Prophecy

The best science fiction is, of course, neither about science nor is it completely fictional. And though it is frequently set in the far future or the remote past, it is always about the present moment. Indeed, I think sci-fi really succeeds to the extent that it can project the present moment into the near future, and fails to the extent that it depends on special effects and scientific wizardry. Mere technology, as a succession of the “wow!” and the “gee whiz” is ultimately boring, unless we can connect it to the situation of man, both the temporal and eternal.

The is another kind of literature like this: it is the literature of the prophets. Prophecy is not so much a matter of foretelling the future as of foretelling the present. That is, the prophet grasps what is real in his society, and really defective, and shows what must be the results. Frequently, he shows these results as the judgment of God upon his society, and so it is. But it is also the judgment of men; if we persist in our ways, then we must go our way, wherever it leads, and it is pointless to blame the end on God. We may end up shouting (as we always do), “God, why did you let this happen?” when really the fault is in ourselves and not in God. We want to be free—even free from God—and we want God to prevent the consequences of our freedom. God does prevent these consequences, ultimately; he takes upon himself the fault that belongs to us. And in the end, as Julian of Norwich was told by the angel, “all will be well, and all will be well, and all manner of things will be well.” But in this, the penultimate world, things will not always be well. And it is the job of the Prophet to tell us just how bad things can be. The Prophet is both timely and eternal. Isaiah was a court official and a practical reformer involved with the day-to-day affairs of the Northern Kingdom. And Jeremiah was speaking mainly about Judean foreign policy. But through the temporal, they grasped the eternal, and in examining the actions of the sons of men, they were able to see—albeit dimly—the coming of the Son of Man. But their prophecies were not confined to the distant future only; Jeremiah could see the destruction that was at hand, as well as the restoration that was to come.

In foretelling the present, the prophet does not “predict”; rather, he shows us the way we must go if we do not change our ways. He shows a present moment, only slightly exaggerated, projected to the near moment. Like the Ghost of Christmas Yet to Come in Dicken's A Christmas Carol, the future is not a given, but a thing in our control; to reform our present is to change our future. All of which brings me to the movie Children of Men, based on the novel by P. D. James.

James asks the question, “what would the world be like if we had no future?” And of course, having no future means having no children. This is the world in the “distant” future of 2027. There has not been a child born since 2009, and the last child born, “baby” Diego, has just been murdered by an autograph seeker. The scenario here is not so freakish as it might appear. In fact, birth rates are already well below replacement rates across must cultures and nations. So this is only a small exaggeration, a slight projection into the future (See The Birth Dearth). The major difference is that now we choose not to have children; in James's future, we cannot have children.

How does the world fare without a future? Not very well. Civilizations and nations have collapsed into chaos, and “Britain alone soldiers On,” as public service announcements constantly remind the British public. The problem is, England is “soldiering on” as a Fascistic “homeland security” state, with heavily armed policeman and soldiers on every corner. Still, there is terrorism in the streets. The chaos in the rest of the world has meant the mass movement of populations, to which England has responded by closing its borders and making immigration illegal.

The novel has been adapted to the screen by Alfonso Cuarón, who left the lucrative Harry Potter franchise (his last movie was Harry Potter and the Prisoner of Azkaban) to make this film. In this childless world, we first meet Theo Faron (Clive Owens), an erstwhile political activist, but now a cowering civil servant. He is kidnapped by his former girlfriend, Julian (Julianne Moore) who is now the leader of the “Fishes,” an underground and occasionally terrorist group working to protect immigrants. They have discovered a pregnant woman, the first in 18 years, named Kee (key?), an illegal immigrant from the Fiji Islands, played admirably by Clare-Hope Ashitey (isn't it ironic that the “key” is played by a woman named “Clear Hope”?) Julian is given the task of smuggling Kee out of England to a shadowy group called “The Human Project,” a group that may be located in the Azores but certainly operates by sea. This is a difficult enough task in a police state on the verge of collapse, but there are even more complications. Julian is murdered by one of her own lieutenants, who wants the baby as a “flag” to rally a rebellion. As a result, the people who are supposed to be helping Theo are now hunting him. Nor is his problem made any easier when he must become a midwife and deliver a baby in the midst of a “refugee camp” that is really an urban dystopia of filth and violence. Finally, he must guide Kee and the baby across an battlefield in the middle of an armed rebellion.

