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The Last Time This Few Americans Thought Stocks Would Drop, They Crashed

August 29, 2017 Tyler Durden 0

According to the latest Conference Board survey, 80% of Americans surveyed believe that stock prices will not be lower in the next 12 months. The last time the nation was so convinced of the market’s ‘permanently high plateau’ was in the fall of 2007, as the S&P topped…

Only 20% of Americans believe stocks will fall in the next 12 months – that is the lowest number since mid-2017

What happened next was not pretty (oh and in 1999/2000…)

And don’t forget that speculators have never been more net long Dow futures

 

Still it’s probably nothing. If biblical floods and threats of nuclear armageddon can’t take stocks down, what will?

 

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UAE criticises “colonial” role of Iran, Turkey in Syria

August 29, 2017 Middle East Monitor 0

The United Arab Emirates urged Iran and Turkey on Monday to end what it called their “colonial” actions in Syria, signalling unease about diminishing Gulf Arab influence in the war. Allied to regional powerhouse Saudi Arabia, the UAE opposes Syrian President Bashar al-Assad and his backer Iran and is wary of Turkey, a friend of Islamist forces the UAE opposes throughout the Arab world. UAE Foreign Minister Sheikh Abdullah bin Zayed Al Nahyan urged “the exit of those parties trying to reduce the sovereignty of the Syrian state, and I speak here frankly and clearly about Iran and Turkey.” He was speaking at a news conference with Russian counterpart Sergei Lavrov, whose country helps Assad militarily. “If Iran and Turkey continue the same historical, colonial and […]

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Economists Are The New Astrologers

August 29, 2017 Tyler Durden 0

Authored by Andrew Syrios via The Mises Institute,

When Christopher Nolan was promoting his previous film Interstellar, he made the casual observation that “Take a field like economics for example. [Unlike physics] you have real material things and it can’t predict anything. It’s always wrong.” There is a lot more truth in that statement than most academic economists would like to admit.

Alan Jay Levinovitz recently put forth the provocative argument that economics is “The New Astrology.” He notes that “surveys indicate that economists see their discipline as ‘the most scientific of the social sciences.’” But unfortunately “real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.”

Indeed, Levinovitz goes on to observe that,

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics … has succeeded: its central problem of depression prevention has been solved’.

 

Short-term predictions fair little better — in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

There are, of course, many other examples of the failure of mathematical models in economics. The model Christina Romer put together during the height of the Great Recession concluded that unemployment could go as high as 8.8 percent without the economic stimulus bill. With the stimulus, unemployment went over 10 percent. The spectacular failure of Long Term Capital Management, which was built solely upon investing on mathematical models, is another great example. Indeed, Daniel Kahneman found the “correlations was .01” when asked to evaluate the investment outcomes of 28 different advisors. Warren Buffet is currently crushing the hedge fund Protégé Partners in their ten year, one million dollar bet. (Buffett picked an index fund that invests in the S&P 500.) Finance and economics are linked at the hip in this overconfident, mathematical malaise it would seem.

Returning to Levinovitz, the problem as he sees it is that these highly complicated models built with mystifying and ingenious mathematical equations are completely useless if they are erected upon false assumptions. You may have built the most luxurious mansion imaginable, but if you built it on a hill of sand it might as well be a house of cards.

Think of the Ptolemaic model of the universe that put the Earth at the very center. The Ancient Greeks would notice that the stars would move across the sky, then stop, then go backward, then start moving forward again. To resolve this conundrum, Claudius Ptolemaeus put together an ingenious model of “circles within circles.” Each star not only orbited around the Earth along a given trajectory, but also maintained a secondary orbit around a point moving along the first orbit to make it appear from the Earth that the star would sometimes move backward.

The geocentric model of the universe was a stupendous mathematical achievement, but alas, it was all for naught given the assumptions it was built on were completely false.

Levinovitz uses the example of astrology, noting that,

As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan. To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas. “An astrologer” is, in fact, the Oxford English Dictionary’s second definition of “mathematician.” For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs. The best astrology required the best astronomy, and the best astronomy was done by mathematicians — exactly the kind of person whose authority might appeal to bankers and financiers.

