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A Personal Statement: Wealth Creation and Preservation: F.A. Hayek's The Road To Serfdom
March 7, 2009
I just talked with Aunt Betty in Bismarck. It's her birthday tomorrow. We spoke of her grandson, Justin, at West Point who will soon be completing his first year there. But the conversation eventually turned to that topic on everyone's mind today... our country's economic state of affairs. "There are too many people today," Betty commented, "who expect to receive hand-outs from the government." She's exactly right, of course.
Who Moved My Retirement Cheese? As a long-time investment professional, I had decided, some months ago, to present to you in these Personal Statements some of my best ideas regarding wealth creation and preservation. And I will do that. At the end of this article, you will find a few links to some things I've written for clients. But... in recent months, everything has changed in the world of money... hasn't it? Aunt Betty said it well.. said what is on everyone's mind: "No one is going to be able to retire anymore. We're just going to have to keep working until we die!" In the last six months, the average person has lost about half of his or her retirement savings! How did this happen? ... so quickly... Have a look at this chart of the Dow Jones. You will see that since September 2008, when it became increasingly clear that a socialist government would be elected, the Dow Jones has been in a death spiral, losing half it's value... and we're not done yet.
I have one main point in this article... During the last 20 years, I have written for clients 50 articles and a book on the subject of investing for retirement during uncertain times. But things in the financial world are spinning so fast right now, in a way that we've not seen before, that I am compelled to make one main point at the moment. We all need to understand and see clearly that...
The financial markets are not in a southerly tailspin due to concern about the banks or real estate or credit. Not really. Those things could be fixed, rather quickly, actually. The markets are going down because of a crisis of confidence! Investors, right now, are casting a negative vote on the future of America. They are selling, withdrawing money from the markets, driving them ever lower, due to fear of what Washington is doing! We see the rule of law, regularly now, circumvented and minimized by ones posing as public servants but, in fact, employing their offices to further private agendas.
British historian Kenneth Clark in his Civilisation says that social order is a very delicate flower. Unless people have confidence that their efforts will be rewarded, unless they have hope in a good future, they will not work hard and give their best... and, if it gets bad enough, they will not work at all! Without the hope that saves us, we will not plant trees or repair our roofs or build new factories or hire new employees... why would we, if we believe that our efforts will come to nothing, pilfered and sabotaged by greedy others... without hope, civilization dies... We have never seen such massive corruption, governmental greed, and power-grabbing - not like this. Dr. Laurence J. Kotlikoff, professor of economics, Boston University, put it this way: "Uncle Sam ... is, in fact, the father of all deceptive accounting. The government has arranged its budgeting to keep the great bulk of its liabilities off the books and out of sight. The real liability facing our government is $70 trillion" ... the father of all cooked books... and Kotlikoff's words were written before the recent trillions of give-away dollars!
Be Careful What You Say These are serious issues. But I want you to also know that my psychic friends have warned me about casting all of this in terms that might be too negative and discouraging. This means that our Guides on the Other Side do not want us to lose hope, no matter how dire the present circumstances. I am mindful of this admonition. And I will attempt to offer measured words and studied opinions, and to mitigate the histrionics. Because they are right. No matter how serious the present trouble might be, the ultimate reality is such that all things will work toward our long-term benefit. Yes, there can be potholes in the road to that better future... sometimes, some rather big potholes... But we must not lose sight of the fact that we are not alone in this world. We are told, by those who help us on the Other Side, that limits have been placed on the amount of damage that dark forces can do to us. And, despite a long chronicle of bad things that we see in world history, somehow, humankind has managed to progress and do better, in spite of it all.
