When Worlds Collide
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This week’s article of the #Weekly #Wintersberger was written in advance and dealt with a topic unrelated to actual financial market events.
A government big enough to give you everything you want is a government big enough to take away everything that you have. - Gerald R. Ford
In the context of the international progressive left, Jeremy Corbyn and Bernie Sanders stand out as prominent figures and among their most significant representatives. In reaction to the prevailing direction of the left in the early 2000s, led by politicians like Tony Blair or Gerhard Schröder, Corbyn and Sanders emphasized social justice and political change in their agendas.
Jeremy Corbyn, a long-standing member of the British political scene, rose to become the leader of the Labour Party with his emphasis on socialist principles and his critique of what he saw as established economic inequalities. His message resonated particularly well with ordinary party members.
Similarly, Bernie Sanders gained prominence in the United States, serving as a long-time member of Congress and through his presidential campaigns. His advocacy for universal healthcare, free higher education, and higher taxation of the wealthy reshaped the political discourse in the USA.
Jeremy Corbyn and Bernie Sanders are regarded by many leftists worldwide as prototypes of modern social-democratic politicians because they consistently championed progressive principles. Their staunchly left-wing positions and authentic personas have made them icons of the contemporary progressive left.
Corbyn and Sanders ignited grassroots movements with their sincere rejection of established political structures and their ability to convey simple yet powerful messages. By engaging directly with the grassroots, mobilizing young voters, and leveraging social media, they created platforms for broader political participation and inspired thousands to support them.
The new chairman of the Social Democrats in Austria, Andreas Babler, is also equated with Jeremy Corbyn and Bernie Sanders by local left-wing intellectuals. Babler secured the party leadership in an internal vote, defeating the candidates from the party's top ranks, Pamela Rendi-Wagner and Hans Peter Doskozil.
Tumultuous events marked the election itself. After Doskozil won the members' poll, he appeared to be confirmed as chairman in the subsequent runoff held during the party congress. However, Doskozil's joy was short-lived, as just two days later, amid media speculation about the SPÖ's future under Doskozil's leadership, it was revealed that the votes had been miscounted, and Babler was, in fact, the winner.
Babler, the mayor of a small town in Lower Austria, ran his campaign for the leadership almost exactly like Corbyn and Sanders, attracting many new members to the Social Democrats who had a significant influence on the members' poll. His emotional speech at the party congress likely convinced party officials as well.
Since then, Babler's statements have been characterized by class-struggle rhetoric, the most noticeable aspect of his remarks. He speaks of hardworking people and our folks who must fight for their rights against the elite once again. In terms of policy, Babler differs only on immigration and climate change from the Social Democrats of the 1970s, although the latter was not a significant issue at that time.
The issues he addresses have become highly relevant again in times of rising inflation, geopolitical turmoil, and a growing wealth gap following the pandemic. Politicians like Babler have, once again, identified liberalism as the culprit, or at least they claim to do so.
The proposed solutions offered by interventionists on both the left and right for over a year are by no means new. They include familiar ideas such as price controls, caps, aid payments, and redistribution. Governments have used these ideas for centuries to combat inflation and other economic problems, never leading to sustainable improvement.
Among those who are more critical of these demands in the public discourse in the media, targeted assistance for low-income earners is put forward as an alternative proposal. However, these suggestions are deemed insufficient by the interventionists from both the left and the right, which is why they accuse them of pursuing a policy of neoliberal callousness.
Indeed, the public skeptics can be categorized as adherents of neoliberalism. Nevertheless, since their inception, neoliberals have gradually adopted many demands put forth by interventionists. This was done because they hoped to slow down the ever-advancing collectivism and preserve the market economy's fundamentals. This ideological discourse of modern times is as old as modernity itself, but some of the ideas of collectivism go back even further. Therefore, due to my absence from the financial markets this week, I would like to take a historical perspective...