When Adams was eventually arrested in 1914 for laws that forbade astrology, “it was her mathematics that eventually exonerated her.” And this is by no means just a Western phenomenon. Another example the author references is the similarly mathematically impressive work done regarding Li in Ancient China. Li was also a mathematical model of the stars and for whatever reason, thought to be “essential to good governance.”

Obviously it wasn’t, but the Chinese spent “astronomical sums refining mathematical models of the stars.” As we do with much that passes for economics today.

Interestingly enough, Levinovitz quotes several famous Keynesian and neo-classical economists, including Paul Romer, who criticized the “Mathiness in the Theory of Economic Growth” and the man who’s always right (except when he isn’t) Paul Krugman. In this instance, though, Krugman is mostly correct observing that “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”

But this reliance on math to hide the underlying flaws in an economic theory sounds like it falls perfectly in line with “The Pretense of Knowledge” that Friedrich Hayek warned about all those years ago.

Since then, many economists believed they had made economics into a scientific discipline based on modeling and empirical testing. They assured us that by using copious amounts of data and fine-tuned mathematical models they could centrally plan an economy, eliminate the business cycle and increase economic growth and prosperity. And they were wrong.

Surprisingly, Levinovitz does not use the word “econometrics” because that’s the first thing that came to my mind while reading his essay. The econometric approach may be the best example of the mathematical arrogance Levinovitz describes. The flaws in its internal reasoning become obvious, however, as you peel away the math, as Robert Murphy shows,

The econometric approach to stock price movements is analogous to a meteorologist who looks for correlations between various measurements of atmospheric conditions. For example, he might find that the temperature on any given day is a very good predictor of the temperature on the following day. But no meteorologist would believe that the reading on the thermometer one day somehow caused the reading the next day; he knows that the correlation is due to the fact that the true causal factors — such as the angle of the earth relative to its orbital plane around the sun — do not change much from one day to the next.

 

Unfortunately, this distinction between causation and correlation is not stressed in econometrics. Indeed, for economists truly committed to the positive method, there can be no such distinction. Although the econometric pioneers may understand why certain assumptions are made and can offer a priori justifications such as “rational expectations” for the details of a particular model, the students of such pioneers are often caught up in the mathematical technicalities and lose sight of the true causes of economic phenomena.

But more fundamentally, as Austrian economist Frank Shostak notes, “In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model-building is an attempt to produce a laboratory where controlled experiments can be conducted.”

The result is that economic forecasts are usually just wrong.

Levinovitz believes there is a conflict of interest at the heart of academic economics. He approvingly quotes one economist saying “The interest of the profession is in pursuing its analysis in a language that’s inaccessible to laypeople and even some economists. What we’ve done is monopolise this kind of expertise.” And furthermore, “…that gives us power.”

But it’s more than even just that. It’s not just that economists fails to make accurate predictions or that hedge funds fail to beat the market. If economics is unable to provide bureaucrats with the ability to effectively guide and control an economy, the best alternative would be to turn it back over the market. It’s not just that “mathiness” gives economists “power.” In many ways, it’s the façade that justifies a large number of them having jobs in the first place.

It appears that Levinovitz hasn’t quite grasped the full consequences of the argument he has espoused; namely that because economics models are mostly useless and cannot predict the future with any sort of certainty, then centrally directing an economy would be effectively like flying blind. The failure of economic models to pan out is simply more proof of the pretense of knowledge. And it’s not more knowledge that we need, it’s more humility. The humility to know that “wise” bureaucrats are not the best at directing a market — market participants themselves are.

 

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“As If It Never Happened” – Stocks, Bonds, Dollar & Gold Erase Almost All Sign Of Korea’s Missile Madness

August 29, 2017 Tyler Durden 0

Don’t worry America – biblical floods and a world on the verge of global thermonuclear war are no reason to be fearful…

As soon as the US equity market opened, the panic protection team went into action. Gold and Bonds have erased all their gains as the dollar and stock recover all their overnight losses…

 

Amid a massive burst of helpful buying mid-morning in the S&P futures…

pic.twitter.com/r04CekyLxm

— pippocamminadritto (@guado77) August 29, 2017

And as Nanex’s Eric Scott Hunsader notes, “this never happens”…

Yes — that NEVER HAPPENS (where a spike after open comes close to the activity level set by the open) https://t.co/5PhSEZTz6G