An Idea Whose Time Has Come There is an old saying in the investment world, a proverb among those who analyze the history of businesses:
So many businesses were started this way: A long time ago, a grandfather had a business idea. So he sacrificed and saved, a few dollars here and there, until finally he had enough to launch his venture. His first workshop or production area was a garage, a barn, or a basement. But his idea was sound, and orders started coming in. Soon he had to move to larger facilities. And he hired employees. And on it went. Forty years later, the once-fledgling enterprise - led by a man in shirtsleeves, but one who knew exactly how every facet of the business worked - had grown into a national concern. Time for the son to take over. He never really liked the business that much. No shirtsleeves for him. Takes a lot of time off, you know how it is, better things to do. Under his watch, the business peaks, stagnates, and begins to decline. Grandson comes along. Rich family now. Very rich. Becomes chairman of the board... uhh... exactly what kind of business did Gramps start here, anyway? ... playboy... social swirl... this ingenue hasn't a clue how to run the business, what made it great, how to grow it, or maintain it... competition eats his lunch... severe decline... family wealth in disarray... back to modest shirtsleeves again... cycle complete... has happened thousands of times. Many of us Americans are like the grandson. We have been living on the family wealth... our heritage and inheritance... but we have no idea, not the foggiest, about how this wealth came to be or how to maintain it.
Many of us do not like to think about the subject of economics. I understand why. It all seems so muddied and incomprehensible. But you must understand that such national befuddlement of clear thinking here has been encouraged, and purposely fostered, by those who would take advantage of us.
The truth is... the real McCoy economics is really quite simple to understand. Truth, in its essence, stripped of propaganda, usually is. Please reference the sources mentioned in my Personal Statements #14 and #15 as these will enlighten you with good basic information.
There is a book that all thinking Americans need to read: Professor F.A. Hayek's 1944 Road To Serfdom:
I would like to offer an overview of this important book - but, again, I would encourage you to read The Road To Serfdom for yourself.
What Is The Essential and Primary Difference Between Capitalism and Socialism? Professor Hayek, writing just before the end of World War II, had studied the history of European socialism. He saw how it had eventually morphed into various forms... Nazism, Stalinism, Fascism... and he looked at the socialistic trends within his own Britain, and also within the United States.
And what are those "basic ideas" upon which Western civilization has been built?
The history of Western civilization might be viewed as that of humankind climbing out of the stultifying dark pit of oppressive government - of monarchies, despotic oligarchies, totalitarian regimes of all kinds. From this environment of power-and-control, Western Man forged for himself, and herself, a sanctified self-image, one made in the likeness of God!
We take this talk of individual self-determination for granted today - but these are radical ideas, long suppressed by dictators of all kinds for thousands of years... and it was Western civilization which offered this gift! Hayek noted that it is often the enemies of the culture of the West who have the greatest discernment in terms of seeing the true essence of how we live:
"the revolt of the individual against the species"! Comte would be laughable if ones such as he weren't so dangerous! Notice, implicit within his words, individual Man does not own himself, and owes allegiance to the Group! And Hayek quotes a prominent Nazi who also saw what we in the West are about:
A 30-second lesson in how wealth is created We in the West, from hundreds of years of bitter experience to the contrary, learned that only individuals can create wealth. Someone has to make something of value that someone else will want to buy - that's how it works. And until those individual creative energies begin to flow, nothing else happens. Government cannot create wealth, but only attempt to redistribute it... or simply steal it from you. East and West Germany once provided the perfect "laboratory" example of this phenomenon. Two identical peoples, same blood, same heritage - one side living in prosperity, the other in ramshackle bombed-out hovel existence; one side respecting individual rights and efforts, the other disdaining this, with its attempt to direct all activity via despotic top-down authoritarianism. We could also look to Hong Kong and mainland China for a similar example; and, as a general lesson, we could point to the entire Soviet system, with its vaunted five-year plans, which collapsed under its own bureaucratic weight, unable to compete with the individualistic creative West.
what happened to us? How did we in the West, who, for twenty-five hundred years, albeit with fits and starts, had marched forward in our growing sense of individualism; our expanding consciousness of our own sacred dignity; our increasing awareness of our own abilities and creativity... the power of simply being human... how did we come to believe the lie that we, ourselves, individually, are not enough? Hayek says that, in a sense, we fell victim to our own success. By the mid-1800s England, for 200 years, had been leading the crusade for individual rights. But, with the growing prosperity from individualistic capitalism, among the "third-generation shirtsleeves" crowd, there arose not only a confusion regarding how wealth is created, but a sense of guilt about having received this unwarranted largesse from their fathers.