Advocates of collectivism justify their calls for a common welfare economy by arguing that it is inherent to human nature. Early human groups in primitive societies often had shared resource utilization to ensure the survival and well-being of all members. This is often cited as an example of how collective approaches to resource distribution can be successful. However, these societal models primarily served the purpose of collective survival.
The romanticization of primitive societies as a model for modern, division-of-labor organized communities is widespread among some socialists. Yet, the way people live together has evolved significantly over millennia. In the early Middle Ages, there was a clear division between nobility, clergy, peasants and laborers, townspeople or serfs, and unfree individuals. This began to weaken from the late Middle Ages due to economic changes, urban growth, religious movements, political upheavals, Enlightenment ideas, and revolutionary movements, ultimately leading to the abolition of feudal structures and the emergence of more modern social orders.
Many historians argue that the Industrial Revolution can be traced back to developments in the preceding centuries. These earlier developments included changes in agriculture that supported population growth, trade and trade routes that facilitated the exchange of goods and ideas and the emergence of new technologies and production methods.
These developments, along with the scientific revolution of the 17th and 18th centuries and the development of new ideas and technologies, eventually led to the Industrial Revolution. In this era of significant economic and social upheaval, along with the intellectual movement of the Enlightenment, which championed individual freedom, reason, knowledge, and human rights, more and more people began to demand individual rights and freedoms.
It was the birth of liberalism and modern economics as well, which was closely associated with it. However, the time also brought massive social and economic changes, including the shift from craftsmanship to mechanized manufacturing. This led to a changed economic landscape and new societal classes.
At the same time, there was a significant increase in population in many parts of the world, leading to rural depopulation. Masses flocked to the cities to find work in the new industrial sectors. Compared to today, the conditions were devastating. Wages were low, working conditions poor, and child labor was not uncommon. However, it must be recognized that this liberalization of the economy saved the masses from death, as it enabled unprecedented productivity gains.
This rapidly changing environment also led to a counter-movement because many suddenly found themselves in a world they did not recognize. They longed for their old life in the countryside, away from cold factories, overcrowded workers' housing, tenements, and slums where workers lived together in highly adverse conditions.
People formed workers' associations to fight for better working conditions and mutual support. Many of these associations were still private organizations then, but with the ongoing political democratization, it was only a matter of time before these workers' associations evolved into political movements. Eventually, in many European countries, socialist parties emerged in the second half of the 19th century.
The theoretical foundation for these parties was formulated by the philosopher Karl Marx, who, in 1848, and his friend Friedrich Engels, a scion of a wealthy entrepreneurial family, published the Communist Manifesto. However, after Marx's death, both theorists gained greater recognition towards the end of the 19th century, a fate they shared with many other artists and philosophers.
The emerging workers' movement was viewed with concern by the rulers. Having already lost privileges during the spread of liberal ideas, they saw the socialist, collectivist idea as a new threat to their privileges. Their solution was to combine the thesis (liberalism) and synthesis (socialism) to counter the antithesis.
They implemented socialist demands, hoping to weaken the growing influence of socialists. Bismarck's introduction of state health insurance aimed to weaken the private insurance systems within the labor movement and consolidate his power. As a right-wing nationalist, he was hardly less inclined towards interventionism than the socialists.
Here, the commonalities between both sides become evident as they seek to secure approval and support through state interventions and redistribution. While socialists aimed to introduce a new, fairer system through this route, conservatives were more interested in maintaining the status quo.
The same can be observed in the attitudes of rulers and large business owners towards liberals. After realizing that liberal economic policies were partly to their advantage, they implemented some aspects while resorting to interventionism in other areas. The Weimar hyperinflation was partly due to the lobbying of big industrialists who benefited from it. This cemented the image of the greedy capitalist in the eyes of socialists forever.
Despite this, classical liberalism retained the upper hand over interventionism, but the Crash of 1929 led to an abrupt end. Although this was also a product of monetary interventionism, the public quickly found the culprit: the unrestrained free market. Classical liberalism was definitively replaced by interventionism.