Cuarón shoots the film in long takes, with very few cuts, the camera following the action in a way that draws the audience into it. This is especially true in a long scene shot inside a car as it is being besieged by a mob of bandits, which gives a sense of claustrophobia and danger not seen since Das Boot. The battle scenes are as good as anything since Saving Private Ryan, and maybe better. But much of the real action takes place in the background, in Cuarón's depiction of the London of the near future. It is a gray and shabby place. After all, why repair the roads, or anything else, if you are the last generation? It is a world where Quietus, a suicide pill, is openly marketed with slick TV ads; Why not? If there is no tomorrow, why should there be a today?

We are not told the cause of the universal infertility, nor are we told the nature or the purpose of The Human Project; the viewer is free to speculate on these and to read into them what he will. But we are told of the connection between potency and civilization. And what we are told in the film contradicts everything we are told everywhere else. For in current ideology, a crash in population would be a boon to mankind and to the environment. And on this question, the film stands or falls. Are James and Cuarón engaging in prophecy or fantasy? Are they showing us where we are and where we're headed, or are the leading us astray? The viewer must decide, but history is on the side of James. Population declines are typically the prelude to chaos. When Rome stopped having any interest in children, her population slowly crashed and she could no longer defend her borders; she was given over to the barbarian hoards. Often, a rapid crash presents us with a choice of a slave society or a more egalitarian one. This is because the shortage of men causes the price of labor to skyrocket, and labor must either be suppressed or liberated. This was the choice after the Black Death in the 14^th century. The rulers tried to suppress the serfs and the peasantry (e.g., The Statute of Laborers in 1348), but their rights were too well-established for this to work, and the final suppression of the workers would not take place for another two centuries.

First Things criticized the movie for being insufficiently Christian; as usual, it is First Things that misses both the point of the movie and the point of Christianity. The lack of physical potency leads to a lack of intellectual vigor, including the impotency of writing for First Things. For indeed, civilization is ordered around children; we give them order and so order our own lives; everything we give them, we receive from them. All of Christianity revolves around a single birth, and a child who must, as in the film, flee the oppressor for fear of his life. In the film, Britain places its hope in military order, while its opponents call for armed rebellion. But it is birth that is the real rebellion, the real hope for the future. And our future depends on a single birth—on every single birth—and the hope offered to every single child.

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Are We Bitter?

The moderators of the recent Democratic debate have received much criticism for questions that seemed to be peripheral to the campaign, questions like lapel pins and campaign gaffes, questions which the critics consider irrelevant. They should have concentrated, the critics say, on the “issues.” But there are at least three problems with this critique: One, in respect to the “issues,” there is very little difference between the candidates, and much less worth debating; two, the issues they are discussing are not the real issues which face us, and; three, we are not ruled by “issues,” but by persons, and it is important to know what kind of persons we are electing. The moderators' questions did go to the subject of character and attitudes, and therefore cannot be characterized as irrelevant.

Concerning the first point, the candidates share the same approach to the problems, and there is little to discuss. Concerning the second point, the “issues” they do discuss are not always the real issues, or are not properly connected to the real problems that face us. For example, universal health care is certainly a real issue, but how is one to accomplish this without wrecking the system we have and driving us further into debt? This has not been addressed by any candidate in either party. It is clear that if we make health care a universal right, then we must also increase the supply of medicines, medical practitioners, and hospitals and clinics. None of the current plans do this, and hence all are doomed to failure. My own thoughts on this problem can be found at Sicko-phancy!

As to the real issues, they have to do with questions like how we can reduce the power of an imperial presidency, pay off our debts, rebuild our industrial base (without which the debts cannot be repaid), meet our staggering Social Security obligations, rebuild a broken army, and fix an educational system which has simply failed most people, and without which we cannot do all the other things. My own list of issues can be found here. Your list may vary from mine, but I suspect it will also vary from the list the candidates are offering us.