The socialistic movement, especially among intellectuals, growing in Germany at this time began to denigrate and despise the individualistic accomplishments of England and America. Sadly, we began to listen to the propaganda.
There's a reason why socialistic forms of government are referred to as collectivism... it is a rejection of the individualism that created the West.
Why The Worst Get On Top This provocative chapter title in The Road To Serfdom presents a good question, doesn't it? Why are there so many corrupt politicians? But, let me put it a little more poignantly. Why, especially, are there so many corrupt politicians who preach socialism? Yes, anyone can lie, say anything he or she likes, but, generally, those working for limited government and individual rights - in a sincere way - are not usually the ones who bedevil us. What is is about socialism that attracts the most corrupt? Why do the worst get on top?
For many years I had wondered how the most cultured civilization on earth, Germany of the 19th century (from which my peoples left 200 years ago to pioneer farmland in Russia) - the land of Beethoven, Brahms, and Bach; of Einstein, Mach, and Braun; of Nietzsche, Schopenhauer, and Kant... and so many stellar others - how could such a nation, having ascended these heights of intellectual achievement, a pinnacle not seen in any other county, have welcomed to power, by democratic process, the darkest forces of totalitarian power? Someone once said that Russia could be raped, but cultured Germany had to be seduced... We need to understand that process lest we walk that same path. Those who defend socialism are quick to say that what happened in Germany in the 1930s was an historical accident... an abberation... that maybe it was certain DNA-flaw in the German character... or just something totally anomalous that could never occur again... especially in the United States.
Is Hayek saying that all socialism will inevitably lead to a Hitler showing up to command us? No. Hayek explicitly says he is not saying that. Life is not quite so formulaic. History doesn't repeat, said Mark Twain, it only rhymes. And yet... and yet... Hayek warns that the dynamic which festers within socialism will inevitably produce unexpected bad results. That much is guaranteed to happen. It must be so... as you will see. And when those bad results overtake us, if we allow them to, our story will be different than Germany's... but, like Germany's, we will not be happy with the outcome.
here's the first problem that socialists face They've convinced themselves that they're the smartest people in the room... that the free market is "untidy"... so "cluttered and chaotic" ... they are certain that a select group of them, making decisions for everyone, will streamline and simply all of life. But here's the catch. In order for them to manage the economy - to guarantee a job for everyone ... to mandate a living wage even if one doesn't work ... to provide womb-to-tomb social services - these elites will need to plan and control all aspects of society... and our lives. This means that the personal freedoms we now enjoy - your freedom to choose - will be sacrificed upon the altar of security... rather, the illusion of it.
It all becomes very dark rather quickly. Because a bureaucrat who has the power to manage society, and your life, also has the power to threaten your life... naive serfs fail to see this connection.
