Who Insures the WHOLE Banking System? Nobody!

There Are No Safe Banks

Occasionally, we see an official attempt at a serious discussion of what Federal Reserve System economists would like the public to believe is safe banking. This means safe fractional reserve banking. This means fraudulent safe banking. This means fantasy banking.

All fractional reserve banking rests on a legal promise: you can get your money out at any time. Yet the money that you deposit is loaned out by the bank. This means that your money is gone. Then how can you withdraw it at any time? Only if (1) the money is loaned out on a “repay instantly on demand” basis, or (2) hardly anyone will demand withdrawal at the same time. The bank will pay you out of its tiny slush fund for withdrawals. The first option assumes that the debtor is always in a position to repay at any time, which is of course ludicrous for most corporate and business borrowers. They will not agree to such terms. The second option is equally ludicrous during a banking crisis.

In other words, all fractional reserve banking is based on a legal deception of the depositors. A depositor cannot get his money back when a lot of other depositors want to get their money back. This is called a bank run. All fractional reserve banking systems eventually experience bank runs.

During bank runs, bankers call on the government to bail them out. The government and the central bank bail out only the biggest banks. They let the smaller banks go under. Then big banks buy the assets of the smaller, now-busted banks at discount prices. The government (FDIC) pays off depositors with $250,000 or less on deposit. Taxpayers therefore subsidize the buying spree of the biggest banks. This is justified as “saving the banking system.” The politicians provide taxpayer money every time.

I remember an on-camera testimony of Congressman Brad Miller, a Democrat Congressman from North Carolina, just before the TARP bailout. He said that his constituents were evenly divided between “no” and “hell no.” He of course voted for the bailout, as did most of his colleagues. He was of course re-elected.

The voters did not really care. They screamed about the bailouts, but they refused to impose negative sanctions on all of the Congressmen who voted for TARP. Until there is real pain, they usually re-elect their Congressmen. They perceive, correctly, that their opinions do not count when big banks are asking for handouts in a crisis. The voters want their lifelong bailouts, and as long as their Congressmen bring home the pork, they really don’t care. By “care,” I mean an automatic vote for the challenger at the next election. Congressmen generally understand only one thing: defeat at the next election. Ron Paul doesn’t care, and maybe Dennis Kucinich doesn’t care, but most of them care deeply.

So, the #1 goal of most politicians, all bureaucrats, and all central bankers is to make sure that the voters feel no pain — at least not pain bad enough that might lead to (1) a new Congress, (2) budget cuts for bureaucracies, and (3) the nationalization of the central bank.

A SCARED CENTRAL BANKER

On June 3, Daniel Tarullo, a member of the Board of Governors of the Federal Reserve System, which is a government-owned institution, unlike the regional Federal Reserve banks, gave a speech at the Peter G. Peterson Institute for International Economics. Peterson until 2007 was the Chairman of the Council on Foreign Relations. As such, he was among the most influential men on earth. He served as Secretary of Commerce (1972-73). He was the CEO of Lehman Brothers (1973-84). He co-founded the Blackstone Group. He is concerned about the growing Federal debt, on-budget and off-budget, which he correctly perceives as a threat to the world’s capital markets.

Tarullo’s topic was the systemic risk of the world’s interconnected banking system. This is surely a relevant topic. When I think of the international banking system, I think of Tom Lehrer’s nuclear war song a generation ago: “We will all go together when we go. Every Tom, Dick, Harry, and Every Joe.”

He focused on the Dodd-Frank law’s requirement that the Federal Reserve System establish prudential standards for “systemically important financial institutions or, as they are now generally known, ‘SIFIs.’ My focus will be on the requirement for more stringent capital standards, which has generated particular interest.”

Keep this acronym in mind: SIFIs. It means very large banks, meaning very large, highly leveraged, highly profitable corporations whose collapse would create a chain reaction in the financial markets. In the old days, SIFIs were called TBTF: too big to fail.

