The Fascist State vs. the Real Economy

Gary North – July 16, 2018

On February 6, 2009, I posted an article in Reality Check: “Economic Fascism and the Bailout.” It is here: https://www.garynorth.com/members/4578.cfm.

I argued the following. There is a move at the national level to expand what is inherently a fascist state. A fascist state does not call for the means of production to be in the hands of the state. Instead, it creates a planning system based on administrative law in which bureaucrats direct large parts of the economy. They create positive incentives economically for those businesses that cooperate. They create negative sanctions for those businessmen who do not cooperate. They control a large section of the economy, but not all of it. They want the productivity of the private sector to remain high, thereby providing state planners greater tools of administration and greater opportunities for personal advancement in the federal bureaucratic hierarchy. This system was devised by Mussolini, who was a former Communist.

I have long argued, following Ludwig von Mises, that all central planning ultimately fails because of its inability to establish prices, especially prices in the capital markets, that correspond to what the public wants to buy. There is no way for central planners to discover what the optimum production level of anything is, especially the supply of money.

The fascist economy is not coordinated. There is no central plan, and therefore there is no coordination of the nearly independent agencies of the federal government that interfere with the operations of specific sectors of the economy and specific businesses within each of these sectors. Most large businesses are regulated by multiple federal executive agencies, none of which coordinate their plans with another agency. They are independent fiefdoms.

PARKINSON’S OTHER LAW

The impulse of most federal agencies is for greater economic control. The reason for this is obvious: the more control that a particular agency has, the more people that it can hire to administer the growing turf of the agency. This is governed by Parkinson’s other law. His first law is the famous one: “Work expands so as to fill the time allotted for its completion.” The second one is more fundamental. A promotion within a bureaucracy is dependent on the number of employees supervised by a particular administrator. As the number of employees increases, the likelihood of a promotion increases for the administrator. He has an economic incentive to expand the jurisdiction of his department, thereby enabling him, in the name of the apartment, to hire additional personnel.

This process was summarized cogently in an article in The Economist in 1955. This august journal publishes only unsigned articles. But the style is clear. The piece was written by C. Northcate Parkinson, who later wrote a series of clever books, seemingly tongue-in-cheek, which were in fact accurate summaries of how bureaucracies operate. We read:

Before the discovery of a new scientific law—herewith presented to the public for the first time, and to be called Parkinson’s Law*—there has, however, been insufficient recognition of the implications of this fact in the field of public administration. Politicians and taxpayers have assumed (with occasional phases of doubt) that a rising total in the number of civil servants must reflect a growing volume of work to be done. Cynics, in questioning this belief, have imagined that the multiplication of officials must have left some of them idle or all of them able to work for shorter hours. But this is a matter in which faith and doubt seem equally misplaced. The fact is that the number of the officials and the quantity of the work to be done are not related to each other at all. The rise in the total of those employed is governed by Parkinson’s Law, and would be much the same whether the volume of the work were to increase, diminish or even disappear. The importance of Parkinson’s Law lies in the fact that it is a law of growth based upon an analysis of the factors by which that growth is controlled.

The validity of this recently discovered law must rest mainly on statistical proofs, which will follow. Of more interest to the general reader is the explanation of the factors that underlie the general tendency to which this law gives definition. Omitting technicalities (which are numerous) we may distinguish, at the outset, two motive forces. They can be represented for the present purpose by two almost axiomatic statements, thus:

Factor I.—An official wants to multiply subordinates, not rivals; and

Factor II.—Officials make work for each other.

We must now examine these motive forces in turn.

The Law of Multiplication of Subordinates

To comprehend Factor I, we must picture a civil servant called A who finds himself overworked. Whether this overwork is real or imaginary is immaterial; but we should observe, in passing, that A’s sensation (or illusion) might easily result from his own decreasing energy—a normal symptom of middle-age. For this real or imagined overwork there are, broadly speaking, three possible remedies

(1) He may resign.

(2) He may ask to halve the work with a colleague called B.

(3) He may demand the assistance of two subordinates, to be called C and D.

There is probably no instance in civil service history of A choosing any but the third alternative. By resignation he would lose his pension rights. By having B appointed, on his own level in the hierarchy, he would merely bring in a rival for promotion to W’s vacancy when W (at long last) retires. So A would rather have C and D, junior men, below him. They will add to his consequence; and, by dividing the work into two categories, as between C and D, he will have the merit of being the only man who comprehends them both.

It is essential to realise, at this point, that C and D are, as it were, inseparable. To appoint C alone would have been impossible. Why? Because C, if by himself, would divide the work with A and so assume almost the equal status which has been refused in the first instance to B; a status the more emphasised if C is A’s only possible successor. Subordinates must thus number two or more, each being kept in order by fear of the other’s promotion. When C complains in turn of being overworked (as he certainly will) A will, with the concurrence of C, advise the appointment of two assistants to help C. But he can then avert internal friction only by advising the appointment of two more assistants to help D, whose position is much the same. With this recruitment of E, F, G and H, the promotion of A is now practically certain.

This really is how the system works. Read the entire article here.

Very little that is productive gets done under these conditions. The longer that the bureaucracy survives, the less productive it becomes. It is self-serving. It lives to interfere with the lives of others. It thereby distorts the production process in the market economy. It leads to reduced economic output.

CONFLICTING LAWS

What is remarkable about the American economy today is the fact that Moore’s law is defeating Parkinson’s law. The enormous output of the computerized sectors of the economy is so great that the bureaucrats cannot keep up with the innovations. They have published controls, but the controls apply to operations that prevailed in the past. These operations are constantly being superseded by radical new technologies that could not have been predicted by the innovators a decade ago, let alone a bureaucrat who was insulated from the market process.