— Eric Scott Hunsader (@nanexllc) August 29, 2017

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Oil Prices Set To Rise as Supply-Demand Gap Closes Up

August 29, 2017 Zainab Calcuttawala 0

Oil prices are poised to climb over the coming weeks as supply and demand approach parity, according to analysts who spoke to CNBC as the remnants of Hurricane Harvey continues to ravage Houston, the energy capital of the United States. A rise in oil demand for 2017 made large strides in closing the gap between available crude and the number of willing buyers, sources said. “[Oil prices] should be going up because inventories have been drawing at a phenomenal pace over the past few weeks and months,” Amrita Sen of Energy Aspects said. Both West…

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Insurance Companies Could Face Staggering $500 Billion Loss During A Crisis-Like Downturn

August 29, 2017 Tyler Durden 0

Here’s one more example of how central banks’ global coordinated monetary stimulus in the wake of the financial crisis has increased systemic risk in the US: According to an analysis conducted by BlackRock, insurers are more vulnerable to a market downturn now than they were ten years ago.

The reason? Ultralow interest rates have forced insurers to venture into markets with higher yielding assets, forcing them to stomach more risk along the way. Whereas insurers once tended to adhere to only the safest types of fixed-income products – typically highly rated government and corporate debt – they’re increasingly buying exposure to risky high yield and EM products, along with illiquid private equity funds, to try and boost their earnings back to pre-crisis levels.

These products carry a potentially higher reward for insurers, but heightened risks are also omnipresent. In a downturn similar to the 2008 crisis, BlackRock estimates that US insurers’ holdings would drop by 11% – even more than they did during the crisis. Such a drop would be tantamount to $500 billion in losses.

“The world’s largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles – underpinning obligations to policyholders across the nation – would drop by 11 percent on average, according to its calculations. That’s significantly steeper, BlackRock estimates, than the group’s “mark-to-market” losses during the depths of the crisis.

 

The reason is simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets – a bucket that can include hard-to-sell stakes in private equity investments, hedge funds and real estate.”

Even as interest rates rise, Zach Buchwald, head of BlackRock’s financial-institutions group for North America, said that the insurers’ appetite for riskier assets will remain because “many of the allocations are hard to reverse.”

‘There is more risk being put into these portfolios every year,’ Zach Buchwald, the head of BlackRock’s financial-institutions group for North America, said in an interview. And such shifts may become permanent, especially because many of the allocations are hard to reverse, he said.”

Which is a problem because, even though insurers claim they’re offsetting risk by “diversifying” into different types of risky assets, big losses can accrue if all of these assets were to drop at the same time – as one might expect during a “risk off” flight to quality.

“The new diversity should provide a huge benefit, according to Buchwald. After all, it was concentrations of investments in mortgage-backed securities and certain equities that proved the biggest pitfalls during the crisis, a study by the Organization for Economic Co-operation and Development found.

 

But even piles of investments that appear diverse can suffer big losses if care isn’t taken to ensure the assets won’t drop at the same time.”

The BlackRock study was an attempt to market its new “Aladdin” analytics software.

“BlackRock examined the insurers’ holdings as it pitches a service called Aladdin. It’s trying to sell the companies analytics and advice, helping them test how complex portfolios may perform under various conditions, so they can design them to withstand catastrophe.”

According to Bloomberg, the study has been published at an “interesting time” for markets.

“The assessment comes at an interesting time. With U.S. stocks trading near record highs and the Federal Reserve starting to unwind years of extreme measures, there’s a raging debate on Wall Street over whether a big correction is looming – and if so, whether unforeseen faults in financial markets might crack open, as they did a decade ago.”

Mohamed El-Erian, chief economic adviser at German insurance conglomerate Allianz, warned that “non-banks” are increasingly reaching for high-yield bonds without regarding the risks.

“The strong ‘quest for yield’ remains visible in non-banks,” Allianz SE Chief Economic Adviser Mohamed El-Erian said in a Bloomberg View column this month. The group, which typically includes insurers, has pushed into asset classes “including what most deem to be a stretched market for high-yield bonds.”