Tarullo made a significant admission: “It was, after all, a systemic financial crisis that we experienced and that led to the Great Recession that affects us still today.” That’s the official party line. It was used to justify TARP and the other 2008 bailouts, such as swaps at face value of liquid AAA-rated Treasury debt held by the FED for toxic assets held by the SIFIs. For a skeptical analysis of the party line, read David Stockman’s response.

Tarullo admitted that the old system of regulation failed to deal with systemic risk. Or, to put it differently, the horse got out of the barn, and now the Dodd-Frank law has increased the responsibility of the FED to regulate things better. But the FED regulated the system before. This is the standard government response: reward failure with greater responsibility.

The pre-crisis regulatory regime had focused mostly on firm-specific or, in contemporary jargon, “microprudential” risks. Even on its own terms, that regime was not up to the task of assuring safe and sound financial firms. But it did not even attempt to address the broader systemic risks associated with the integration of capital markets and traditional bank lending, including the emergence of very large, complex financial firms that straddled these two domains, while operating against the backdrop of a rapidly growing shadow banking system.

But things will be different Real Soon Now. The FED is going to regulate large banks on a comprehensive (macroeconomic) basis. This assumes that a committee of salaried bureaucrats who do not own the banks or have any assets of their own at risk will be able to design fail-safe rules that will coordinate the decisions of depositors and bankers inside the United States. Of course, the system is international, so the USA is dependent on decisions made by bureaucrats, bankers, and depositors around the world. But Dodd-Frank did not cover them.

A post-crisis regulatory regime must include a significant “macroprudential” component, one that addresses two distinct, but associated, tendencies in modern financial markets: First, the high degree of risk correlation among large numbers of actors in quick-moving markets, particularly where substantial amounts of leverage or maturity transformation are involved. Second, the emergence of financial institutions of sufficient combined size, interconnectedness, and leverage that their failures could threaten the entire system.

In short, the FED’s economists, who failed to foresee what would happen to a few banks in 2008, are now going to foresee what will happen to lots of banks, including multinational banks that are interconnected with SIFIs all over the world.

He assured his listeners that “No one wants another TARP program.” No one wants hyperinflation, Great Depression II, or both. The question is: What can a bunch of regulators do to prevent this? “In order to avoid the need for a new TARP at some future moment of financial stress, the regulatory system must address now the risk of disorderly failure of SIFIs.”

There is a theoretical problem here. Risk can be estimated by use of statistical analysis. An example is life insurance tables. Uncertainty cannot be estimated, such as life insurance tables during a nuclear war. These are called “acts of God,” and insurance companies write contracts to escape liability.

A systemic failure is triggered by an event that is not governed by the law of large numbers, i.e., risk analysis. It is triggered by an event that is inherently uncertain. That was why Long Term Capital Management went belly-up in 1998, despite its sophisticated formulas based on the work of two Nobel Prize-winning economists.

He referred to an international agreement known as Basel III. That is the successor to Basel II, which was not enforced and which achieved no protection from 2008. “The Basel III requirements for better quality of capital, improved risk weightings, higher minimum capital ratios, and a capital conservation buffer comprise a key component of the post-crisis reform agenda.” It all sounds so reassuring. But what authority does the committee have to impose sanctions? None. “Although a few features of Basel III reflect macroprudential concerns, in the main it was a microprudential exercise.” In short, it ignored The Big Picture.

We need to pay attention to The Big Picture. “We” means Federal Reserve economists who have formulas, but who were not smart enough to win a Nobel Prize.

Here is the problem:

There would be very large negative externalities associated with the disorderly failure of any SIFI, distinct from the costs incurred by the firm and its stakeholders. The failure of a SIFI, especially in a period of stress, significantly increases the chances that other financial firms will fail. . . .

He argued that the SIFIs must increase their capital reserves. Increased capital means lower leverage. It means a reduced ROI: return on investment. So, a SIFI will not do this without regulation. “A SIFI has no incentive to carry enough capital to reduce the chances of such systemic losses. The microprudential approach of Basel III does not force them to do so.” Quite true. So, what is the FED going to do about it? And how, exactly, can the FED get foreign SIFIs to do it?