That leaves the third set of concerns, concerns about character, and here I think it is legitimate to ask whether Hillary's memory is a bit too convenient, her style too strident; whether Obama's attitude is a bit too condescending, his answers a bit too facile. The question of the lapel pin certainly seems frivolous, yet what is revealing here is not the question, but the answer. Symbols are important; language itself is nothing more than symbols, and without language we cannot really be human. Indeed, all creation is in and through The Word, and all history revolves around The Word made flesh. Hence we cannot ignore symbols, but even more importantly, we cannot ignore how they are manipulated and subverted. The proper answer to the question involves this subversion of the symbol. The lapel pin has become the symbol, not of national unity and ideals, but of the chicken-hawks: no one more insists on displaying the flag than those who refused to fight for it when they had the chance. When there were real battles, their biggest battles were for deferments, or for places in the National Guard. Now, like so many Dukes of Plaza-Toro, the lead their regiments from behind, and from the safety of suburban castles order men and women to their deaths. They are the people who have taken the flag-pin and made it a badge of shame, a symbol of cowardice. Every candidate must be willing to point to this hypocrisy, and if he or she doesn't then they end up joining the hypocrites.

Then we come to the more serious issue of Obama's comments suggesting that clinging to God and guns is a sign of lower-class bitterness. His statement is, of course, a product of a rationalist mentality, which holds that religious belief has to have a material cause, because transcendent causes are excluded from the outset. Now, I am more than willing to accept the Senator's explanation that this was a gaffe, a clumsy statement to state a real thing. And while it is wrong to exclude transcendent causes, it is equally wrong to ignore material ones. There is nothing wrong, per se, with attempting to connect deeply held beliefs to our material circumstances; there is only something wrong with attempting to reduce those beliefs to circumstance. And in truth, when beliefs are under attack, believers often respond by clinging to those beliefs more strongly. That is, we come to the defense of Holy Mother the Church for the same reasons we might come to the defense of any other lady enduring such assaults. And we defend her with the same sense of indignation and anger that we would (as gentleman) display towards any cad we find attacking a lady.

As for guns, we cling to them for another reason, a reason that his little to do with the arguments about the second amendment, arguments which few of us really understand, least of all myself. No, we cling to them precisely because the know-it-alls tell us not to. We live in an age when “experts” give us no end of good advice on subjects that are none of their business, and when each new day brings new headlines about what we should or should not be doing. Be it cholesterol or sex, God or guns, children or politics, there are endless experts to tell us what we are doing wrong. These professional naggers really have our best interests at heart, and the more so the more removed they are from us.

But if we really wanted to be nagged, we would call our mothers more often. Nagging in itself isn't a bad thing. “All civilization,” says George Will, “depends on two things: education and nagging.” Children who are not nagged to clean their rooms and finish their homework tend to grow up to lead dissolute lives; they may even become nanny-state liberals. This is the real problem with liberal naggers: they reject the nagging authority of mothers but insist on the nagging authority of the state. It takes a village, says Hillary Clinton, to raise a child, but when she says “village,” she really means “The State.” Indeed, between the state and the corporation, villages have been pretty much abolished. And as Chesterton noted, those who reject legitimate authority, like the authority of mothers, do not end up rejecting all authority, but rather subject themselves to every fraudulent authority; their liberation from real authority enslaves them to every passing authority. And that's fine for them; they must live as they must, and I wish them well. But they would insist that we live as they do, and would enlist both social scorn and state power to make us do so. At this point, we might become bitter, and cling more firmly to both God and guns.

The real reason we cling to guns is that they are ours. And even more, they were our fathers. Ownership of guns is something that distinguished the New World from the Old. In the decadent aristocracies of Europe, guns were largely for the landowners, and “poaching” was punishable by flogging or worse. In the New World, every frontiersman had a gun, and it was an essential part of feeding his family and declaring his liberty. We no longer need to feed our families by hunting, but we still need to assert our liberty, and especially our liberty from the army of experts who claim to know what is best for us.

Senator Obama comes from a Church were the language of bitterness was part of the regular rhetoric. And I am not inclined to hold his gaffe too much against him. But I think it does reveal the problems of a “liberal” populism, two terms which are almost a contradiction in terms. For the liberal always knows what is best for you, while the populist asserts that we know best for ourselves; we are content to run our own lives in our own ways, even if they are deemed to be inferior ways. And any effort to tell us how to run our lives is likely to make us resist all the more.

Indeed, it may even make us bitter.