Some insurers, like Athene Holding, have bragged about the outsized returns from their riskiest investments.

“Athene Holding Ltd., an insurer that leans on Apollo Global Management to oversee investments, is wagering on complex, hard-to-sell debt. Its alternatives portfolio, representing about 5 percent of total holdings, posted a 12.3 percent return on an annualized basis in the second quarter.

 

It’s among a handful of insurers backed by private equity firms betting they can earn better returns than peers focusing on traditional investments. But even MetLife Inc. and Prudential Financial Inc., two of the oldest and largest life insurers in the U.S., have said they’re pushing into commercial property bets and private market debt in search for yield.”

When insurers invest in illiquid products like a private equity fund, they need to hold more capital on their books to offset the risk – money, that, as Bloomberg points out, “isn’t free.” After adjusting for the reverse capital, BlackRock found that the high-flying PE returns weren’t as spectacular as some insurers believed.

“BlackRock’s study showed that the industry’s forays into alternative investments haven’t always delivered yields on par with what the underlying money managers project. Insurers have to hold large amounts of capital against the investments they make — money that isn’t free. When adjusting for those charges, private equity returns are generally less than 4 percent, whereas they would have been above 6 percent.

 

That, according to BlackRock, indicates insurers would probably earn more on investments in mezzanine real estate debt and high-risk equity investments in global real estate and other real-asset financing.”

Since the crisis, insurers have increased PE investments by 50%, despite the lower risk-adjusted returns highlighted by BlackRock. Maybe some of them SHOULD consider buying the asset-manager’s new software…

“After experimentation with different assets, some insurers have shifted wagers. By the end of last year, the industry’s funds held in private equity had soared 56 percent to $56 billion from 2008. That trend is leveling off, Buchwald said.

 

Real estate investments, meanwhile, hit a seven-year high in 2015, then dropped by $7 billion the next year to $42 billion. Hedge fund holdings spiked to $24 billion in 2015, only to drop to $18 billion the next year. MetLife and American International Group Inc. were among those that began changing strategies.

 

The key is to find “other, more predictable income generators,” Buchwald said, ‘things like infrastructure and real estate.’”

Whatever their risk tolerance, a growing number of market strategists believe that the next sharp downturn in markets could begin as soon as this year. This would mark the first real test of insurers’ capital cushions since the crisis. And, particularly if it triggers a wave of defaults in the high-yield sector (or even among European sovereigns), a market rout could wipe out trillions of dollars worth of insurance company holdings.

Let’s hope that – for their sake – when the other shoe drops, insurers are ready. With Republicans controlling the White House and both chambers of Congress, failing insurers likely won’t receive the same type of bailout that AIG did during the crisis.  

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“Liberal Socialism” – Another False Utopia

August 29, 2017 Tyler Durden 0

Authored by Richard Ebeling via The Mises Institute,

Very often bad and failed ideas do not die, they simply reappear during periods of supposed social and political crisis in slightly different intellectual garb, and offer “solutions” that would merely help to bring about some of the very types of crises for which they once again claim to have the answers. Socialism in its various “progressive” mutations represents one of the leading ones in our time.

The latest manifestation of this appeared on August 24, 2017 in the New Republic online in an article by John B. Judis on, “The Socialism America Needs Now.” He is heartened by the wide appeal, especially among younger voters, that Bernie Sanders received during the 2016 presidential contest. He thinks that this may herald a rebirth and a renewed possibility for a socialist alternative to the current American political and economic system.

Having traveled over the decades from the 1970s to the present from being a radical, revolutionary socialist to a more “moderate” one today, Mr. Judis admits that the Marxian-style socialism of the nineteenth and the first half of the twentieth centuries is now long passé. The embarrassing experience of “socialism-in-practice” in the form Lenin and Stalin created in the Soviet Union or by Chairman Mao in China will not fly anymore.

From Soviet Central Planning to “Liberal Socialism”

Central planning seemed not to work too well, and the “communist” variation on the socialist theme also had a tendency to be “authoritarian” with some drawbacks for human life and liberty. (He tactfully avoids mentioning that Marxist-inspired regimes in the twentieth century murdered well over a 100 million people — with some estimates suggesting the number might have been closer to 150 million or more in the name of building the “bright, beautiful socialist future.” See my article, “The Human Cost of Socialism in Power”.)