So, on the one hand, we see this constant expansion of bureaucratic meddling, which is economic fascism. But on the other hand, we see the expansion of the market sector, especially in the field of information, that escapes a much of the control system established by technologically clueless lawyers who are employed by various bureaucratic agencies.

We also find that the agencies are limited in the number of cases that they prosecute, so they tend to prosecute only small companies that they find out about and that they think will not have the monetary resources to defend themselves in the various agencies’ administrative law courts.

The bulk of the agency’s money always goes to the 80% of the operations that produce 20% of the meddling. This is simply another example of the operation of Pareto’s law. Pareto’s law, when coupled with Parkinson’s law, produces mostly paper shuffling inside the organizations. Meanwhile, Moore’s Law is enabling the innovative sectors of the economy to escape the bureaucratic meddling.

Then there is the question of financing. Always start with the money. Follow the money. More important, follow the budgets. Are the budgets of the federal agencies increasing? Yes, always. Are the increasing as fast as the general economy? Yes, they are. But what is not increasing are the receipts in actual taxes collected by the federal government. The ratio of federal receipts to GDP never changes much. It never exceeds 20% of GDP.

What does increase is the level of federal debt. The government is paying for the expansion of the government by means of selling debt to the public and, at least until recently, to the Social Security Administration and Medicare. These days, however, the so-called trust funds no longer cover the expenses associated with the retirement of the baby boomers. So, the agencies are selling the IOU’s back to the Treasury, and the Treasury pulls the money out of the general fund. The cash cows of Social Security and Medicare have become cash hogs. At some point, the hogs are going to be slaughtered. This is going to force a major transformation of the American political system. Politicians are not ready for this. so, they do for the day of inevitable actuarial judgment. every day, 10,000 more baby boomers go on to the roles of Medicare and Social Security. The process is demographically relentless.

Now consider another law, Bastiat’s law of the thing not seen. What we see is the expansion of federal intervention. What we don’t see are the myriads of innovations associated with Moore’s law. This is where the real economic action is. People are being liberated by this process. It is taking place at a faster rate than the expansion of the administrative law system of the federal government. I cannot prove this, precisely because there really is a law of the thing not seen. We cannot see it. But we can perceive the effects of it. Accurate information keeps getting cheaper. The number of transactions increases. As the number of transactions increases, the ability of federal agencies to both monitor the transactions and enforce the administrative laws against specific violations decreases. They can monitor something if they know what to look for, but the volume of transactions is so great today, that in most cases, they don’t know where to look. Even if they do know where to look, every dollar that is associated with prosecuting a particular violator, usually small, cannot be used on all the other violators. The number of violations is rising exponentially. The ability of federal agencies to enforce administrative laws cannot keep pace.

On the one hand, we see the expansion of the fascist state. We read the regulations, or at least somebody does, and we find out about the worst of them. Matt Drudge will usually publish an article about egregious violations. There was always lots for James Boulevard to write about. He is a cottage industry of horror stories of bureaucratic agencies. He was that even before the Internet. The same is true of constitutional lawyer John Whitehead. I know both men. They’re both very bright man. They don’t make up these stories. The stories can be seen and reported. What can’t be seen are all the violations that are not reported, not perceived, and not prosecuted.

The expansion of the fascist state is a disaster for the people who get caught by a particular agencies invasion of their privacy. But what happens to an individual is not what happens to the vast majority of individuals. The vast majority of individuals never get taken to court. Once in a while, they may receive a letter from the IRS saying that they owe more money, but it is usually not a whole lot of money. If you receive a letter like this, and you have a CPA, just send the letter to the CPA. He probably will get the IRS to back down. It depends on how many hours it takes him. If your contract with him specifies that he has to defend the case for free, he may be tempted to settle.

But he doesn’t want to lose you as a client, so he may not. On the other hand, if you pay him per billable hour, you will either pay him or you will pay the IRS. A lot of people simply write a check to the IRS. But if the amount is large enough, a businessman or person of substance won’t write the check. He will make the IRS prove it. The IRS is busy. Agents want big hits, not small hits. An agent probably will drop the case.

The real sign of the power of the central state should be based on how many people you know who’ve gone to jail or been bankrupted by an agency the federal government. You won’t know many people like this.

Parkinson was right. Bureaucrats prefer to make work for each other. They much prefer this to having to prosecute cases, first in the agencies’ administrative law courts, which are always busy, and then perhaps in a federal court, in which they may lose. They don’t want to lose. It looks bad in their files if they lose a major case. This may hamper promotion. The name of the game inside the bureaucracy is promotion. Caution is by far the driving single force inside any bureaucracy.

Caution is not the driving force inside a profit-seeking business. Caution is suicidal. The real-world market does not grant safety to anybody. Moore’s Law is making everybody unsafe. In the name of customer authority, entrepreneurs keep innovating. We are ruthless as customers. We are vulnerable as producers. This is the essence of the free market system.

CONCLUSION

There is a big difference between the fascist state and the economy that the fascist state attempts to regulate. They are both growing. The market economy is becoming freer than it has been in the past, primarily because of Moore’s law. I don’t think this is going to change.

As the fascist state grows, it becomes more incoherent. It faces the inherent irrationality of its uncoordinated operations.

To this is added the gridlock of Congress.

In the background, the unfunded liabilities of Social Security and Medicare increase. This is the #1 thing not seen. This is the time bomb inside the fascist state.

In between then and now will be a major recession. The bailouts will accelerate the growth of the deficit, as they always do. The debt clock will speed up, as it always does.

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