What has been done so far? Committees have been set up. This is basic to the theology of all modern civil government: salvation by committee. “Together with the FDIC, the Federal Reserve will be reviewing the resolution plans required of larger institutions by Dodd-Frank and, where necessary, seeking changes to facilitate the orderly resolution of those firms.”

Still, we must acknowledge that we are some distance from achieving this goal. The legal and practical complexities implicated by the insolvency of a SIFI with substantial assets in many countries will make its orderly resolution a daunting task, at least for the foreseeable future. Similarly, were several SIFIs to come under severe stress, as in the fall of 2008, even the best-prepared team of officials would be hard-pressed to manage multiple resolutions simultaneously.

I see. “Some distance.” “Practical complexities.” “Daunting task.” In short, they don’t know what they are doing. The formulas are not yet clear. The appropriate sanctions are not yet on the books. So, it’s “pray and patch.” It’s bureaucracy as usual.

“I HAVE A PLAN”

He offered a five-step program. Point one is choice:

. . . an additional capital requirement should be calculated using a metric based upon the impact of a firm’s failure on the financial system as a whole. Size is only one factor to be considered. Of greater importance are measures more directly related to the interconnectedness of the firm with the rest of the financial system. Several academic papers try to develop this concept based on inferences about interconnectedness from market price data, using quite elaborate statistical models.

Oh, boy. Academic papers! Yes, my friends, academic papers, written by Ph.D.-holding economists who have never run a bank or anything else. That will do the trick!

Others have proposed using more readily observed factors such as intra-financial firm assets and liabilities, cross-border activity, and the use of various complex financial instruments.

So, the experts do not agree. Surprise, surprise! Then whose system will win out? None. A committee will decide how to coordinate all these proposed solutions.

Second, the metric should be transparent and replicable. In establishing the metric, there will be a trade-off between simplicity and nuance. For example, using a greater number of factors could capture more elements of systemic linkages, but any formula combining many factors using a fixed weighting scheme might create unintended incentive effects.

You know: transparency. It’s the new mantra. It’s a revision of Woodrow Wilson’s “open covenants openly arrived at.” Trust them!

“Systemic linkages.” “Formula combining many factors.” “Fixed weighing scheme.” Yes! Yes! I believe!

On the other hand, using a small number of factors that measure financial linkages more broadly might reduce opportunities for unintended incentive effects, but at the cost of some sensitivity to systemic attributes of firms. Whatever the set of factors ultimately chosen, the metric must be clear to financial firms, markets, and the public.

Clear. It’s all so clear. Doesn’t it appear clear to you? It does to me.

This is transparency, all right: the transparency of the wardrobe worn by the emperor, who had the best tailors money could buy.

Tarullo went on and on. The fifth point was the corker: international cooperation with independent agencies, all according to Basel III standards, which will be imposed by 2019. They promise!

Fifth, U.S. requirements for enhanced capital standards should, to the extent possible, be congruent with international standards. The severe distress or failure of a foreign banking institution of broad scope and global reach could have effects on the U.S. financial system comparable to those caused by failure of a similar domestic firm. The complexities of cross-border resolution of such firms, to which I alluded earlier, apply equally to foreign-based institutions. For these reasons, we have advocated in the Basel Committee for enhanced capital standards for globally important SIFIs.

Achieving and implementing such standards would promote international financial stability while avoiding significant competitive disadvantage for any country’s firms. I would note in this regard that it will be essential that any global SIFI capital standards, as well as Basel III, be rigorously enforced in all Basel Committee countries.

I have summarized half of his speech. The rest of it is equally concrete, realistic, and inspirational. You can read it here.

CONCLUSION

This is the best the FED has to offer. This is one Board member’s proposed solution to systemic risk, which is in fact systemic uncertainty. It is a salaried bureaucrat’s proposed solution to the inherent uncertainties imposed by fractional reserve banking — a system whose major players are politically protected from failure, and which therefore subsidizes high leverage and high returns . . . until the day the dominoes begin to fall.