how does socialism take root in a free society? Socialistic central-planners are dead in the water until they can convince you to give up your freedoms, which will allow them to run your lives. And how is that to be accomplished in a free society... wherein the people have grown accustomed to personal freedoms? Well, this is a real problem for our socialistic friends. But we must not discount them too easily, for, as Yeats warned us, the "worst are full of passionate intensity." They are resourceful. And they have their ways. Hayek treats us to a brilliant analysis of the psychology and methodology of socialism... here's how it works... how a society, in stages, is seduced into accepting a life of serfdom. Listen to Professor Hayek:
the three-step tango: a dance with the devil "There are three main reasons why such a numerous and strong group with fairly homogeneous views is not likely to be formed by the best but rather by the worst elements of any society. By our standards the principles on which such a group would be selected will be almost entirely negative. "In the first instance, it is probably true that, in general, the higher the education and intelligence of individuals become, the more their views and tastes are differentiated and the less likely they are to agree on a particular hierarchy of values. It is a corollary of this that if we wish to find a high degree of uniformity and similarity of outlook, we have to descend to the regions of lower moral and intellectual standards where the more primitive and 'common' instincts and tastes prevail. "This does not mean that the majority of people have low moral standards; it merely means that the largest group of people whose values are very similar are the people with low standards. It is, as it were, the lowest common denominator which unites the largest number of people. If a numerous group is needed, strong enough to impose their views on the values of life on all the rest, it will never be those with highly differentiated and developed tastes - it will be those who form the "mass" in the derogatory sense of the term, the least original and independent, who will be able to put the weight of their numbers behind their particular ideals. "If, however, a political dictator had to rely entirely on those whose uncomplicated and primitive instincts happen to be very similar, their number would scarcely give sufficient weight to their endeavors. He will have to increase their numbers by converting more to the same simple creed. "Here comes in the second negative principle of selection: he will be able to obtain the support of all the docile and gullible, who have no strong convictions of their own but are prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently. It will be those whose vague and imperfectly formed ideas are easily swayed and whose passions and emotions are readily aroused who will thus swell the ranks of the totalitarian party. "It is in connection with the deliberate effort of the skillful demagogue to weld together a closely coherent and homogeneous body of supporters that the third and perhaps most important negative element of selection enters. It seems to be almost a law of human nature that it is easier for people to agree on a negative program - on the hatred of an enemy, on the envy of those better off - than on any positive task. "The contrast between the 'we' and the 'they,' the common fight against those outside the group, seems to be an essential ingredient in any creed which will solidly knit together a group for common action. It is consequently always employed by those who seek, not merely support of a policy, but the unreserved allegiance of huge masses. From their point of view it has the great advantage of leaving them greater freedom of action than almost any positive program. The enemy, whether he be internal, like the 'Jew' or the 'kulak,' or external, seems to be an indispensable requisite in the armory of a totalitarian leader."
a how-to manual for seducing a nation Hayek's three steps to socialism represent an old playbook now. We've seen this formula unfolding itself in many countries over the years... and today, as well... in our country, too. Do you recognize these tactics? We see them, hear them, are subjected to them, every day in the news. Notice Hayek's phrase, the appeal to "primitive and common instincts." Totalitarians cannot speak the truth, their real intentions, as it would alarm people. Instead, they play to our fears, our base instincts. They are "against" something, and employ a "negative program"; in so doing they hope to foment bitterness and anger against some scapegoat on whom they can pin all of the blame for any problems in society. This becomes a daily rant, an incessant chant of coordinated talking points, as Hayek says, "drummed into" the ears of the naive every day. A lie, spoken often enough, for the gullible, becomes the truth. This propaganda tactic is first directed, as Hayek observes, to those of "undifferentiated tastes," the less intelligent, the non-discriminating. To this group, the socialists hope to add the "serfs," those with their hands out, those who hope for a free-ride, at the expense of others, when the totalitarians come to power. But here's what really juices the whole program. A nice little crisis. This is what the totalitarians hope and pray for! Because it is during those times of trouble that the unthinking, the disaffected, the embittered, the envious, are most open and susceptible to propaganda lies. And not only do they pray for crises, when they are able to do so, they will exacerbate and fan the flames to make it worse. What better way to "prove" to you that your way of life doesn't work... and that you need them to save you from your original sins of individualism! And during these troubled times, the totalitarian, while not offering any specific solutions, will promise heaven on earth - "change" - salvation, miracles, all good things from above... if only you will allow them to save you!
Ahhh... now it's starting to get interesting... "whatever he wants" ... a bit ominous, wouldn't you say? And notice the phrase, "ineffectiveness of parliamentary majorities"! Yes, it's such a darn shame... all this gridlock in Congress... what we need is a "strongman" who can get things done... yessirreebbobb... so this king can do whatever he pleases... I remember George Will many years ago lampooning Jessie Ventura who wanted a unicameral legislative structure in Minnesota... so much untidy gridlock, you know... can't we all just get along...
