Myths Of A New Era

In what might have been the equivalent of the four-minute mile, Mr. Iaroslav Tchij of a collective farm in the Lvov region of the Soviet Union in 1959 reduced a hog to 100 kilos of meat in just 5.6 hours. This seems like a leisurely pace to me…but it was an hour less time than it took an American to do the job.

“But that was just the beginning,” we are told in a fascinating new book. “The communist butcher did the job in just three hours in 1960 and promised to do it in an amazing 1.5 hours the following year.”

The book, “The Scientific Mythology of Communism,” was written by Lucien Boia, a professor of history at the University of Bucharest, and was published by my friend, Michel, of Les Belles Lettres. Michel always loads me down with books to read. Most of them were stolen when my briefcase was taken in Normandy. At this very minute, the thieves are probably discussing Hesiod’s ideas on economics or perhaps the translation of “Xenophon” from the original Greek.

Fortunately, Boia’s book, which recounts the preposterous ideas of the communist era, escaped.

Mr. Tchij, for example, was not alone in believing he could increase productivity in such a remarkable way. In fact, one of the myths of communism was the idea that productivity would increase — without interruption — at spectacular rates. This was not based on any observation. It was a myth developed by Marx and Engels.

The founding fathers of communism, like today’s Internet investors, believed that a new era had arrived. It was an era founded neither on observation nor on hope — but on what they thought were the laws of history. In his funeral oration for Marx, on the 17th of March, 1883, held in Highgate cemetery, Engels credited Marx with being “the Darwin” of economic history. Just as Darwin had discovered the key laws that governed the evolution of natural history…Marx had discovered those that governed economic and political history.

These laws, such as the concept of “surplus value” which undergird Marx’s critique of capitalism, were not laws at all…but just screwball ideas dressed up to sound important. Yet they formed the basis for an entire bestiary of myths — like unicorns and basilisks — that inhabited the imaginary world of communist society.

The myth of determinism, for example, meant that everything was already worked out…the future was already set in stone…according to the principles Marx described.

The myth of progress — whereby things got better and better year in and year out (a myth disproven by communism itself).

The myth of the New Era — in which the entire world would be recreated neither by God nor by nature — but by man, following the scientific and rational concepts of historical determinism.

And the myth of the New Man — heck, a new world needs a new man. This new Marxist man would not have the same hard wiring as other men. He would be an entirely new being. He would not need a profit motive, for example. Nor would he wish to accumulate wealth…after all, the collective would supply all his material wants. He would not even want to have his children with him…they would be raised in collective nurseries.

As loony as these notions were, they were nevertheless taken up enthusiastically throughout the 20th century by assorted despots and crackpots. They were not only argued over endlessly in the cafes of Paris…they were also the foundation of an entire imaginary world.

Much like Net investors today, Soviet policymakers saw no reason why they should be constrained by the observed growth rates of the past. Besides, without private property and private business, there would no longer be a business cycle to worry about. Kondratief, who had researched the cyclical nature of business activity and reported it to Soviet officials, had been sent to Siberia …where he died in a labor camp.

Economic growth rates rarely pass 5% a year. So the Soviets set growth targets of 10% to 15%(or even higher). These projections then became the measure of actual (though imaginary) growth rates. The economy of the Soviet Union was thought to have multiplied itself 36 times between 1913 and 1959. The United States, by contrast, only increased by a factor of four. Soviet leaders predicted that they would pass the United States in a dozen years.

Even this was sluggish to Kim Il Sung, the North Korean dictator. If you could determine economic growth by decree, he must have reasoned, in 1969, why be satisfied with 15%? In his text entitled “On Some Theoretical Problems of Socialist Economies,” he declared that there was no reason for communist economies to ever slow down…and that growth rates of 30% to 40% per year could be maintained.

North Korea, by the way, is the same country, where three decades later, millions of people are starving.

He should have paid attention when his fellow maniac, Ceausescu of Romania, addressed the agricultural problem. “Ceausescu decided,” Boia tells us, “to put his country in the forefront of world agriculture.” This he accomplished in the simplest and most expedient fashion – – he simply multiplied per-acre production figures by four. Marxist myth held that collective farms would be vastly more productive than old-fashioned independent farms.