The field of economics also changed. Young economists increasingly turned away from the idea of a free market and formulated theories that more significant state intervention during times of crisis could spur economic recovery. These theories, ultimately consolidated by John Maynard Keynes in his General Theory, were not new. Nevertheless, governments used them to justify growing state influence.
The last liberals and free market proponents knew that they needed to change their image to regain significance in economic discourse. The Colloquy of Walter Lippmann in 1938 in Paris is considered the birth of neoliberalism, where liberal economists such as Hayek, Röpcke, Rüstow, or von Mises discussed the future of the idea of liberalism. After the end of World War II, Hayek gathered the mentioned economists and others like Milton Friedman, Walter Eucken, and Karl Popper at Lake Geneva, leading to the founding of the Mont Pelerin Society, which remains a target for many interventionists today.
The classical liberal idea was finally laid to rest at this meeting because most participants believed that a certain degree of interventionist policies, the so-called third way, had to be accepted. Mises rejected this view and referred to those who held this opinion as a bunch of socialists. Hayek also quickly lost influence, although he remained a member until his death.
In the following years, Keynesianism remained the dominant school of thought in economics, although the Ordo-liberals in Germany achieved success by advocating the social market economy. However, despite their economic success, the further rise of interventionism could not be halted.
Mises always referred to the Ordo liberals as Ordo interventionists. In his view, they were hardly distinguishable from the socialists he had fought against all his life. In the United States, Germany was seen as a bastion of classical liberalism. Still, according to Mises, this was only because it referred to the monetary policy of the Bundesbank, which was less inflationary.
The transition from the gold standard to the fiat standard in 1971 provided more flexibility, and politicians did not hesitate to use the new possibilities for distributing electoral gifts. At the same time, the influence of central bankers began to rise as they made these policies possible through their monetary policy.
Sociopolitically, liberalism achieved successes, such as gender equality and non-traditional partnerships outside the classic marriage model. However, these measures were implemented and advocated for by social democrats and leftists. Ultimately, this did not mean the end of the state's influence on citizens’ private lives but somewhat further politicization. In this regard, interventionism has also prevailed here.
The financialization of the economy since the 1980s, driven primarily in the United States and the United Kingdom by deregulation laws and tax cuts under Ronald Reagan and Margaret Thatcher, is referred to by critics of liberalism as the birth of financial capitalism. Since then, critics claim that the interests of large corporations' profits have been prioritized over those of society.
At first glance, this may seem plausible. However, upon closer examination, one realizes that interventionism has been the driving force here, consciously or unconsciously. During this time, the monetarists took control of monetary policy at major central banks. Economically, they align with the liberal tradition but not in terms of monetary policy.
While Keynesians rely on government intervention through additional government spending to combat economic crises, monetarists aim to achieve this effect through interest rate cuts and expanding the money supply. The goal is for the private sector, rather than the government, to boost investment activity.
Yet, upon closer inspection, this market-oriented solution to crisis management is merely an insurance policy for investors. In the best-case scenario, financial investments yield a profit for them, and in the worst-case scenario, their losses are limited by central banks. The late economist Roland Baader referred to this type of monetary policy as monetary socialism. Still, one could also call it socialism for the rich, where any significant loss in investment value due to an expansion of the money supply is stopped.
This system offered advantages, especially for interventionists. On the one hand, election gifts could be distributed by continuously lowering interest rates, and on the other hand, one could denounce unbridled capitalism for widening the wealth gap.
After the 2008 financial crisis, this was further exacerbated by the massive bond purchases by central banks. It was no longer the monetarists but the new Keynesians who had taken control of central banks. Monetary interventionism was a new form of interventionism, exempted from any democratic control.
The fight against deflation was paramount. For highly leveraged financial systems like ours, deflation is a significant danger because borrowers are disproportionately burdened in a deflationary environment. This placed left-wing interventionism in a favorable position.