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The Birth Dearth

We have all been educated to the idea of a “population bomb,” the idea that the natural order which supports the human race will be overwhelmed by the sheer number of people. Rising populations will cause shortages of food, water, land, and every other natural resource, leading to the collapse of the eco-systems which support human life itself. This idea has been regnant in the West since the publication of Thomas Malthus's An Essay on Population in 1798. In Malthus's model, man has an antagonistic relationship with the natural order, an order that is fragile and limited. In this model, man is a predator who consumes scarce resources until they disappear, which in turn causes the disappearance of man himself. Human population is therefore locked into a cycle of growth and collapse, with misery for the many, and happiness only for the very few. For Malthus, charity and wages above mere subsistence were a threat to the natural order. Instead of working to ameliorate poverty, the authorities should increase it and work to raise the mortality rates among the poor:

Instead of recommending cleanliness to the poor, we should encourage contrary habits. In our towns we should make the streets narrower, crowd more people into the houses, and court the return of the plague. In the country, we should build our villages near stagnant pools, and particularly encourage settlements in all marshy and unwholesome situations. But above all, we should reprobate specific remedies for ravaging diseases; and those benevolent, but much mistaken men, who have thought they were doing a service to mankind by projecting schemes for the total extirpation of particular diseases.

Malthus based his theory on a “predator-prey” relationship. Think of the relationship between chicken-hawks and chickens: the more of the one, the less of the other. A rise in the hawk population will lead to a decline of the chicken population, which in turn will mean less food for hawks, and a fall in their population, etc. The problem with this comparison of man and predators is that man is not a predator, but a cultivator; his relationship is entirely different. Because man eats chickens, there are more chickens than the natural order would ever produce by itself. And more cattle, corn, wheat, and everything else as well.

But one might object that chickens and corn are “renewable” resources, but that other things are not, things like oil and iron, and these things must deplete as the population advances. But this is not true either, or at least not necessarily true. Man can become a “predator” in regard to non-renewable resources, but he can also be a cultivator. Indeed, 98% of all metals ever mined are likely still recoverable and usable, while there is no need to have the least efficient transportation system imaginable. The problem is not the natural limits on these things, but false ideas of happiness and economics. As long as we place our hopes for happiness in things, rather than in people, there will never be enough resources to keep us happy. As Ghandi put it, “The earth produces enough for each man's needs, but not enough for even one man's avarice.” The real problem is not too many men, but too much injustice. When 20% of the people consume 80% of the resources, the problem lies with the 20, not the 80.

Does this mean that there is no “population problem”? There certainly is, but it is the opposite problem from what the latter-day Malthusians imagine it to be. It is not the population bomb, but the birth dearth. We are entering a period of aging populations across all cultures and nations. Birth rates have fallen far below replacement rates, and this fact will cause—indeed, is causing—more problems than even Malthus could have imagined. These problems are the subject of a new film, Demographic Winter, which documents the troubling numbers. As the film points, the growth in population is itself a statistical illusion. The population of children is actually shrinking; it is only the population of old geezers like myself that is advancing. “It is not,” as the film points out, “that people are breeding like rabbits, it is that they are no longer dying like flies.” While this causes a temporary rise in population, that situation is reversing itself with dramatic consequences.

The ecological movement has often embraced the Malthusian argument, and therefore has missed the real point. They have made “people” the enemy, rather than rampant consumerism. Although they point to a real problem, the miss the real cause, and hence have difficulty offering real solutions.

Demographics lay at the heart of every other analysis of the human economy, and if one wishes to understand our situation, one must understand demographics. It has never been the case that a declining population leads to greater prosperity. Indeed, the opposite is true: depopulation always leads to poverty and social chaos. “Children are the future,” we are fond of saying. But the obvious conclusion must be that without children, there is no future.

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A Request To Our Readers

Friends and neighbors, thanks to you, we know have between 80 and 100 visitors a day to this web log. We at the Review want to thank you so much for taking time out of your day to read it. But with folks living through economic and political hard times worldwide, and looking for a way out of the morass our so-called leaders have thrust us into, we need your help in letting people know about Distributism and this blog in particular.

Since the majority of our readers are from the United States, we encourage you all to get one other person interested in reading this blog. If you know anyone living outside of the U.S.A. who has an interest in politics and economics, and is curious to learn about this alternative to BOTH Capitalism and Socialism, please tell them about us.

