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Monday, May 11, 2009

Chrysler's Debt Holders Meet Karl Marx

In several past posts [1,2,3], I discussed the Obama Administration's fascist tactics related to their recent handling of Chrysler's secured debt holders. These debt holders, relying on the rule of law and hundreds of years of jurisprudence, expected to be repaid first in any sort of bankruptcy proceeding. When they realized that Obama is trying to thwart the rule of law, several dissident bond holders mounted a lawsuit aimed at stopping this process, however, they have now thrown in the towel. Thomas Bowden from ARC discusses the case here. [update: Alex Epstein discusses what should have happened here if we did not live in "Bailout Nation"]. In an article titled “U.S. Played Rough With Chrysler’s Creditors”, the WSJ recounts the recent events surrounding this travesty.

The results of these hardball tactics were on display Friday, as the last resisters of a deal to slash the value of Chrysler debt abandoned their effort to fight it in bankruptcy court. That raised the chances for a relatives swift transit through Chapter 11, producing a new Chrysler that is 55%-owned by a trust for union retirees, 35% by Fiat SpA-a company that hasn’t even been a Chrysler creditor-and not at all by the senior secured lenders.
The more fundamental concern related to this series of events is that such government tactics represent a major broadside on the rule of law and a further dramatic step on the road to outright fascism. What is fascism and what distinguishes it from socialism?:
The main characteristic of socialism (and of communism) is public ownership of the means of production, and, therefore, the abolition of private property. The right to property is the right of use and disposal. Under fascism, men retain the semblance or pretense of private property, but the government holds total power over its use and disposal . . .

Under fascism, citizens retain the responsibilities of owning property, without freedom to act and without any of the advantages of ownership. Under socialism, government officials acquire all the advantages of ownership, without any of the responsibilities, since they do not hold title to the property, but merely the right to use it—at least until the next purge. In either case, the government officials hold the economic, political and legal power of life or death over the citizens . . .

Needless to say, under either system, the inequalities of income and standard of living are greater than anything possible under a free economy—and a man’s position is determined, not by his productive ability and achievement, but by political pull and force.
If continued, this disturbing trend will end in chaos, economic stagnation, and oppression as capital flees the country or never enters it in the first place. What incentive would any investor have to invest in "secured debt" when the government can and will change the rules at any time? Even if Obama mitigates this type of intervention going forward, the cost of capital will likely rise as investors demand a larger premium (interest rate) to compensate them for the risk that the government will not protect the rule of law. America, rather than a bastion of safety under a stable system of laws, will begin to resemble a third world emerging market - a state of affairs for which we will all pay the price. Unfortunately, this trend is far from ending. In fact, it is just beginning as the PPIP (Public-Private Investment Program) makes clear.

To flesh out the more fundamental premises behind these programs, consider a statement in the WSJ article:

The White House ‘s role in restructuring Chrysler has sent a shudder through the community of lawyers and lenders in the field of bankruptcy and corporate workouts. Critics complain that the administration has violated a bedrock principle of American capitalism and unfairly demonized financial firms that are vital to the functioning of the economy and its eventual recovery.

Administration officials reply that the Chrysler crisis required bold action. While Chryslers suppliers, dealers and unionized workers are critical to its survival-and so is Fiat, which will contribute high-efficieny engines and foreign distribution-the creditors were expendable.

“You don’t need banks and bondholders to make cars,” said one administration official. [emphasis mine]

What!? So, according to the Obama administration, capital is not required to build factories, car engines, or dealerships?! Of course, this is a statement that contradicts the most obvious facts of reality. What is the root of such a claim made not by an uneducated ignoramus but presumably by a highly educated member of Obama's administration? The root of this claim can be found in virtually every college classroom, the same college classrooms funded and supported by the very businessmen who decry the real life consequences of the lessons taught in those classrooms.

The root of this claim is Karl Marx’s Labor Theory of Value.