We are asked to believe that Federal Reserve economists can design a coherent, enforceable system of controls to protect the world from leveraged banks that overestimate the ability of their formulas to protect them from uncertainty. We are asked to believe that salaried economists at the FED and all other major central banks can produce a better formula, and then impose it in ways that profit-seeking bankers cannot evade.

My conclusion: we will all go together, when we go.

June 8, 2011

From LRC, here.

‘Trust the Doctors!’ (Unless They Disagree with You, Of Course…)

Nearly 100 Israeli Doctors Issue Letter Demanding That State Not Vaccinate Children Against COVID-19

Nearly 100 Doctors and medical professors signed their names to a letter requesting that the Israeli health system refrains from vaccinating children under any scenario unless the disease were to become dangerous to them.

According to a report by Channel 12 News, the doctors explained that “there is no room to vaccinate children at this time.” The doctors added that based on agreed-upon medical values, including “caution, humility, and do no harm” that there is not enough evidence or threat to vaccinate children against the disease. The doctors explained further that not enough is known about the disease and the various vaccines that have been produced to combat it.

Among the signatories of the letter are such well-renown Doctors as Dr. Amir Shachar, director of the emergency room at Laniado Hospital, Dr. Yoav Yehezkeli, an expert in internal medicine and a lecturer at Tel Aviv University, and Dr. Avi Mizrahi, director of the intensive care unit at Kaplan Hospital.

In the letter that was addressed to “the chiefs of the Israeli Ministry of Health, to our fellow doctors around the country, and to the entire public.”

They noted that “the increasingly prevalent opinion within the scientific community is that the vaccine cannot lead to herd immunity, therefore there is currently no ‘altruistic’ justification for vaccinating children to protect at-risk populations.”

They added that even today it is unclear whether the vaccine prevents the spread of the virus and for how long it confers protection and noted that new variants “that may be more resistant to vaccination are popping up all the time.”

The letter continues, “We believe that not even a handful of children should be endangered through mass vaccination against a disease that is not dangerous to them. Furthermore, it cannot be ruled out that the vaccine will have long-term adverse effects that have not yet been discovered at this time, including on growth, reproductive system, or fertility. Children should be allowed a quick return to routine; the many tests and broad isolation cycles should be stopped, and no separation between the vaccinated and unvaccinated should be created in the public sphere. Vaccination of at-risk populations should be allowed, and under the almost complete vaccination of this population – it is possible to return to full routine (with periodic adjustments) even in the presence of COVID-19 virus.”

“Therefore, we fear that at this point in time, there is under-reporting of side effects. Moreover, a causal link between events – if any – will only emerge in due course, as more and more events of a certain type accumulate. For example, if there is a serious health event that happens to 12 young people a year in Israel (ie – an average of 1 per month), while the vaccine also causes this serious event infrequently, it will take many months until it is clear that there is an increase in the incidence of the event, and that there is a connection between the vaccine and its appearance.”

“Do not rush to vaccinate children as long as the full picture is not clear. Coronavirus disease does not endanger children, and the first rule in medicine is, do no harm. The full picture is expected in many months, and possibly years. Moreover, one must wait for such documentation not only from Israeli data but from global data. In this context, it is worthy to add that black box warnings – about severe or life-threatening side effects – accumulate months and years after drug approval, due to the fact that severe but rare toxins appear, naturally, only over time.”

“We believe it is not appropriate to impose the inconvenience of vaccination on the pediatric population, where coronavirus is not dangerous, especially at this stage when the efficiency, in the long run, is not at all clear. Pediatrics in Israel is one of the best in the world, and pediatric intensive care – above all. It is extremely rare for a child to die of a viral disease, and this can happen, unfortunately, as a result of various types of viruses. We do not think it is right to manage private life and public health policy as a result of an ongoing fear of a viral illness that is very rarely liable to harm our children’s lives. ”

“In view of the fact that the vaccination of the vulnerable population reduces hospitalizations and mortality from Covid – we believe that the negative effects of the virus will be much smaller when the majority of the at-risk population is vaccinated, as begins to appear to be the case in the country, and this without the need to vaccinate children,” they explained.