Social democrats rightly criticize the privatization of profits while socializing losses. However, the demand for the socialization of profits through redistribution would only increase the influence of the state. In the end, it is the state that determines who gets how much of what.
It would be naive to assume that this would solve problems, most of which were created by previous interventions. A good example is the drastic interest rate hikes by the Federal Reserve and the European Central Bank.
Zero-interest rate monetary policies, QE, and government spending programs during the pandemic kept demand constant while supply, in certain sectors, significantly decreased. In response, prices surged dramatically, and the geopolitical tensions surrounding the war in Ukraine further exacerbated the situation. Central banks had no choice but to raise interest rates significantly to maintain their credibility.
Those who had taken out long-term, variable-rate loans in recent years are facing troubles now. In some cases, their interest burdens have more than doubled. The culprit for collectivists from both the left and the right is clear: the banks pushed their customers into this situation.
Nobody mentions the Forward Guidance highlighted by central banks for years, which, as recently as December 2021, suggested only gradual interest rate hikes. Thanks to the central bankers, Bank employees reassured their clients that rising interest rates are hardly imaginable. Demands for a windfall tax on banks to subsidize variable-rate borrowers are just one example of how interventionist policies create more problems.
Another example is found on the interest rate side, but not with lending rates; it's with deposit rates. Left-wing and right-wing collectivists are outraged that banks still keep deposit rates near zero despite central banks raising short-term rates significantly.
The reason can also be traced to central bank interventionist policies, which these parties had demanded at the time. Due to the massive bond-buying programs of central banks, commercial banks suddenly had excess reserves. On the one hand, this strengthened bank balance sheets, but on the other hand, it significantly altered the boundaries for potential lending.
However, bank lending remained restrained during this period but increased in this decade due to state credit guarantees and rising interest rates. Banks typically need to attract deposits to expand lending, as minimum reserve requirements limit the quantity of loans they can grant.
They do this by offering higher deposit interest rates. However, there is no reason to offer higher deposit interest rates if they have enough reserves. Thus, the current situation where banks do not pay interest to savers on their demand deposits is also a consequence of political interventionism.
Currently, neoliberals still reject these proposals, but as is often the case, this rejection may be temporary. During the pandemic, they immediately came on board when it came to providing exorbitant transfer payments to companies (in Europe) or households (in the USA) to mitigate the consequences of political decisions (lockdowns).
During the sharp increases in energy prices when Russia began its war of aggression against Ukraine, they were immediately on board to assist businesses and households. Since then, the ECB has regularly called for a reduction in these subsidies. However, nothing is as permanent as a temporary aid program. The third way eventually leads to what former leader of the German liberals, Guido Westerwelle, summarized in a speech: Freedom always dies inch by inch.
In Austria, the left has been pushing for the reintroduction of inheritance taxes for years, which the liberal Neos have consistently opposed. However, now that the prospect of government participation beckons after the upcoming elections, they are willing to discuss this issue.
In the end, it is the liberal idea that is undermined by such compromises, and the population, not politicians, pays the price. Collectivists can also blame the problems that arise on neoliberalism, further weakening support for liberal policies.
The good intentions of ordo-interventionists and neoliberals, namely to preserve liberal principles as much as possible, have paradoxically achieved the opposite. They have driven people into the arms of interventionists and further decimated the idea of liberalism.
Last year, I wrote that liberalism is again in crisis, and neoliberals must bear much of the blame because they distort the perception of liberalism. Monetary policy and the socialization of losses are precisely the opposite. Liberals must re-engage in the discussion more actively, including offering criticism of ordo-interventionists.
I wish you a splendid weekend!
Fabian Wintersberger
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(All posts are my personal opinion only and do not represent those of people, institutions, or organizations that the owner may or may not be associated with in a professional or personal capacity and are no investment advice. I may change my view the next day if the facts change.)