In essence, Marx’s theory holds that the price of a good consists solely of the physical work required to make the good. Under this doctrine, if a good sells for more than the sum total of the wages paid to workers who allegedly are entirely responsible for its production, this excess (or profit) is held to be exploitative to the workers. This theory is the bedrock foundation of Marxian exploitation theory and of the entire philosophy of Marxism. Under this theory, capitalists serve only to exploit the workers by siphoning off revenue which rightly belongs to the worker. Thus, “you don’t need banks and bondholders to make cars.”

Of course, it is a fact that labor is one of the determinants of a good’s value, a fact recognized by classical economics. However, the idea that a good’s value consists entirely of the physical labor required to produce it is absolutely false. For a full refutation of this argument, I recommend Dr. George Reisman’s, Capitalism: A Treatise on Economics which can be found in its entirety here. Quoting Reisman:
The Marxian exploitation theory has been and continues to be among the most influential economic doctrines in the word. Despite the global collapse of socialism, it continues to be the prevailing theory of wages. Its truth in the explanation of the determination of wage rates is taken for granted both by the overwhelming majority of intellectuals and by the great mass of ordinary citizens in all countries of the world...

According to the exploitation theory, capitalism is a system of virtual slavery, serving the narrow interests of a comparative handful of "exploiters" - the businessmen and capitalists - who, driven by insatiable greed and power-lust, exist as parasites upon the labor of the masses. This view of capitalism has not been the least big shaken by the steady rise in the standard of living of the average person that has taken place in the capitalist countries since the beginning of the Industrial Revolution. the rise in the standard of living is not attributed to capitalism, but precisely to the infringements that have been made upon capitalism. Thus, people attribute economic progress to labor unions and social legislation, and to what they consider to be improved personal ethics on the part of employers...

As I have indicated, the exploitation theory has been and continues to be a guiding force in the thoughts and actions not only of the various Communist and socialist parties around the word, but also in those of the great majority of people who regard themselves as anticommunists and antisocialists. It is believed to be correct by almost everyone, not as a description of present-day conditions, to be sure, but as a description of the workings of laissez-faire capitalism-of capitalism free of all government intervention into the economic system...
Dr. Reisman offers a full refutation of Marx's theory along with an exposition of the classical labor theory of value. See particularly:

Chapter 11, Part C 4: The Labor Theory of Value of Classical Economics
Chapter 11, Part C 5: The “Iron Law of Wages” of Classical Economics
Chapter 11, Part C 5: Marxian Distortions of Classical Economics; The Final Demolition of the Exploitation Theory
Chapter 14, Part A: The Productivity Theory of Wages, The Marxian Exploitation Theory

Why is it that Marx's ideas continue to dominate academia despite economic theory and the facts of reality which overwhelmingly refute it? Is there an even deeper cause that explains Marxism's appeal? Marxism has gained currency because its fundamental premises resonate with the prevailing ethos of our culture: the morality of altruism.

The morality of altruism regards anyone who pursues their self-interest as evil. This is why Marxism, which regards capitalism to be "driven by insatiable greed and power-lust", is palatable to modern intellectuals. Marxist economic theory much like the science of global warming provides a pseudo-scientific veneer to the socialist agenda - an agenda which seeks to subjugate the individual in the name of egalitarian social justice. Only a philosophy which boldy and proudly upholds the right of the individual to exist for his own sake, i.e., a philosophy which upholds rational self-interest, can defeat Marxism.

For those who do believe that banks and bondholders are "necessary" to make just about anything and to those who grasp that the foundation of civilization: individual rights and the rule of law are necessary if man is to survive and prosper, it would serve them well to understand what modern universities are and are not teaching, and demand “value” for their money.


HaynesBE said...

Thanks for this post Doug.

What is the source of the quote beginning: "The main characteristic of socialism..."

The Rat Cap said...


There is a hyperlink on the word before the quote that takes you to the source at www.aynrand.org in the lexicon posted there.


HaynesBE said...

Thanks. I just didn't scroll down far enough.