“We believe that our children should be allowed to return to the routine of their blessed lives immediately, and should not be vaccinated against Covid-19. Asymptomatic children’s tests, which have no clinical significance but cause widespread indirect damage, and the mass isolation cycles in education frameworks, should be stopped immediately. It should be emphasized to the public that even vaccinated people can be infected and infect others, and that the same rules of conduct apply to everyone without connection to vaccination status. We must stop pointing the finger of blame at the unvaccinated, and we must stop violating the rights of the individual. We must immediately stop all forms of exclusion and separation between people in the public sphere.”

(YWN Israel Desk – Jerusalem)

From Yeshiva World, here.

Mainstream Economics Is Superstition

– December 2, 2019 Reading Time: 5 minutes

 

Sit in any time beyond the first month of a typical ECON 101 class and here’s what you’ll be taught: free markets work well, but only under conditions that seldom prevail in reality – a regrettable fact that requires the state to intervene to correct each of the many market failures.

The apparent science on display seems impressive. Curves are drawn on the whiteboard to portray the difference left by free markets between marginal private cost and marginal social cost, between marginal private benefit and marginal social benefit, and the resulting failure of markets to produce socially optimal quantities of outputs and to attach to these outputs socially optimal prices.

Gazing at the curves – or, if the class is especially mathematical, studying the equations – reveals the remedial action that must be taken if society’s welfare is to be optimized. Shift this curve upward, or that one downward – or in the equations modify this coefficient that way or that coefficient this way – and, voila!, society is engineered to optimality with the aid of Scientific Economics.

It all seems to be so objective and free of any taint of ideology. After all, you can see it right there in the graph, in black and white: the marginal private cost of operating the oil refinery is lower than is the marginal social cost of doing so. Only a libertarian ideologue objects to using government to bring marginal private cost into equality with marginal social cost. This libertarian stubbornly elevates his ideology over the public good, for, as the graphs and equations make clear, bringing marginal private costs into equality with marginal social costs yields net social gains. Such engineering is Kaldor-Hicks-Scitovsky efficient. (It’s impressive to have scientific terms that non-specialists must google.)

It’s a Scientific Fact: Economic Reality is Highly Complex and Often Unobservable

But the reality is that this allegedly scientific case for intervention is not close to being as scientific as it is widely believed to be, especially by economists.

Curves and equations are often very useful tools for helping us to think clearly about reality. But these curves and equations are seldom realities on which researchers can gather actual data. While Jones does incur particular costs by increasing her factory’s output, those costs are not observable to outsiders. Nor are Jones’s costs the same as the costs to Smith who increases his factory’s output by the same amount as does Jones.

Also not observable are the marginal social costs of these factories’ operations. The factory across town might indeed spew pollutants into the air that my neighbors and I breathe. But I challenge anyone to objectively quantify the cost that each of us experiences as a result of a one-percent increase in the factory’s output – then of a two-percent increase – then of a three-percent increase… and then to add these costs together in order to construct a genuinely objective marginal-social-cost schedule.

This challenge cannot be met, although meeting it can be faked. The best that can possibly be done is for a fair-minded researcher to estimate – inevitably using her own subjective evaluations – the costs that I and each of my neighbors individually bear. But how does this researcher know my discount rate – or, rather, know the length of time over which I regard as relevant my exposure to the factory’s emissions? She doesn’t. She can’t possibly know such a thing. And what’s true for her knowledge of my discount rate is true for her knowledge of my evaluation of the precise degree to which the factory’s emissions negatively affect my present well-being.

This researcher – assumed here to stick as closely as possible to the scientific tenets of economics – knows that the preferences, risk tolerances, and discount rates of all individuals affected by the factory’s output differ from each other. Therefore, to scientifically quantify “marginal social costs,” this researcher must get not only such ungettable information about me; she must also get such ungettable information for each of the many individuals who is or who might become affected by the factory’s emissions.

