The End of Economic Man: The Origins of Totalitarianism, is a forgotten classic, despite being lauded by Winston Churchill after it was published in 1939. The second chapter is titled "The Despair of the Masses," which I adapted to the name of this blog entry.
Drucker makes several important points that are eerily reminiscent of the current economic situation. But, before I go any further, let me make it completely clear I am not comparing Barack Obama in any way to Mussolini or Hitler. But I do believe our society faces some similar moral and philosphical challenges as did Italy and Germany in the post-WWI period.
First, the Austrian-born Drucker stressed how the failure of Socialism created a dangerous vacuum in the German psyche. This is hard for Americans to understand because Socialism enjoyed only a brief spell of popularity in the USA before WWI. And, it was never as visionary or metaphysical as in Germany, where a substantial minority of the population actually believed in a coming socialist paradise.
"The appeal of socialism had not been based originally upon its promise to bring better bargaining conditions for unskilled workers. It owned its strength and its very existence as a creed to the promise to a new social order and to establish equality. Without this appeal the belief in socialism has no basis and disintegrates." (p 31-2).
When the Great War broke out, Socialists expected workers globally to unite and create a workers' utopia. Instead they aligned according to nation-states under the command of their bourgeois "oppressors" and marched off to kill each other. The final nail in the coffin of socialist thought was the Russian Revolution, which didn't cause the proletariat uprising in western Europe expected by Marx. On top of these specific failures of the Socialist cosmology, Drucker also observes how advanced industrialism produced a growing middle class of white-collar workers rather. This completely obliterated Marx's prediction that capitalism would produce widening disparities of wealth and worsening exploitation. Henry Ford's $5 day made the Soviet Union morally bankrupt four years before it came into existence.
Drucker argues that the collapse of this Marxist vision embraced by many Germans and Italians created a bitter sense of despair and cynicism during and after WWI. This was fertile ground for the growth of reactionary fascism.
Fast forward 80 years to the USA. Instead of socialist utopianism, you have a country that embraced the religion of consumer capitalism and financial markets until a few months ago. Years of rising prices for stocks and real estate have come to a sudden and jarring end, obliterating retirement plans, pensions and endowments. Citigroup and Bank of America -- the country's two largest banks -- are teetering on the edge of the abyss and tens of thousands of people who thought they "had it made now" face the prospect of unemployment late in their careers.
Many were ardent supporters of free-market capitalism, yet now speak hopefully of Barack Obama's stimulus plan. With a dreamy look in their eyes, they say "we'll get through this" and "the system will adjust" as they cheer each new slug of government money. I don't know what good can come from such a cynical embrace of government intervention in an industry based on private capital and self-interest. It reminds me of how disenchanted German and Italian socialists embraced fascism. (Many may not realize that Mussolini was a socialist journalist before inventing fascism.) German-born Sebastian Haffner addessed this in his brilliant 1939 book Defying Hitler: A Memoir , which is even better than Drucker's work:
… there was a process that might have taken place in mythical times when a beaten tribe abandoned its faithless god and accepted the god of the victorious tribe as its patron. Saint Marx, in whom one had always believed, had not helped. Saint Hitler was obviously more powerful. So let’s destroy the images of Saint Marx on the altars and replace them with images of Saint Hitler.
Today, one might add: Let's smash the images of Saint Free Markets and replace them with the images of Saint Government Capitalism.
Alan Greenspan recently engaged in this kind of idol-swapping when he said he was "shocked" to learn that deregulated markets might actually be exploited by one group of people to get rich at the expense of everyone else, rather than promoting broad social good. Greenspan's religious embrace of free-market ideas was actually quite similar to that of Germany's socialist utopian thinkers in the early 20th century. (And, judging by the massive contradictions in his own thought process -- such as abandoning the gold standard to become the Gutenberg of Greenbacks -- I am not sure he ever fully respected the nature of capitalism or money.)
Just as disheartened European leftists embraced fascism to fill the vacuum left by Marx, many financial professionals are now embracing big-government statism to fill holes in their portfolios. German socialists who once rejected the nation-state as a capitalist ploy to keep them oppressed suddenly became ardent supporters of nationalistic violence and imperialism. Now that the idol of free-market capitalism is leading to despair, its one-time supporters demand massive government intervention and stimulus. I won't quote anyone by name, but watch financial news for 30 minutes and you're sure to come across a portfolio manager, economist or strategist speaking hopefully about Obama's infrastructure spending. It's the new coming utopia for the capitalist class. "Money managers of the world unite! (around Nucor) You have nothing to lose but your losses!"
The despair of the "conservative" and free-market capitalists cannot be overstated at this time. Our entire financial system is running on the guarantees of the federal government, foreclosures continue to mount and bank-analyst goddess Meredith Whitney recently warned of further writedowns. She even said recently that earnings for Citigroup in 2009 are "highly unlikely."
