The Problem with Socialism

As I read the headlines, I can’t help but see the tendrils of socialism grasping more and more very day. And it always brings to mind my uncle, Wm. R. Duvall.

When I was a boy, my uncle was the richest man I knew. He was fond of saying, “”There are three things you need to get rich: time, leverage and other people’s money.” I didn’t know what it meant at the time, but when I got older, I wanted to hear how he made it big

“I always knew I would be rich,” he said. “Even when I didn’t have two nickels to rub together.”

He started out as a barber, renting a chair in another man’s shop for $20 a week. “10 heads,” he said, “that’s all I needed. After that, every dollar was mine.”

“At that point,” he remarked, “all I had was time. I was making money, but I wasn’t getting rich.” It finally occurred to him that a real way to get ahead in barbering was to have his own shop and rent out his own chairs to other guys who were getting started in the barbering business.

So he looked high and low until he found a dumpy old place where he could afford the rent, then spent his nights and weekends fixing it up. In a couple months, he had it ready and went to work. He rented out the five chairs in the shop while he still worked at the same chair he had rented for several years. “It seemed like a risky idea to leave the spot where my customers were used to coming,” he told me.

Unfortunately, after a year, his landlord realized how good the business was and forced my uncle out. “What a setback,” he said. “All these customers and nowhere to go.”

His first thought was to look for a new place to rent. But then he was hit with a stroke of genius: “Own my own place, and I can’t get kicked out again!” It only took him a handful of days to locate what would become his goldmine: 3 acres of land with a corner shop and two houses.

He set out his shingle in the shop, bought a trailer for $150 and moved it onto the back of the property, then rented the two little houses. He had talked the owners into selling him the whole ball of wax with 100% financing over 10 years. After he got his extra chairs rented out and moved another trailer onto the property, he was flush with cash. In the end, the property was paid off in eight years. But in the meantime he dabbled in other real estate, left the country and bought a house in Cancun where he lived as a tour guide. Years later he came back and bought a beachfront house on a local river, where he lived until just recently.

“Everybody gets the same amount of time, Billy,” he would often say. “But that’s not enough to get you to the top of the heap.” His experience with collecting the rent from four other barbers showed him the power of leverage. His no-money-down real estate deal taught him about other people’s money. And I imagine he probably watched a boatload of late-night infomercials that helped formulate his “Wealth Outline.”

I have come to find that what he said (even though it was completely borrowed and not original) held a great deal of truth.

But up to this point, you’re probably wondering what in the world this has to do with socialism. Seems like a pretty entrepreneurial story. Right? You are correct.

Seeing the proper working of a man and his wealth, well, that makes a counterfeit all the more easily spotted. But we could add to that story our own little adventure in currency options. The same three principles are at work. Time, leverage and other peoples’ money.

But the path to wealth through socialism is not so clearly seen. As a matter of fact, it is more like a path to nowhere. Because socialism denies the capitalistic importance of these four pillars: wealth, time, leverage and other people’s money. Instead, they corrupt them to their own destructive ends.

Any socialist will tell you wealth is important. As a matter of fact, that is the big carrot held out to entice people to follow such a muddleheaded plan. They will also tell you that time is important. Not because you need it to build wealth, but because you need it to spend wealth. In other words, the here-and-now is what is of the utmost importance. And you must be rich now, in order to enjoy what time you have here!

Leverage is also important to the socialist. As poor men manage their wealth very poorly (but seem to know instinctively how to manage their ballot), it is imperative to leverage out the efforts of the poor man into large voting blocks. One poor man cannot get a candidate into office. But 100,000 of them, that’s a horse of a different color.

Finally, we have the socialist’s take on other people’s money. They love it. They covet it. And they’ll do anything to get it. Obviously it is impossible to enrich the poor men who voted for them with the candidate’s own money. This is why other people’s money is so critically important. Unfortunately for them, they have forgotten the words of U.K. Prime Minister Margaret Thatcher, who said, “The problem with socialism is that you eventually run out of other people’s money.”

Whether she actually believed that or not is a question for another day. But it still has the ring of an eternal truth.

My uncle’s understanding of other people’s money was that it could be used to make money for himself. And he was right. But here is a key difference. The “other people” in my uncle’s life lent him that money VOLUNTARILY, not because they were coerced. And they expected a real cash return on their funds, not just the “warm feeling” that comes from being forced to help an indolent person by way of government-run charity!

Because socialists reward those who treat money poorly and penalize those who treat money well, the system will never work. True, advocates of wealth redistribution can point to circumstances where it did “work,” and where it does “work” from time to time (if only for a limited time). But I can also point to circumstances where the laws of gravity are temporarily suspended, such as when I get on a plane.

But even God will not help me if I just assume because I can fly for a few hours from here to there that I can fly forever. At some point my plane has to come back to the ground. At some point the laws of gravity will resume their authority, and I will realize that my flight and my violation of gravity’s laws are coming to an end.

Capitalism is a law established by God, just like gravity. Its foundation is in the 9th Commandment, “Thou shalt not covet.” I am never free to desire to take what is my neighbor’s. Not his wife. Not his house. Not his lands. Not his possessions. I can trade him for them if I have something he wants more than what he has. (Except his wife, of course…) I can buy them from him if my offer is right. But I cannot steal (or vote) away his property into my account. That is not wealth creation; it is merely re-distribution. God condemns it, and He will not be mocked by those who think that they can make socialism “fly” forever.

Eventually, they will run out of other people’s money. And when they do, their plane will come crashing to the ground.

One more thing. All around us, we see the widespread push toward more socialism, even when it hasn’t yet worked. How could that be? To explain what we are seeing currently, we must acknowledge that if the socialists manage to escape complete annihilation in the plane that they wreck, they will begin a campaign of propaganda, reminding the people that if only the free market force of gravity hadn’t gotten involved, they would have been successful. And that all they need is more fuel (other people’s money) to get the thing going again.

And, of course, the people will see the wisdom of their case, and will vote for more fuel or parts or anything, just so long as we don’t let those stupid Gravitarians have control of the cockpit.

More groundbreaking efforts will be tried, such as debasing the fuel, so that we have more of it. Sure, if you add five gallons of water to five gallons of gasoline you get 10 gallons… Certainly we can go further on twice as much fuel, right? Yeah, Right. Whatever you say, Comrade. Meanwhile, anybody who knows better had better be preparing a parachute.

As the major nations of the world move deeper and deeper into the “Pit of Despair” (to borrow a good term from “The Princess Bride”), their solutions will work less and less. Each effort will become more and more futile. Perhaps then we will learn our lessons. If not we will be doomed to repeat them.

All that being said, we did have a big news item from last week. Chinese Premier Wen Jiabao fired a shot across the bow of the Good Ship USS Treasury.

It was not just a request, and it was not couched in the tactfulness of political diplomats.

China warned the United States to “Keep its word.” Seems that the Moral Empire of America has a hard time with the bad habits of lying and stealing.

And now the rest of the world knows it.

And now we know that the Chinese know it.

And we know that we need their lending to keep up our little charade.

And they know we need their lending.

Now they are telling us, do not fool with our investments. China has options of where to put their money. What options do we have? How many nations can lend us the amounts we are consuming? China has options. We don’t. “The borrower is servant to the lender.”

The world is changing… and we will keep looking for opportunities to profit from it.

The Daily Reckoning