Even ignoring the fact that preferences, risk tolerances, and discount rates can and do change in unpredictable ways, this researcher’s task is undoable.

This impossibility is no small matter. If the researcher overestimates the social costs of the factory’s emissions, she – in league with government officials – imposes her own “social” cost on others. She obliges the factory to reduce output to a level below that which is textbook optimal. The cost to society of this suboptimal level of output might well be as large as, or even larger than, the cost to society of simply leaving the factory free to operate without government attempts to “internalize” on it the social costs of its emissions.

The Scientific Appearance Is a Mirage

At this point the mainstream economist pushes back. He doesn’t deny (How could he?!) that, as a technical matter, getting precise information on marginal social costs is practically impossible. But he insists that such an ideal standard is inappropriate. “We can estimate the divergence between private and social costs closely enough,” the mainstream economist assures us, “and then have government act on those estimates. It’s better than doing nothing.”

While it’s true that the perfect should never be allowed to obstruct the good, there are at least two looming problems with this mainstream-economics approach – problems that warn against trusting it to serve as a reliable guide to government policy.

First, as explained above, there’s no good reason to think that estimates made of social costs by even well-intentioned and sparklingly brilliant government officials will be close-enough to accurate to trust that a government empowered to correct market failures will, on the whole, raise social welfare. The assumption that such officials will typically perform well enough on this front is based on no science; it’s merely an assumption – or, rather, an aspiration.

Second, there’s no good reason to think that government officials in reality face incentives that prompt them to behave as their doppelgängers in textbooks behave. The entire case for using government to correct alleged market failures is built on the belief that self-interested actions of private decision-makers lead them to seek private benefits at the greater expense of the public. But if we assume that people act self-interestedly in their private spheres we must make the same assumption about people’s motivations in public spheres.

Yet despite more than a half-century of warnings from public-choice economists, mainstream economists continue to assume, without much apparent thought, that government officials act in a way that is categorically different from the way these same persons would act were they in the private sector: private persons are assumed to act to promote their own self-interests, while government officials are assumed to act to promote the public interest.

What, however, could be more unscientific than this assumption of dual motivations? It is justified neither by science nor by common sense, but it is crucial to the “scientific” case for government action to correct market failures.

My argument is not that markets are perfect. (They certainly are not.) Nor is my argument that a highly informed and well-meaning deity could not intervene in markets in ways that improve their performance. (Such a splendid creature certainly could.) My argument is that because economists advise government officials rather than deities, the economic case for using government to correct market failures is scientific only in the most superficial sense. Deep down it’s mostly superstition.

From AIER, here.

Bringing Korban Pesach: One Day, They Will Say They Never Really Disagreed…

The Longed-For Sunset of the Rabbinic Establishment

My Passover plans ran into a few hitches this year. As everybody who knows anything about me knows, I have been preparing for Korban Pesah for some time. In previous years, I hoped and prayed that we would be allowed to have our Passover service, and early in the afternoon of the fourteenth of Nisan I would check the news often and wait for that phone call telling me that the sacrifice was on, at which point I would take my pre-packed suitcases and hightail it with the family for Jerusalem. However, because the fourteenth of Nisan was the Sabbath this year, and intercity travel is prohibited by Torah law thereon, I had to make sure to be in Jerusalem before the Sabbath. Then again, as I was telling anyone who would listen for the last year, YOU also had to make sure to be in Jerusalem before the Sabbath, or else YOU would not have been able to eat of the Korban Pesah. I am astounded by the sheer multitudes of people who did not make suitable arrangements.