He turns his mind and ideal to the “democratic socialist” parties and regimes in Western Europe in the post-World War II era, or as Mr. Judis prefers to call it, following John Maynard Keynes, “liberal socialism.” What makes this form of socialism “liberal”? It is belief that there can be a “socialism with a human face.” In other words, a form of “economic” socialism that leaves in place democratic politics with a respect for a broad range of personal and civil liberties.

We have heard this all so many times before. While Mr. Judis wishes to suggest that there is no real or definitive definition of “socialism” (any more than there are of “liberalism” or “democracy”), the fact is that throughout the nineteenth century and well into the twentieth, virtually all socialists condemned and called for the abolition of private ownership of the means of production, and in its place some form of socialist central planning directed by government in the name of “the people.”

Mr. Judis actually more or less admits this, and that the only great debate among socialists and communists in the late nineteenth and twentieth centuries was over how the socialist utopia would be brought about – through violent revolution or through the democratic ballot box. The Russian Marxists led by Vladimir Lenin insisted that only revolution and a “dictatorship of the proletariat” could bring “the workers” to power and assure their permanent triumph over the exploitive capitalist class. The German democratic socialists opted for democratic means to power and rejected the dictatorship of Lenin and later Stalin.

But it is nonetheless the case that well into the post-World War II period this was a dispute over political means and not ideological ends, which remained for both branches of the socialist movement the abolition of capitalism and the imposition of socialist central planning. Communists wanted to bring about this transformation of society in one fell swoop through violent means and imposed dictatorship. The German Social Democrats and the “Fabian” socialists in Great Britain proposed democratic means, with socialism coming more gradually and through incremental extensions of government control and planning over more and more parts of society. But for both, the end result would be the same: centralized government direction of economic affairs and social change.

As the 1950s turned into the 1960s and 1970s, more and more “democratic” socialists in Western Europe grudgingly accepted the fact that comprehensive socialist central planning was a failure as practiced in the Moscow-dominated Soviet bloc countries; and it brought little of the prosperity that government planning promised to provide as an escape from poverty in the “third world” countries of Asia, Africa and Latin America. Plus, the tyranny and brutality of Soviet-style socialism made it ethically difficult to defend. So the democratic socialists turned to the interventionist-welfare state to achieve their “social justice” ends without nationalizing all the means of production or centrally planning all economic activity in society. (See my article, “Barack Obama and the Meaning of Socialism”.)

In Search of Socialist Utopias Elsewhere

But those communist regimes were not so repulsive that many, if not most, of these democratic socialists in the West would not continue to still give moral indulgence and wishful hopes that, maybe, somehow, Marxian socialism would still finally work and fulfill its promise in, first, Mao’s China, then in Castro’s Cuba, or Ho Chi Minh’s Vietnam, or in the Sandinista’s Nicaragua, or . . . The collectivist dream and delusion springs eternal. Plus, after all, even a rude, crude and rough Marxist regime isn’t the United States – please, please almost anything other than capitalist America!

Even today, the enlightened “progressive” can take a tour of Castro’s Cuba with the leftist magazine, The Nation. Don’t miss out! This November 2017 you can go with The Nation and, their advertisement promises, “learn about the Cuban Revolution from experts at some of its most pivotal locations, including the Moncada Barracks, the site of the first armed assault by Fidel Castro and his band of rebels on July 26, 1953.” The progressive political pilgrim to the collectivist promised land will be spending his or her “days meeting with prominent Cuban professors, government officials,” including “urban planners” and “health care workers.” Don’t miss on your chance to visit one of the remaining socialist “utopias” before global capitalism succeeds in taking it away.

No doubt, these “social justice” tourists will not be taken to La Cabana prison, where Che Guevara was assigned by Castro the role of state prosecutor against “enemies of the people,” following Fidel’s triumphant entrance into Havana and seizure of power in January 1959. In the role as unrestrained judge and jury, Che arbitrarily sent hundreds to their death, sometimes literally by his own hand.