But, see, it took us 200 years to "get over" the Founding Fathers - and, today, the "third generation" is in the fitting room, getting measured for their shirtsleeves... it's the latest... quite fashionable these days... I want you to think about this. Hitler came to power, by democratic process, in the most cultured nation the world had ever seen... the greatest philosophers... the greatest musicians... the greatest scientists! (Do you remember the joke, after World War II, the competition between the US and the Soviets to capture German scientists? and the taunt: "Our German scientists are better than your German scientists!") But the scapegoat, in those days, was not only the Jew and the Kulak, but the "unfair" Allies, after World War I, at the Treaty of Versailles, who had saddled Germany with "unfair" war reparation obligations. Hitler began his rise to power with the unthinking disaffected, the "Brownshirts," but he later won over large numbers who, in their bitterness against the Allies, surrendered to socialism, voluntarily surrendered their freedoms, to a small man who promised a blank check of "change" and a rebirth of national glory. Allow me to summarize: Why do the worst get on top? Because socialism, at its heart, is all about coercion - making people do what a small group of elites want them to do. This takes power. And force. Only the truly corrupt-in-heart will actually go so far as to do this. Will socialism automatically produce a Stalin? or a Hitler? or a Castro? or so many other generalissimos of history? No. As I said, history is not quite that formulaic. Socialism-lite can limp along, say, as in a Sweden, for a long time. The wealth-redistribution policies will stifle business and retard the general wealth accumulation of the populace. And, for a time, socialistic, well-meaning nincompoops and incompetents can apply their misguided visions of "fairness" and "compassion" - but without stark dictatorship. Germany, too, pushed farther and farther into socialism for many decades, without a monster at the helm. But... let me tell you something... If you build it, they will come... eventually. If a nation progressively sets aside its heritage of personal freedoms; if it denigrates the principles of individualism and the sacred dignity of Man; if it encourages an entitlement mentality; if it allows itself the base and dark-spirited thoughts of "blame the scapegoat"; if it punishes its entrepreneurs and drives them away... I submit to you that, eventually, someday, they will come. Why is that? Because the culture will be ready for it. And the prize waiting for would-be totalitarians - the heady power and pomp - will be so juicy, so compelling, that it's only a matter of time before Hayek's "worst" are attracted to this pot-of-gold; only a matter of time, and the right circumstance, the right crisis, until these small and dark spirits "get on top." To those who consider my statements here to
be an overreaction, I will simply say to you that our country was
built upon a certain view of human nature. The Founders looked with
great skepticism upon the prospects of long-term good issuing from
power concentrated too narrowly. That is why they enshrined the
principle of "checks and balances" within our republican form of
government. Such institutionalized caution recognizes that men, and
women, are not yet, as Madison reminded us, angels; that the grand
lesson of history is that of man oppressing man; that, as Lord Acton
asserted, power corrupts, and absolute power corrupts
absolutely.
Do you know what "political correctness" really is? It's an attempt at censorship by those who support socialism... those who cannot bear to hear the truth spoken. Maybe you read Animal Farm in high school. You should read Orwell's little allegory again wherein he warns us of the dark forms of socialism.
The farm where the animals live is a place of increasing corruption, oppression, and exploitation... yet, all of this untowardness is cast in terms of magnanimity by "the pigs," those who run everyone else's lives. And when Orwell uses his famous line, All animals are equal but some animals are more equal than others, he means to tell us that, under despotic socialism, the plain meaning of words will be twisted beyond recognition... twisted by those with hidden agendas of private gain and power over others.
up means down, and right means left Hayek gives us the greatest example of turning language on its head. The term "liberal," as we can see without much imagination, comes from the larger word, "liberty." One hundred years ago, the political term liberal referred to a defender of individual liberties - yet, today this word refers to activities on the other side of the political spectrum, to those who advocate collectivism and mitigation of individual rights! See, those who were working against individual rights and freedoms just hated to be called by what they were really doing... so they started calling themselves "liberals" ... let's not, but just say we did! And look at the term "conservative"! A conservative was once someone who "conserves" or attempts to maintain the status quo! it referred to those who didn't want the boat to be rocked because they had already made it! But, today, those fighting for individual freedoms and limited government are called conservatives! Up is down, black is white, right is left! ... designedly so, by those who cannot bear to hear the truth publically spoken regarding what they are really attempting to do.