WALL STREET'S DEMONS
Returning to Peter Drucker, on pages 66-7, he mentions how people faced new "demons" such as war and unemployment, which:
"...are all the more terrible because they are man-made. The demons of old were as natural as their manifestations in earthquakes or storms. The new demons, though no less inescapable, are unnatural. They can be released by man only, but once they have been turned loose, man has no control over them... The new demons are far more unbearable than the old ones ever were. A Kierkegaard, a Dostoevski, an isolated, consciously lonely poet or philosopher, might be able to look at them unflinchingly and yet remain sane. The average individual cannot bear the utter atomization, the unreality and the senselessness, the destruction of all order, of all society, of all rational individual existence through blind, incalculable, senseless forces created as a result of rationalization and mechanization. (emphasis added)
We might replace Drucker's demons with deleveraging, bank writedowns and hedge-fund redemptions. Just as his demons were created by man, today's crises result from our own policies and actions. After all, for the last 60-70 years, America embraced consumerism as the basis of capitalism. Facing a glut of cheap commodities and excess industrial capacity in the 1930s, the government subsidized suburban sprawl to encourage demand. It then proceeded to transfer hundreds of billions of dollars -- if not trillions in today's money -- from established industrial states in the northeast to less developed areas across the Sunbelt. This trapped millions of poor blacks in decaying inner cities, created a dependence on foreign oil and skewed growth towards less skilled professions such as construction.
We encouraged Americans to take on extra possessions -- cars, houses, refrigerators and TVs -- and told them to shoulder the growing debt loads. We continued to do this even after an increasing share of the products came from outside the country, so it could no longer even be argued that consumption provided jobs for other Americans. Faced with recession in 2001, our glorious leader told us to go out and spend money. The result was a massive trade deficit that helped inflate the credit and commodity bubbles.
Rising incomes, positive demographics and easy money allowed Americans to maintain this consumption binge for decades and establish a mythology of plenty. A constant inflow of cheap credit gave the appearance of financial stability, much as a valium drip into an IV line gives a patient the sensation of well-being. As this process now reaches its own ultimate climax, our government-managed "free market" capitalism is looking about as robust as did utopian socialism in the wake of WWI. The mythology of perpetual prosperity is now a nightmare haunted by demons of delayed retirements, lower standards of living and bleak career prospects.
Drucker mainly addressed Europe in the 1920s and 1930s, but his passages remind me strongly of what's going on now:
Every rigid legal system that tries to maintain an artificial society by outlawing violence, makes the eventual revolutionary break in legal continuity all the more violent. Just so does the vain attempt to outlaw war in order to maintain society increase the imminence of war by threatening to turn every local conflict into a world conflagration. p 69
One might easily exchange the idea of outlawing war for outlawing bank failure. One might also argue that attempts to ameliorate recession with increased consumer spending have now compressed 50 years of problems into a short period -- much as the tendency to appease Hitler only made him stronger. Efforts to prevent economic weakness have now compounded to threaten the entire economy. I for one am amazed that legitimate economists can argue in favor of cutting interest rates during a credit crunch. By definition, borrowing costs rise during a credit crunch -- they should. The entire Keynsian notion of using government force and central bank printing presses to fight the business cycle worked for a while, but it has created layers of unintended consequences and unproductive outcomes. (How many millions of man hours and trillions of wealth were devoted to building houses that will now stand empty in the outer reaches of places like Phoenix. Why weren't those resources spent on improving healthcare or education?) Fighting market forces never works. Imagine someone is distraught about being spurned in love or losing a job. Would any responsible person tell them to go and shoot up some heroin or snort cocaine to feel better about themselves? Yet that is the monetary philosophy espoused across Wall Street and at almost every academic institution in the land.
If we decide that we have to abolish or to curtail economic freedom as potentially demon-provoking, the danger is very great that we shall soon feel that all freedom threatens to release the demonic forces. Freedom ceases altogether, therefore, to be autonomous and supreme ... freedom cannot remain real and valid in a world which is ruled by demonic forces. p 78
In our case today, we are not losing political freedom -- we are losing economic self-interest as a way of allocating capital. The very basis of free enterprise is that two people enter into a transaction out of self interest. Banks are supposed to lend money because they hope to make a profit. Now we ask them to lend money out of patriotic duty. Is that sustainable? Can an altruistic bank ever attract new capital from anyone other than the government? (Instead, why are we not letting banks fail and encouraging the rise of new ones that WILL BE profitable? )
Again, let me emphasize that I am not making ANY comparison between leaders or saying that Obama is in any way like Hitler. He embodies neither the invectiveness nor the anger of Hitler. Furthermore, I think that the USA has always been blessed with the right leader at the right time, while Germany often wound up in just the oppositive situation. (We had people like FDR and Lincoln, while they had people like Hitler and Kaiser Wilhelm.) I personally am not a big Obama fan because I worry that his efforts to spread unionization ("card-check") will drive jobs from the country. I also don't think government stimulus will succeed because it will discourage private enterprise. And, while I fear deflation now, I worry that the ultimate result of his policies will be inflation and a possible loss of our country's AAA sovereign credit rating -- just like what happened to Japan.
The point of this blog entry is just to emphasize that the USA faces more than just economic challenges now. This isn't 1991 when things will "go back to normal." Unlike in any other post-WWII recession, home prices are falling and consumer credit is shrinking. The basic moral and philosophical assumptions that have guided our culture and economy for the last 70 years are collapsing. (There are actually two things coming undone: Consumer capitalism dates back 70 years, and deregulatory capitalism dates back 30 years.)
And, just like Germany in the 1930s, people are reacting to crisis out of reactionary and cynical despair, rather than a positive sense that it's the right thing to do. Something good might come out of this, but it would probably be a first in history.
(I for one proposed a more constructive solution in this blog entry. More recently I expanded this idea to saying the government should buy all kinds of debt securities such as ABS. Interestingly, policymakers have adopted many policies resembling my suggestions since I published them.)