Whatever the case, we were in Jerusalem early the afternoon of Friday, and then, on the morning of the Sabbath, because one who is ritually impure is not allowed to consume sacrificial meat, I dutifully immersed myself in a local miqweh shortly after the morning prayers, before I consumed my second-Sabbath and final-leaven meal. Then, after some relaxing/stressful quality time with the kids, I put on my finest clothes and began my 45 minute trek to (what now, due to our neglect, only remains of) the Temple. I told my wife that our sacrificial animal would remain on the Temple Mount that afternoon with whomever was in charge of our group, while I would return sometime later that afternoon. Because it is strictly forbidden to prepare in any way for the night of Yom Tov on the Sabbath, we would then sit tight at our place of lodging until the Sabbath ended, at which point we would gather the kids and begin the march, as a family, back to the Old City to have our seder. The initial walk was pleasant enough, but as I began my final decent from the Jewish Quarter’s parking lot to the area of the Kotel Plaza, I met another Jewish man and his family, and in response to my query, he said that the sacrifice had not been offered. Because it was still fairly early in the afternoon, I proceeded, and presented myself to the lone guard stationed at the entrance of the Temple Mount, and requested to be admitted so that I could view the slaughter of the Pesah. The guard, with out flinching, asked to see my goat, to which I answered that I was but one member of a larger group, and that the Rabbi was in charge of bringing our animal, and I was still unaware if it was to be a goat or a lamb. Struck by the readiness of that answer, he countered that the Mount was to remain closed, but as the aforementioned Jewish man I had encountered had also told me, the Mount would be open the next morning at 7am. That was all well and good, but the time for Korban Pesah is only the afternoon of the fourteenth.

Dejected, I prepared for the afternoon prayers (at least they don’t stop us from doing that) at the Kotel (not because it is any better than any other Old-City synagogue but because that’s where I could find a convenient minyan), and went home to disappoint the family by announcing that we would be staying put and having a b’diavad seder once again this year, and Haggadat Hapesah would have to wait for the next year.

But that was not the first hitch.

Continue reading…

From Rabbi Avi Grossman, here.

Lenin’s Full Speech on Armed Revolution

On Authority

Works of Frederick Engels 1872


Written: 1872;
Published: 1874 in the Italian, Almanacco Republicano;
Source: Marx-Engels Reader, New York: W. W. Norton and Co., second edition, 1978 (first edition, 1972), pp 730-733.;
Translated: Robert C. Tucker;
Transcribed: by Mike Lepore.


A number of Socialists have latterly launched a regular crusade against what they call the principle of authority. It suffices to tell them that this or that act is authoritarian for it to be condemned. This summary mode of procedure is being abused to such an extent that it has become necessary to look into the matter somewhat more closely.

Authority, in the sense in which the word is used here, means: the imposition of the will of another upon ours; on the other hand, authority presupposes subordination. Now, since these two words sound bad, and the relationship which they represent is disagreeable to the subordinated party, the question is to ascertain whether there is any way of dispensing with it, whether — given the conditions of present-day society — we could not create another social system, in which this authority would be given no scope any longer, and would consequently have to disappear.

On examining the economic, industrial and agricultural conditions which form the basis of present-day bourgeois society, we find that they tend more and more to replace isolated action by combined action of individuals. Modern industry, with its big factories and mills, where hundreds of workers supervise complicated machines driven by steam, has superseded the small workshops of the separate producers; the carriages and wagons of the highways have become substituted by railway trains, just as the small schooners and sailing feluccas have been by steam-boats. Even agriculture falls increasingly under the dominion of the machine and of steam, which slowly but relentlessly put in the place of the small proprietors big capitalists, who with the aid of hired workers cultivate vast stretches of land.

Everywhere combined action, the complication of processes dependent upon each other, displaces independent action by individuals. But whoever mentions combined action speaks of organisation; now, is it possible to have organisation without authority?

Supposing a social revolution dethroned the capitalists, who now exercise their authority over the production and circulation of wealth. Supposing, to adopt entirely the point of view of the anti-authoritarians, that the land and the instruments of labour had become the collective property of the workers who use them. Will authority have disappeared, or will it only have changed its form? Let us see.

