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by Justin Jefferson, Economics.org.au senior columnist

The Occupy movement has attracted a lot of mockery for its naivety. Bristling with iPhones, clothes made in China, and pure water in plastic bottles, they really gave me a laugh when they demanded free wi-fi! Most of the scorn is well-deserved, but there is a kernel of important truth in their complaints.

To understand it, we must first winnow the wheat from the chaff. For starters, where on earth did they get the idea that the capitalism they are complaining about is “unregulated”?

When asked, no-one can ever name even one unregulated market.

The classic example of unregulated markets that people give is the financial markets. But a quick Google search shows the following regulators:

  1. Securities & Exchange Commission
  2. Commodity Futures Trading Commission
  3. Federal Reserve System
  4. Federal Deposit Insurance Corporation
  5. Financial Industry Regulatory Authority
  6. Office of the Comptroller of the Currency
  7. National Credit Union Administration
  8. Office of Thrift Supervision

And that’s just at the federal level, just in the USA, and just in the markets for money and credit.

Reflect that this represents thousands of officials, whose permanent full-time function is to manipulate supply, demand and prices so as to change them from what they would be on the market unhampered by such interventions.

So for anyone concerned with the facts, that rules out unregulated capitalism as a cause of the problem.

Indeed the very idea that the problem is unregulated capitalism only makes sense viewed from the standpoint of full government control of all the means of production — full socialism. Yet no-one will own up to that conclusion.

No, the Occupiers say, the solution is somewhere between the level of big government that we have now, and full socialism. But they can never identify any principle to distinguish the economic interventions that are excessive, from those that are not. The only principle is that in any given case the problem is blamed on unregulated capitalism, and the solution is assumed to be more government intervention. So it’s not a rational belief system: it’s an “if-everything-were-nice-then-wouldn’t-everything-be-nice?” belief system.

Stock markets perform three major economic functions. The Occupiers wrongly criticize all three, when only one is the cause of their valid complaints.

Without capital we would produce everything with our bare hands. Stock markets negotiate the provision of capital which companies used to produce the goods and services that we all use: the food, clothing, shelter, transport, communications and entertainment. While the protestors use all these goods and services more than most other people in the world, their protests about “greed” ring hollow.

Stock markets also provide a way to combine the factors of production so as to find out which ways of using scarce resources best satisfy the wants of the 99 percent, as judged by the 99 percent. This process is essentially similar to a farmer deciding how best to use his farm to produce food. Should he sow by hand or use a tractor, and if so what kind? Should he grow wheat, or raise lambs, to sell in one year, or grow apples to sell in five years? Should he do a repair himself or contract it out? The function of the entrepreneur is to decide what to produce, and how to combine the factors of production. The main difference between a stock market and a single producer is that the stock market involves large numbers of people who don’t know each other, co-operating to decide how to allocate resources as between a large variety of competing demands, in constantly changing conditions.

Competition is a discovery procedure. If we already knew who was going to win a competition, there would be no point in having it. The capitalists are entirely subject to the decisions of the consumers because if a business doesn’t provide what the masses want, it suffers losses or goes broke, and the market transfers its assets into the hands of people who will use them to serve the masses better. If a business does provide what the masses want, it makes a profit in direct proportion to the behaviour of the 99 percent in preferring that particular use of capital to other possible uses of it.

So (assuming that the Occupiers are not in favour of mass starvation) their hostility to profit, competition, and capital only shows confusion. Without profit and loss, all production would be transformed into a corrupt and wasteful jumble — which is why no-one will advocate full socialism. Without profit and loss, resources would be withdrawn from producing what the people value as most urgent and important, and diverted into making goods more costly, and the people poorer in a massive waste worse for the environment, for the great mass of human beings, and for social justice. Instead of the distribution of wealth being decided by the 99 percent in their decisions whether to buy or abstain from buying, it could only be the result of arbitrary political favouritism and parasitism — exactly what the Occupiers are protesting against.

This brings us to the third function of stock markets, where the Occupiers’ criticisms are completely justified. Stock markets function to carry out government redistributive policies which work by manipulating the supply of money and credit. Markets don’t choose to carry out these policies — it happens automatically from people using money as a medium of exchange. That’s why governments do it!

Just because government policies redistribute wealth, doesn’t mean that such redistributions are fair or just. They can, and do, redistribute wealth by taking it from the masses of ordinary and poor people and giving it to big corporate cartels, billionaire bankers, foreign authoritarian governments, and the military-industrial complex.

It is not as though we give government power to manipulate the supply of money and credit — monetary policy — which can be used badly or well. These powers can only be used badly, because they cannot be exercised without giving banks a legal monopoly to monetise the debt — in other words, to make money out of government debt — and channel it straight to Wall Street.

The huge bank profits and huge government debt are not some kind of strange coincidence. They are two sides of the same coin, namely, fractional reserve banking.

Thus people are right when they smell a rat, and right to demand the abolition of such corruption. But “for every hundred hacking at the branches, there is only one striking the root”. The root is the central banking system itself — the Fed in America, and the Reserve Bank in Australia, and their government-created banking cartels. Granting the right to control interest rates grants a licence to print money. It works through lending “money” unbacked by deposits.  This could not happen on a free market for money and credit because it breaches the common law of fraud and of contract, and depositors would have a simple effective remedy — withdrawal. Under the current fractional reserve system it doesn’t work to protect yourself from the fraud by withdrawing your money precisely because the end of government interventions is to stop it working, by protecting the banks, and forcing everyone to foot the bill by using constantly-devaluing money. The scam works by diluting the value of the existing money stock. Everyone — especially the poorest — pays through the constantly rising prices. Government exempts itself from the law against fraud, and to do that it must protect the banks too. That’s what monetary policy is — else the supply of money and credit would be no more regulated than the supply of shirts or sandwiches.

Central banks function to spread this inflationary, bubble-making, depression-making, instant-grat, consumer debt, future-eating, war-funding disorder and injustice throughout the whole banking system, and from there into into the whole structure of production and morality.

The Occupiers are right in protesting against the exploitation of the 99 percent by the one percent. But they have misidentified the one percent that’s causing the problem.

Those who support government control of money and credit — whether they realise it or not — also support the gross moral, economic and social injustices that it intrinsically and necessarily causes. The Occupiers have played right into the hands of the powers and cartels whom they complain about.

To strike the root we should all be demanding the abolition of the central banks.