In response to Michael Mandel’s article for Business Week.
Is Social Security a Ponzi Scheme? Response to Comments
I’ve read through all the comments on my previous post, and I wanted to see if I could respond to some of them. In particular, a lot of people objected to me calling Social Security a Ponzi scheme. Other people thought that Social Security would be unsustainable, even with technological progress.
So let me explain why I think that Social Security has most of the characteristics of a Ponzi scheme—let’s call it a “Ponzi-like” scheme. Nevertheless, the system of intergenerational transfers—the young supporting the old—is sustainable as long as productivity is rising.”
Now that is a very western way of looking at the world. It may, in fact, be a very Anglo way of looking at the world, which makes it an exceptional, as in RARE viewpoint. There isn’t a lot of history of productivity increasing along those lines in a “sustainable” fashion.
The US’s extraordinary productivity after the 1860’s was due to cheap manufacturing exported to Europe, just as the Chinese are exporting to the US today. Immigration and land expansion fueled the next phase of growth. The extraordinary productivity of the 20th century was because of the impoverished nations who were either under Communism or socialism, or were recovering from the world war.
What on earth would make you think this trend, this fantastic opportunity, would continue? Like it did for who else in history? Who on earth attributed it to democracy rather than circumstance?
The Ponzi scheme other people on this blog topic refer to operates worldwide on many levels, internationally with super-tribal cultural and philosophical differences as well as institutional, technological, and demographic differences, it operates nationally, with the Fed’s dollar, laws and social services, and individually with traditions and values, and especially with consumerism and destruction of the saving behavior.
Do you mean you want to place the blame on some one part here? The dollar? The Fed? The Government? The culture? Just one?
The west has used its technical advantage to expand capital for a long time, at least since the defeat of Napoleon. It has financed wars with it. It has financed global expansion with it. It has financed empires with it. Why should we think that there is any monetary policy that will produce any result that is different from what any other empire in history has done?
Our self-appreciative analysis not withstanding, one promise holds true: money and prices are a knowledge system, and you can only fool the system long enough for as long as it takes for people to adapt to it.
They have adapted. They don’t trust the information system. And the Keynesians’ and Monetarists’ methods, which are designed to make people spend money because otherwise it will be destroyed, only provide an incentive when the people trust the system in the first place.
You can fool a few people now and then. But you can’t create a system of foolery for long.
This same set of ideas can be expressed purely quantitatively using less romantic language, but this form of argument tends to be more memorable, partly because it is more entertaining.
This is too abstract for this forum, but property cannot be divorced from the knowledge of its holder, or it ceases to be property because economic calculation becomes impossible.
Numbers are insufficient, as we currently know how to use them, to express inter-generational commitments. There is some evidence that human comprehension of the use of property cannot extend beyond perhaps fifteen years, maybe twice that at the margin.
That is our problem. In a nutshell. That is the problem.
We are unable to create debt instruments that allow infinite expansion of credit. Maybe someday, but right now it is beyond us. We do not understand our numbers and our own cooperative system well enough yet. What failed is our belief, expressed above as “… increases in productivity…” is precisely this problem.
If you want to regulate something, then do that. We’ve done it with CEOs and public companies. It isn’t a problem of incentives. It’s a problem of knowledge. It’s only an incentive if you think people are greedy and want to stop them, rather than believing that they simply don’t know any better and few of them have any depth of understanding of the monetary system and its uses, so they can’t know better.
And that’s the problem. I would call it a vanity. A more romantic continental philosopher would call it a sin.
Social services can be provided without relying on future productivity while preserving property and calculation. Making it a moral argument is simply a political distraction, so that governments can spend and class warfare can be justified on supposedly moral grounds, while an economically destructive, immoral act can be prosecuted out of view of the average person. You can have as much redistribution as you want, as long as you preserve economic calculation. But if you don’t, you’re just destroying the ability of the people to calculate more slowly than a central planner, and in the process socializing losses and privatizing gains.
And we have been privatizing gains at least since Waterloo, but at an accelerating rate.