A people with the light of freedom glowing in their hearts will not likely be conquered. Such domination would come at a very high price; would require the invader to kill every last inhabitant - they would have to slit the throat of every little old lady, every little old man, every young boy and young girl... all of whom would be waiting behind every door and every tree, be it only with a kitchen knife - as Churchill gravely intoned, "take one with you"! But, see, this is the beauty of propaganda, why it was invented... we'll just talk you to death, with incessant lies... no need to use storm-troopers if we can convince you to surrender... convince you by making you believe that you are no good... not enough... without them...
Among all of the bulwarks of freedom, none is hated more by the socialist than the concept of "The Rule of Law"; as such, it is propaganda's greatest target.
We today, this very month, are witnessing an effort to dismantle, as much as possible, while the current crisis provides excuse and cloud-cover, a dismantling of the rule of law. When Hayek speaks of "ad hoc action," he refers to a trumped-up "special situation" that is used to set aside the rule of law. It's in almost every news item we hear today... with the implied message: "Capitalism doesn't work; the free market doesn't work; we must act quickly, there is no time to lose, to institute socialism to save you!" And in that subterfuge, our freedoms are reduced, taken away, and power to control all, more and more, is directly toward an elite group at the top. This is all so dangerous, on many levels. On the economic level, the death of the rule of law means, as Hayek points out, results are not foreseeable, outcomes become less certain; in such an environment, investors will not commit capital, and the whole economy enters a downward spiral of fear and apprehension. And what replaces historical precedent, the rule of law, our heritage of free markets and individual planning? It is replaced by whim and arbitrary notion... replaced by whatever the hell they want to do... as I said, the prize to those who can pull off this kind of coup is very juicy, very compelling... it truly is a coup d'etat of the highest order.
There was a time in history when it was believed that some people, by nature, were fitted to become slaves, while others were destined to be freemen - even Aristotle believed this. This kind of social caste system became systemic in Britain from the time of William the Conqueror, with some born as "nobility" - the dukes, earls, and barons - while others were shunted to the side as scullery servants, stable hands, and milk maids. So strong was this sentiment, that even in recent times in Britain, some students were "streamed" into college prep courses, while others were consigned to tech courses of the laboring class... all of this is part of what Hayek calls "the rule of status"; the rule of law was born in England, but, even so, some vestigial bad ideas die hard. But it is only under the rule of law - the game of life played by a set of rules acknowledged by all, not somebody's arbitrary whim, or which family you were born into - that men and women finally found freedom to control their own destinies. Socialists speak of "unfairness," of the immorality that some should have more than others... and yet, as we learn from Hayek, instead of merit and diligence, under the rule of law, determining who shall have what and how much, under socialism, the elites will now decide, for all, who shall succeed and who shall prosper... and all of this is a throw-back to the days of the rule of status.
The rule of law as the legal embodiment of freedom is a beautiful insight of Hayek's.
Wealth Creation and Preservation
People without a measure of personal wealth will soon also be without personal and political freedoms. It's a lesson of history, as Hayek points out. This article, you may have forgotten, is about personal wealth creation and preservation. Sorry about the long introduction. It's just that, the present economic crisis, a product of socialistic mismanagement, should remind all of us that our personal wealth is a function of the freedoms we enjoy in our American republican form of government. Alright... said my piece on that.
VIDEO of Whitney singing Greatest Love of All "Searching for a hero," a fine example to inspire oneself, is a good thing... but... how much better to find that hero within. The vicarious life, that of worshipping another, is not much of a life; especially sad, when we could be discovering the vast goodness and power within... each one of us... made in the image of God... Learning to love yourself is the greatest love of all!
Here are three articles that I've written as a registered investment advisor that will help you with your financial planning:
Letter to Clients, February 1, 2009
Wishing you the best of everything, Wayne P. Becker
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