And for our foreign readers, we ask the same of you. We are praying and working for the dawn of a Distributist Earth, no matter how long it takes. We will always need your help in spreading the good word about this “third way”. Tell you friends and neighbors about it, so that your own countries will benefit from it.

The best advertising comes from word-of-mouth. And you, our readership, are the only means of letting folks know about this blog. So please tell at least one person this week about the Review.

And thank you very much.

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Free Trade and Alternative History

In recent decades, there has developed a new literary genre, that of the alternative history. In these “histories,” given in the form of a novel, the author imagines what would happen if some important event in history had turned out differently, for example, what if the South had won the Civil War, or Hitler had defeated Russia and England. The author then proceeds to construct an alternative history based on these changed events. Now, I have never read any of these fictitious histories, so I can't comment too much on them. However, I can imagine that they are a pleasant enough diversion and possibly an interesting enough intellectual exercise, and that they do no one any harm.

However, what happens if the fictitious history becomes the “official” history? What happens if the widely accepted history diverges from what really happened? In such a case, The alternative history does a great deal of harm; our view of reality becomes distorted, and the decisions we make will be based on false premises. But could such a thing happen? Is the science of history so imprecise that we could accept the false as factual, and the facts as fables? According to a new book by the Cambridge economist Ha-Joon Chang, that is exactly what has happened in regard to the history of economic development. The book is called Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. The book is written at partially in answer to the most popular account of the “alternative history” as given by Thomas Friedman's The Lexus and the Olive Tree. Mr. Friedman is, of course, a journalist and not an economist, but his version of events reflect the neoliberal and neoconservative economic orthodoxy which guides trade policy at the highest levels of government. According to this history, states developed by following a strict free trade regimen, along with a laissez-faire government policy.

It is somewhat difficult for Dr. Chang to accept the official history since he grew up in South Korea during its transition from a feudal backwater to an industrial nation. The problem is that Korea's path to development contradicts the official history: everything that the “unholy trinity” (as Dr. Chang calls them) of the WTO, the IMF, and the World Bank preaches (and enforces) was violated by Korea in its advance into a modern economy; had Korea followed the advice of these Western worthies, it would still be the backward and poverty-stricken country it was in the 50's. It is hard to accept the official history when one's own history and experience contradicts it. Moreover, in looking at the development in other countries, Dr. Chang finds the same pattern: those who followed the advice of the unholy trinity are condemned to poverty; those who progressed did so by ignoring their advice. And further, the Western powers are hypocritical. The truth is that no great nation got to be great by following free trade. The United States was the most protected economy until the Second World war, with Britain in second place until 1860. It wasn't until these nations achieved a dominant position in manufacturing that they began to preach free trade. Their very dominance gave them a “comparative advantage” that made tariffs unnecessary for their own economies, while brow-beating other countries to drop their own tariffs meant that they would never be able to compete.

The history of free trade is a history of failure. Every country, or nearly (Ireland may be an exception) that followed the free trade line, followed it to disaster. In the so-called “third world,” growth rates were much higher before trade liberalization than after. Indeed, there is a certain irony in Mr. Friedman's selection of the Lexus as his symbol for trade, since if Japan had followed his advice, there would be no Lexus. Japan would not have been able to develop the heavy industries that she did in a free trade regime. Toyota was and is heavily supported by the government. Its first venture into the business, the ill-started Toyopet (“four wheels and an ashtray”) was a failure. It took time, patience, and government protection to build the industrial behemoth that we see today. If Mr. Friedman is going to use this as a symbol, he might have troubled himself himself to learn something of the company's history, and the country which produced it.

But it is one thing to note the lack of historical knowledge on the part of a journalist; it is quite another to note that this historical ignorance is widespread among the economic profession itself. How did this come about? Alas, the recent history of study of economic history is troubling. Graduate students in economics used to be required to take at least one course in economic history. But in 1972, the University of Chicago dropped this requirement, and nearly every other major school followed suit. History, argued the Chicago-school economist George Stigler, had no useful past, and its study was a waste of the students' time. For Prof. Stigler, economics was a set of formal relations, always and everywhere true and the same, and history could not add anything to our knowledge. Yet, economics is a strange discipline to desire its freedom from history. All of its data comes from history, and history provides the only laboratory to test ideas. And when one's ideas are free of any real test, one is free from any real thought. As the situation now stands, economic historians are practically a “rump” group with economics, standing as critics, or rather as Cassandra's: speaking the truth but always ignored. And the economists, lacking any formal training in history, have no way to judge the myths that are presented to them as “history.” I believe that even those who make their living writing “alternative histories” never wanted them to be accepted as real history; it takes the fun out of the whole thing.