Ceaucesescu merely brought the myth to life — he realized it in the spirit it deserved — mythically. The astounding thing was how ready people were to believe the myths. Even American economists calculated that the Soviet economy must be 50% or 60% of the U.S. economy. For decades, the Soviet Union was listed as the world’s second biggest economic power.

It was, of course, all myth. The Soviet Union was not getting richer. It was getting poorer. Its people were not becoming more productive — they were becoming less productive…to such an extent where they had created a “value subtracted” economy — in which raw materials were processed and turned into products that were worth less than the raw materials themselves.

Even the leaders were myths. Mr. Djougatchivili, a not- very-smart former seminarian and New Era aficionado, became Josef Stalin (or “man of steel”). And Kim Il Sung turned himself into a virtual deity — an object of worship, like a mythical god of ancient Greece, for his impoverished people.

More on this to come…and the remarkable myths of our own New Era…

In the meantime, best wishes for the weekend,

Your servant,

Bill Bonner

Ouzilly, France April 7, 2000

*** Another day of confusion in the markets. The Dow rose 80 points. The Nasdaq rose, too — 98 points.

*** At least some of yesterday’s bullishness was attributed to Abby Cohen. William Fleckenstein, ( says Abby heard Greenspan opine that the techs were for real. They were not cyclical, he is supposed to have told her. So Abby went back to Goldman and came up with the “magnificent 7” tech stock recommendations. These included the big favorites — such as Cisco and Dell. It’s hard to believe that anyone could make money buying these overpriced has-beens at this stage…but stranger things have happened.

*** The most exciting action yesterday was among the biotechs — which rose 5% following the announcement by Celera Genomics that it had completed sequencing the genes of a human being. Celera stock rose about 20%…even though any practical application of the research remains far in the future and extremely uncertain.

*** But what the heck…it’s a stock play, not a business.

*** Is the fix in? John Crudele noted in the “NY Post” that Goldman and Merrill Lynch came into the market last Tuesday — when the Dow and the Nasdaq were both down about 500 points — and did some heavy buying. They bought high leverage futures contracts and were credited, by some, with turning the market around. Why would these two big players do that? Well, one rumor that has been circulating for the last few years is that a “plunge protection team” organized by the government and the major financial institutions moves in whenever there is a risk of a serious crash.

*** Of course, if it were true…and if it were known…this would add immensely to the moral hazard already rampant in the investment markets. That is, if investors knew — as they seem to — that there were no risk of a crash, they would buy the dips without fear. Overpriced stocks would become more overpriced. And the market would become even more hazardous.

Which is, of course, what has happened.

*** “We obviously had a bubble,” said Frank Zarb, chairman of the Nasdaq, in a speech in China, “and the bubble has been corrected.” Well…there you are. The worst is over. It’s clear skies from here on. “The correction…was expected and very healthy.”

*** Do these guys make this stuff up as they go? I don’t recall Mr. Zarb warning investors of a coming correction. And what’s healthy about a shock that leaves tech and Internet stocks trading at 100 times earnings — as Dell is? C’mon…this market doesn’t call for a correction…it calls for a purge or maybe an exorcist.

*** The Tokyo market is up this morning…but it’s the employment data in the United States, due out this morning, that will probably set the tone for the day. It’s Friday, though, and the market is on edge. Savvy investors may not want to hold big positions in vulnerable stocks over the weekend.

*** The euro has sunk to 95 cents.

*** Bonds, gold and oil all fell yesterday. Not a lot…but enough to keep the worry of deflation alive.

*** More stocks advanced than declined yesterday…1,861 to 1,634. And there were 43 new highs against 32 new lows. These are healthy signs.

*** An article from “NY Times” news service shows that employee stock options at Cisco, one of Abby’s magnificent 7, totalled a quarter of the company’s earnings. These disguised labor costs continue to distort the real financial picture among the techs and Nets. More on that below…

*** After several days of rain, the sun is out in France this morning. In fact, it is a beautiful spring morning – – too nice a day to worry about the stock market. We’re here for the kids’ school vacation. I’ve been working every day…but trying to take off a couple of hours every afternoon to do something outside. The trouble is, there is so much work to be done outside it’s hard to come back in.

*** By the way, I noticed that we have begun addressing these letters to DR readers personally. A couple of readers have objected. I don’t have any strong feelings about it…do you?

The Daily Reckoning