Nor are they likely to have quoted to them Che’s words that, “My ideological training means that I am one of those people who believe that the solution to the world’s problems is to be found behind the Iron Curtain.” And that “I can’t be the friend of anyone who doesn’t share by ideas.” Or that Che was the one who in 1960 instituted communist Cuba’s system of forced labor camps. This would not fit in with the heroic face of Che on the t-shirts that, no doubt, some of these “progressive” travelers to utopia would be wearing. After all, Fidel and Che did it all for “the people,” and, well, they did have “good intentions.”

Of course, while such political pilgrims are pleased to visit these places and bask in the moral satisfaction that the few remaining communist regimes in the world are still trying to make that “better world,” even if with the heavy hand of dictatorship, censorship of art, music and political views, the imprisonment of political opponents, and torture and execution of “enemies of the people” (all of which they still mostly turn a blind eye), they prefer to live in their own Western countries and dream the “liberal socialist” dream, as clearly Mr. Judis is doing.

Liberal Socialism as the Regulatory and Redistributive State

What, precisely, is this democratic or “liberal” socialism to which Mr. Judis hopes a younger generation of Americans will turn in the years ahead? It turns out to be the same “utopia” of the interventionist-welfare state that Western countries have been following since the end of the Second World War, though, admittedly, to different degrees in different places around the world.

Mr. Judis wants the government to intensively and pervasively regulate, command, restrict and direct various aspects of the private enterprises in society, while assuring that American society can still take advantage of the self-interested incentives and innovations that can improve the material conditions of life. But the direction, form and extent to which private enterprisers shall be allowed to do those productive and innovative things with their businesses will be confined to and constrained within those avenues that serve the “higher” and “non-market” values and purposes of “society.”

Matching the regulatory and interventionist state must be the redistributive welfare state. The excessive and unnecessary income and wealth of the businessmen and private sector investors of America must be taxed, and heavily, to assure greater material egalitarianism, and to fund all the social services and government-provided safety nets, which “would bring immeasurable benefit to ordinary Americans. A good watchword is economic security – something that is very lacking to all except the wealthiest Americans.”

At this point, it might be wondered what, then, marks off Mr. Judis’ “liberal socialism” from the already existing modern American “liberal” interventionist-welfare state? It turns out that it is all a matter of intentions and the intended recipients. In Mr. Judis’ view, mainstream modern American liberals have lost their way; they too frequently sleep with the enemy (think Bill and Hillary Clinton) in the form of excessively collaborating with businessmen and bankers to the latter’s benefit; American liberals and progressives have stopped sufficiently emphasizing “economic justice” for middle America with their increasingly primary focus on “identity politics.”

Liberal Socialism and Democratic Politics Without Romance

Also, unlike the communists and many radical socialists and some progressives, Mr. Judis calls for moving towards his notion of a better socialist future through a more active participation in the Democratic Party. The task is to nudge and shove mainstream modern American liberals in the Democratic Party further to the socialist left, which in many of their hearts these people already know is right. And to use the Democratic Party as the vehicle to propagandize and persuade more in society that socialism is good and just and the best for them.

In other words, Mr. Judis calls for using the methods of the earlier German Democratic Socialists and the British Fabians, only do so in a way that does not seem to be as threatening or undermining of all the institutions of existing society as those earlier groups often did with their call for the total abolition of capitalism.

Mr. Judis’ “liberal socialism” is really just the existing interventionist-welfare state placed – “democratically” – in the “right” elected hands, so those manning and managing the machinery of government will do what he wants political authority to do, rather than what it is currently being done by Republicans and the current Democratic Party establishments.

A way for Mr. Judis to more easily defend his desire and ideal is to suggest that the existing political-economic system in America today is a free market, “neo-liberal” capitalism, rather than what the Italian economist, Vilfredo Pareto once more accurately labeled it: “bourgeois socialism.” That is, a system of government regulation, redistribution, favors and privileges that benefits many in the private enterprise sectors of society rather than a more “proletarian socialism” that simply would take from “the rich” to give to “the workers” and “the poor.”

What is sometimes called “crony capitalism” is just Pareto’s “bourgeois socialism.” Pareto also understood, in the 1890s, with amazing clarity one of the insights of modern Public Choice theory, that “participatory democracy” of the community as a whole is a theoretical and practical illusion in an complex society. Politics in an unrestrained democracy always becomes a contest among special interest groups capable of gaining concentrated benefits from State intervention and redistribution at the diffused expense of the rest of the society.