Using history, Dr. Chang skewers a whole host of free-trade myths. In their place, he concludes:

• Free trade reduces freedom of choice for poor countries.

• Keeping foreign competition out may be good for them in the long run.

• Investing in a company that is going to lose money for 17 years may be an excellent proposition.

• Some of the world's best firms are owned and run by the state.

• “Borrowing” ideas from more productive foreigners (that is, violating patent laws) is essential for economic development.

• Low inflation and government prudence may be harmful to economic development.

• Corruption exists because there is too much, not too little, market.

• Free markets and democracy are not natural partners.

• Countries are poor not because their people are lazy; their people are lazy because their countries are poor.

We have previously pointed out just how disastrous it was for countries to follow the policies of Hayek and his allies (Hayek's Super-Highway). Indeed, free-trade ideology has been as much a failure as was Marxism. Yet the history of Marxism is well-known; the history of Capitalism is still a great secret. Dr. Chang does us all a great service by revealing the secret.

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Investment, Speculation, and Regulation

Henry Paulson, the SecTreas, has proposed a new set of regulations for the financial markets. As expected, the response is all over the map, from “its just re-arranging the desks at the Treasury Department” to “an unwarranted interference with the free market.” Nothing new in all of that. Of course, the “interference” argument is somewhat strained, since the meltdown is occurring precisely in those parts of the market that were lightly regulated or not regulated at all. And even in areas where the Fed had oversight authority (and therefore, responsibility), they did not exercise it. And further, while it is true (or should be true) that anyone has the right to arrange whatever exchanges they agree to, it is also true that if any set of exchanges have the power to bring down the whole market—indeed, the whole economy—then the rest of the economy has the right to review those transactions; if something we do can so deeply affect everybody, then everybody has the right to review what we do.

This clearly establishes, I believe, a right to regulate, as well as a principle directing us when and where to regulate. No small group of traders should have it within their power to bring down the market, and any market where that can happen cannot be called a “free” market in any meaningful sense of that term. The right to regulate, or rather, the duty to do so, has to be further guided by intelligible principles that anyone can examine to see whether particular regulations make any sense. In our last post (Aristotle and the Subprime Mess) we reached back to Aristotle to recover the distinction between natural and unnatural exchanges, a principle that guides us to where regulation is most needed and where least. To put it briefly, natural exchange needs little in the way of regulation, while unnatural exchange needs a great deal of it. Now is a good moment to apply these principles directly to the regulation of financial markets.

Before we can do this, however, we need to make a further distinction, one that is normally lost today, and that is the distinction between investing and speculating. Today, we tend to call anybody who buys a share of stock, for example, an investor. However, normally this is not true. Investing is the deadly serious job of getting money into the hands of businesses so that they may expand their production, providing both goods and services to the public and jobs to the workers. The investor takes a risk and hopes to reap a reward, a reward that is earned by the risk he takes and the products he helps provide. No economy can ever hope to grow and proper without investment; aside from the rewards to the investor, there is a great utility provided to the public, a contribution to the common good. Investment is normally either a “win-win” or “lose-lose” proposition. That is, if the enterprise succeeds, then both the entrepreneur and the investor prosper; and if it fails, then both share the loss.

There is, however, another kind of bet in the financial markets, and this is a bet that provides no funds to business; it does not directly expand the output of goods and services. This is a pure bet on the future of some firm, and a bet that provides nothing to the firm. The stock market is normally a bet of this kind. That is, when we buy a share of stock, we normally buy a “used” share, one that was issued long ago and for which the company was paid. What we are doing is making a bet on the future of the company, with buyer and seller betting in opposite directions; the buyer things the price will rise above its current value, while the seller thinks it won't, or thinks that there are better values for his money. This is always a “win-lose” or “lose-win” situation. That is, one sides gains or losses are measured precisely by the other sides losses or gains; there is no net gain to society. Ninety-five percent of trades in the stock market are of this type, and only 5% are really investments, usually in the form of initial offerings, a “new” share of stock rather than a “used” one.

