the Fed computer bumping his account balance by $200B. One could argue that Bezos deserved the former—or the latter. Accounting is about who has what, not who deserves what.

The zero-sum asset market

One could also argue that the East German model is bad, because stock markets serve the very important function of providing CEOs with objective accountability. Once the companies are all nationalized and report only to Comrade Ulbricht, all they get is subjective accountability—an inferior good. At least if you look at East German cars.

This is true. But it doesn’t require systemic asset-price appreciation. A stock market which is a zero-sum game—in which the market capitalization of the whole market does not change significantly or predictably—can provide even more accountability.

In fact it provides more, because there is no “beta,” only “alpha,” in such a market. Confusing beta with alpha is a major cause of the cruise-control fat-cat CEO. In a boom, not even God can tell the difference. How do we create this alpha-only market?

Reviewing the transformation

Let’s review and continue our thought-experiment.

First, we nationalize all all financial and financed assets for direct Fed dollars (M0), creating something like 50x as many literal dollars as existed yesterday. Contrary to folk wisdom, this is not at all “inflationary” in the sense of a general price level. Prices are set by supply and demand, and purchasing power is unchanged.

Second, we unify Fed and Treasury. Accounting fictions—who needs them? In reality, a Federal Reserve Note—a dollar—is sovereign equity. In reality, a Treasury bond is not a debt—it is a restricted dollar. It does not mature—it vests.

We also merge all banks, etc, into the Fed; debts to them are debts to the Fed. There are no financial intermediaries at all—just the blinding monetary light of the naked, divine, all-powerful Federal Reserve. Which now owns all productive assets.

All this remains praxeologically neutral. It creates a system of state capitalism which is extremely simple and easy to understand. There is no shock to the economy at all; it will continue to operate normally.

Completing the transformation

But over time, this command economy will deteriorate for lack of proper incentives. It is, after all, Soviet America. The goal here is to make America less Soviet, not more. Therefore, let’s figure out how to unwind it—leaving our desired alpha-only market. These steps will not be praxeologically neutral.

First, we fix the number of dollars. Put them on the blockchain, or something like that. We often hear of a “central-bank digital currency” these days. It never has the most important feature of a proper digital currency: a mathematically bounded supply.

Since fiat currency is sovereign equity—a dollar is a nonvoting share of government stock—we can define dollar positions not as a raw number of dollars, but as a fraction of the total dollar supply.

With a fixed dollar supply, these accounting forms are identical. If the government, like a company, can issue new shares, fractional and literal accounting diverge—and we see what diluting the dollar really means. Issuing new shares is a wealth tax on all existing shareholders.

Corporations have good reasons to issue new shares—like mergers and acquisitions. They also have bad reasons to issue new shares—like funding continuing operations. A company that does this is heading for the toilet, but corporations aren’t sovereign. The problem with governments is that they can live in the toilet.

Moreover, if the government cannot print new dollars, it cannot conduct or promise bailouts. This means that private actors, like banks, cannot safely create money. They would just be creating little bubbles, which would pop in runs. Since this would be dangerous, it is proper regulation to make it illegal, by requiring intermediaries to match the duration and currency of their assets and liabilities.

Second, we auction the nationalized assets—and burn the dollars received. Again, by definition, private and public purchasing power are unchanged after this auction. It will be seen that the asset prices produced by this auction are much lower than the former prices, and the interest rates are much higher.

And we are back to capitalism—or at least, a free market in capital. Yay!

Asset markets under capitalism

Under capitalism, the efficient market hypothesis actually holds. There is no beta, only alpha. Barring exogenous events—like a pandemic—which actually affect all assets, markets do not tend to move as a whole. No one needs to gamble to preserve capital. Speculation is only for players who have signal to add, or think they do.

But how can the economy grow, when the money supply is fixed? Don’t all companies continuously work to grow more valuable? Then why doesn’t the stock market, which equals the value of all companies, have to go up?

The error here is in thinking of money as a measure of value. As Austrian economists will tell you till your ears bleed, there is no such thing as a measure of value—nor is there any need for any such thing.

When we talk of economic “growth,” we really mean an increase in the total revenues of all corporations—which is “nominal” GDP. Then we try to subtract out the effects of rampant monetary dilution, getting “real” GDP—which is the value of all the goods produced. For “real” GDP, we are looking for an increase in productivity—that is, an increase in the quality and/or quantity of the goods produced.

If there was no need for these statistics, there would be no need for these concepts. Creating more and better stuff does not require diluting the money supply. As we saw, creating money, under fractional accounting, is just a wealth tax. Is there some reason that, without a wealth tax, Apple cannot make better phones? What?

Suppose Apple makes much better phones this year than four years ago. It charges exactly the same for them. Everyone engages in exactly the same economic behavior, but with nicer and better stuff.

In some abstract sense, Apple has grown more “valuable.” In the concrete financial sense, it is the same business, bringing in the same revenues, and yielding the same profits. None of this requires Apple’s stock price to increase—unless it performs better than the average speculator expects.

And if this does happen, it means that Apple is taking revenue away from other companies—because consumer spending, too, is constant. They will perform worse, and their shares will go down; the market, as a whole, remains flat. As it should be. Financial “beta” is always and everywhere a monetary phenomenon.

Why this can’t happen

Is this just a thought-experiment? Or is it actually… a proposal? Of course not.

For one thing, politics is the art of the possible, and this process is two to five orders of magnitude away from political possibility. But there is a more important problem.

The advantage of this design is that it creates a sane and watertight financial system which cannot hide systemic losses under the carpet of seignorage. The disadvantage is exactly the same.

The disadvantage is that, once this financial system can no longer hide systemic losses, it can no longer hide the reality that America loses half its GDP in red ink every year. Is it any wonder that if you drive across the country, you see a country bleeding to death—even before 2020? Well… that’s exactly what you’re looking at. Financially, anyway.

So the message of this free-market vision is not in any way a message of hope. Or at least, not easy hope—not the cheap hope our discourse so routinely trafficks in. It is more the vision of Rilke:

Otherwise this stone would seem defaced
beneath the translucent cascade of the shoulders
and would not glisten like a wild beast's fur:

would not, from all the borders of itself,
burst like a star: for here there is no place
that does not see you. You must change your life.