In democratic societies it takes the form of coalitions of special interest groups who succeed in offering campaign contributions and votes to politicians desiring elected political office, who then fulfill their campaign promises to those groups once in the actual halls of political power. In totalitarian societies such as in the former Soviet Union, it took the form of hierarchical position within the Communist Party and within the central planning bureaucracy, including the state enterprise managers, who had the decision-making power over access to and use of the socialized means of production; thus, the communist “classless society” had one of the most intricate social webs of power, privilege, favoritism and plunder ever seen in human society.

This “politics without romance,” to use Nobel Laureate, James M. Buchanan’s phase, shows why the notion of “the people” owning, controlling, regulating and overseeing the collective direction of an economy is pure illusion and deception concerning the reality of how and why political power works the way it does.

What Mr. Judis and, far too many who share his views about capitalism and some form of socialism – “liberal” or otherwise – fail to understand is that any and all forms of planning, regulation and political redistribution in fact takes power and decision-making out of the hands of the people about whom they express their concerns.

Real Participatory Liberation under Free Market Liberalism

It is the open, competitive market economy that, precisely, gives each and every individual wide latitude and liberty over his own personal affairs. It is the market that enables each of us to make his own choices concerning the profession, occupation or productive calling to pursue. It is the market that enables each and everyone of us to have the freedom to make our own choices to earn an income and spend that income as we consider best in terms of the values, beliefs, purposes and desires that we think may bring meaning and happiness to our individual lives.

It is the free society of individual liberty and voluntary association that provides truly participatory opportunities to form organizations, clubs, and groupings of almost any type to further the goals and ends outside of the narrower arena of market transactions to better our lives materially, socially, culturally and spiritually. (See my article, “Individual Liberty and Civil Society”.)

At this point, no doubt, Mr. Judis would reasonably ask, but what about those who are unable to provide for themselves, due to personal tragedy, unfortunate circumstances, or simply bad luck? Is this not the reason why enlightened and decent societies had to move “left-ward” to establish and financially provide for those unable to personally meet the essentials of everyday life and to have opportunities to fulfill their potentials as a human being? Is not the welfare state of “liberal socialism” the inescapable necessity of having a humane society?

The classical liberal responds that these very concerns can be far better and more successfully solved and served through the voluntary institutions and associations of civil society than to turn such tasks over to the government. In the nineteenth and early twentieth centuries, before the modern welfare state, all such “social problems” were handled with wide and positive affect by charities, philanthropies and for-profit organizations in places such as Great Britain and the United States. That their workings and successes are virtually unknown to most people in modern society shows the extent to which their history and social nobility has gone down a memory hole of collectivist misinterpretation and misunderstanding of what a society of liberty did and could provide. (See my article, “A World Without the Welfare State”.)

Furthermore, the transfer of such welfare responsibility to the government reduces each and every recipient to a ward of the State. It is politicians and bureaucrats who decide the education your children will receive in government schools; they are the ones who determine the retirement possibilities you will have; the healthcare to which you will have access and its type; the wages and work conditions under which you may be allowed to employed or unemployed, and the forms and types of associations you may enter into and the activities and membership you permitted.

The “liberal socialism” about which Mr. Judis dreams is not the path to liberation but a continuing servitude and obedience to the those with political power and who have the arrogance and presumption to imagine that they know better how people are to earn a living, care for their own lives and that of their families, and associate with other members of society better than those individuals deciding all of these matters for themselves. (See my article, “Democratic Socialism Means Loss of Liberty”.)

One would have thought that after more than seven decades of the interventionist-welfare state as the political left’s “liberal socialist” alternative to Marxian socialist central planning, it would be realized that it is just another constraining and corrupt manifestation of the unworkability of any collectivist system of control and command.

Mr. Judis’ program for a socialist America also shows the intellectual bankruptcy of those on “the left.” The revolutionary transformation of society, for which they yearn, ends up being nothing more than the existing interventionist-welfare state, just with the desire that people who agree with Mr. Judis should be at the helm of political power rather than those with whom he disagrees.

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