It should be pointed out that there is an indirect gain to the public in such speculation, in that speculative markets provide liquidity (the ability to quickly and reliably convert non-cash assets into cash) and therefore make people more willing to invest in the market. Therefore this speculation does have some social utility, even if it doesn't directly add to new production. However, there are other speculative markets which provide very little social utility, and which are pure zero-sum games, with one party's gain being exactly equivalent to the other party's losses. These are the derivatives, which are normally (or abnormally) just bets speculators place on the direction of a given market or security. Now, even these derivatives can have some utility, as when a bond-holder buys an insurance policy or hedge against the bond defaulting; he lowers both his risk and his reward. However, you can buy the insurance policy without owning the bond; it is pure speculation without any social benefit: no new goods are produced, no risk is insured, and the whole thing is zero-sum. Further, such sums devoted to speculation compete with sums for investing; the more devoting to bets, the less is devoted to production. Therefore, there is a net loss to the economy.

Normally we would not care about such silly bets, anymore than we would give much thought to the local crap game. If some man were foolish enough to gamble away his paycheck, we assume that his conduct will be “regulated” by his wife's anger and his children's misery. However, unlike the local crap game, which is a threat only to the solvency of a few families, the derivatives crap game can become a threat to the solvency of an entire economy. This is because they tend to be highly leveraged.

During the 1920's, people were highly leveraged in the stock market; they could buy stocks on 10% margins. That is, they put a thousand dollars down and could buy $10,000 worth of stocks. This is an excellent way to make a lot of money when the market is going up; it accelerates the gains on your $1,000. However, when the market is going down, it accelerates the losses. And when that happens, the brokers issue “margin calls”; that is, they ask you to pay down your debt. At that point, you must sell your assets. But since everybody is selling, prices plummet, with bankruptcies all around. The government no longer allows such 10-1 buying; I believe 50% margins are now required in the stock market.

However, in the derivatives market, there is no limit on the margins. Hedge funds (major speculators on these pure bets) were typically leveraged 15-1, 25-1, or even 75-1. With a little money down, they could generate enormous gains. But again, they can also generate enormous losses, and when the bets are as large as they are, they can lock up the entire credit system, drying up funds for investment. People who had not the slightest connection with these schemes find that they have lost their jobs, or taken pay cuts, because their employers can't get operating funds. They find that their homes have decreased in value, because defaults are forcing an oversupply of homes on the market, while drying up credit for potential buyers. Now, the people who caused this problem tend to get bailed out by the federal government; the people who had no connection with it tend to suffer the consequences.

Note how well this distinction between investing and speculating matches Aristotle's distinction between natural and unnatural exchange. Insofar as investment is connected with production, the exchange is natural and requires very little regulation. If I give a million dollars to an entrepreneur to build a factory, the government has little need to scrutinize the transaction. If it wins, we all win, and if it loses, the major loss is only to ourselves. But of course, most of us do not directly give our money to an entrepreneur; perhaps we give it to the bank, and let them choose the entrepreneurs. Here we are at one remove from production, and a bit more regulation is required. Since there is danger that a bank failure can affect all the depositors, we naturally want the bank to be required to follow certain rules and keep a certain amount of reserves against losses. But such regulation need not be onerous. But as investment becomes pure speculation, and as it becomes large enough to threaten an entire economy, more and more regulation is required to protect the innocent parties, that is, all of us.

However, we have done exactly the opposite in regulation: we heavily regulate natural transactions, and lightly regulate—or fail completely to regulate—unnatural exchanges. We place onerous requirements on regular banks, and ignore completely the investment banks and the hedge funds. But when these banks and funds fail, they are in a position—a blackmail position—to demand a bailout from the federal government. As Ha-joon Chang has observed, it constitutes Keynesianism for the rich, and Monetarism for the rest.

The regulators do not normally read Aristotle; Paulson and his colleagues would, no doubt, consider such an exercise to be a pointless waste of time in a modern economy. Hence, they can derive no principle upon which to base their regulations, and get it wrong nearly every time. The regulators are normally trained in the sterile economics of the Chicago or Austrian schools, and economic “science” which has demonstrated, over and over again, that it has no power to describe, much less understand, any actual economy.

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