Let us take by way if example a cotton spinning mill. The cotton must pass through at least six successive operations before it is reduced to the state of thread, and these operations take place for the most part in different rooms. Furthermore, keeping the machines going requires an engineer to look after the steam engine, mechanics to make the current repairs, and many other labourers whose business it is to transfer the products from one room to another, and so forth. All these workers, men, women and children, are obliged to begin and finish their work at the hours fixed by the authority of the steam, which cares nothing for individual autonomy. The workers must, therefore, first come to an understanding on the hours of work; and these hours, once they are fixed, must be observed by all, without any exception. Thereafter particular questions arise in each room and at every moment concerning the mode of production, distribution of material, etc., which must be settled by decision of a delegate placed at the head of each branch of labour or, if possible, by a majority vote, the will of the single individual will always have to subordinate itself, which means that questions are settled in an authoritarian way. The automatic machinery of the big factory is much more despotic than the small capitalists who employ workers ever have been. At least with regard to the hours of work one may write upon the portals of these factories: Lasciate ogni autonomia, voi che entrate! [Leave, ye that enter in, all autonomy behind!]

If man, by dint of his knowledge and inventive genius, has subdued the forces of nature, the latter avenge themselves upon him by subjecting him, in so far as he employs them, to a veritable despotism independent of all social organisation. Wanting to abolish authority in large-scale industry is tantamount to wanting to abolish industry itself, to destroy the power loom in order to return to the spinning wheel.

Let us take another example — the railway. Here too the co-operation of an infinite number of individuals is absolutely necessary, and this co-operation must be practised during precisely fixed hours so that no accidents may happen. Here, too, the first condition of the job is a dominant will that settles all subordinate questions, whether this will is represented by a single delegate or a committee charged with the execution of the resolutions of the majority of persona interested. In either case there is a very pronounced authority. Moreover, what would happen to the first train dispatched if the authority of the railway employees over the Hon. passengers were abolished?

But the necessity of authority, and of imperious authority at that, will nowhere be found more evident than on board a ship on the high seas. There, in time of danger, the lives of all depend on the instantaneous and absolute obedience of all to the will of one.

When I submitted arguments like these to the most rabid anti-authoritarians, the only answer they were able to give me was the following: Yes, that’s true, but there it is not the case of authority which we confer on our delegates, but of a commission entrusted! These gentlemen think that when they have changed the names of things they have changed the things themselves. This is how these profound thinkers mock at the whole world.

We have thus seen that, on the one hand, a certain authority, no matter how delegated, and, on the other hand, a certain subordination, are things which, independently of all social organisation, are imposed upon us together with the material conditions under which we produce and make products circulate.

We have seen, besides, that the material conditions of production and circulation inevitably develop with large-scale industry and large-scale agriculture, and increasingly tend to enlarge the scope of this authority. Hence it is absurd to speak of the principle of authority as being absolutely evil, and of the principle of autonomy as being absolutely good. Authority and autonomy are relative things whose spheres vary with the various phases of the development of society. If the autonomists confined themselves to saying that the social organisation of the future would restrict authority solely to the limits within which the conditions of production render it inevitable, we could understand each other; but they are blind to all facts that make the thing necessary and they passionately fight the world.

Why do the anti-authoritarians not confine themselves to crying out against political authority, the state? All Socialists are agreed that the political state, and with it political authority, will disappear as a result of the coming social revolution, that is, that public functions will lose their political character and will be transformed into the simple administrative functions of watching over the true interests of society. But the anti-authoritarians demand that the political state be abolished at one stroke, even before the social conditions that gave birth to it have been destroyed. They demand that the first act of the social revolution shall be the abolition of authority. Have these gentlemen ever seen a revolution? A revolution is certainly the most authoritarian thing there is; it is the act whereby one part of the population imposes its will upon the other part by means of rifles, bayonets and cannon — authoritarian means, if such there be at all; and if the victorious party does not want to have fought in vain, it must maintain this rule by means of the terror which its arms inspire in the reactionists. Would the Paris Commune have lasted a single day if it had not made use of this authority of the armed people against the bourgeois? Should we not, on the contrary, reproach it for not having used it freely enough?

Therefore, either one of two things: either the anti-authoritarians don’t know what they’re talking about, in which case they are creating nothing but confusion; or they do know, and in that case they are betraying the movement of the proletariat. In either case they serve the reaction.

From Marxists.org, here.