Econ lesson No. 2: Centralization destroys opportunity, prosperity, risk


The eye at the top of the pyramid tells of Uncle; in his world, relationships are vertical and most of us are at the bottom. In a decentralized society under God’s blessing, horizontal relationships among equals (more or less) are more common.

By David Tulis

A handy way to perceive the free market and local economy is to draw a picture. Several sketches emerged from my ballpoint pen during a scheme to develop a creative writing group for boys under the pretext of an economics club. Two are nearby.

The centralization pyramid is a way of seeing where we Americans have come from, and perhaps where we are going. Christian reformation and local economy are, if you will, at the base, or heading that way. They imply turning our backs on the all-seeing eye at the top of the pyramid, and returning to the open country, toward decentralization. The base is wide open, rural, seemingly. The players are small. Control is local.

The base is broad because it implies people’s relationships are horizontal. They are taking charge of their own risk. They are dealing personally, individually and responsibly as among equals. Relationships are left to right, and right to left. The closer decentralization, the fewer vertical relationships. Over time, as liberty increases and centralization evaporates (Lord willing), we will have fewer master-slave relationships.

Centralization has the evil effect of making all of life a bore. It intends to socialize prosperity by socializing excitement (risk). No one can fail, and no one can really succeed independently. Every good deed is licensed and occurs in an official, regulated marketplace, under constant surveillance and taxation. Because this vertical system does not leave people alone, they will find it increasingly hard to be inventive and to exercise their genius. Thanks to the FDA and the Justice Department, for example, medical inventors have a nearly impossible journey, with the end being a government approval, and maybe after that a marketplace success. In centralized systems, the brightest ones work in terms of a top-down system where approval is bureaucratic, not of the marketplace. The disincentives to risk-taking are enormous.

Under decentralization, relationships with others are not in terms of power (compulsion, law, statute, regulation, license), but in terms of laissez faire and mutuality. Laissez faire in literal French means “let to do,” or letting go. In other words, freedom of action among actors who have defensible and enforceable property rights and who compete in service to the customer.

Laissez faire operates on a premise hostile to that underlying centralized society. That idea is mutuality and cooperation in the economy. In centralization, attention shifts away from the marketplace and to government. Bureaucracy is a constant threat (prosecution, investigations over interpretations of rules, indictments, fines) but a boon for getting free money. In bureaucracy, actors fight for subsidies and for getting the regulatory apparatus to suppress competitors (the idea of regulatory capture).

Centralization is about constant conflict. Free markets about constant service.

Local economy is at the base. National economy in the eyeball.

The whole Western economic system is balanced precariously on a tiny bit of real money. The further up the pyramid you go, the less liquid the asset. The greater the economic cataclysm, the harder that asset will be to trade.

Liquidity pyramid

The liquidity chart is adapted from The Moneychanger newsletter, to which I encourage you to subscribe (only F$99 a year; click the store window).

In the 2008 financial meltdown, a panic among big investors caused a rush to liquidity and safety that crashed the stock market and made the credit markets seize up. No one wanted to lend to anybody else as everyone suspected everyone else of being sickened by securities containing packaged subprime loans. In a system built on confidence and appearances, a panic becomes a spreading disaster.

Gold, silver and cash are at the teeny-tiny point upon which all the rest is balanced. In a panic, the crowd rushes downward, toward the most liquid assets. The chart rightly suggests that a bank run reduces the availability of liquid assets, thus raising their price.

According to the Moneychanger, the best investment decision you can make is to buy 90 percent circulated coin (dimes, quarters, 50 cent pieces), which carry the lowest premium and are highly divisible and useable. An ounce is silver trades now for about F$34.