Capitalism Revisited

I have written a bit about capitalism in the past. In this post, I'd like to put the idea in the context of how it relates to other elements of our society, past, and present.

Here is a great Wikipedia article on capitalism. I love the way it puts capitalism in a historical context. The relatively modern view of capitalism seems to have emerged with Marx, who viewed it as an inherently evil and doomed system. These days, defenders of capitalism present it as the exact opposite of "socialism", which is seen to be evil in all its variations.

It helps to avoid all the moral outrage and take a look at what capitalism is and why some like it but others don't.

The issue is about ownership of the means of production, along with ownership of "profits" arising from that ownership. We are bothered by the fact that the "owners" are a tiny minority of society and the rest of us slave to make the rich even richer.

To me, this system seems to be built into virtually any historical society we can call "civilized". Civil societies are (literally) based in cities and have economies based (at least) on agriculture. The oldest civilizations we know of emerge fully formed complete with kings and armies defending the territory (which is necessary for agriculture - they are based on the ownership of land). So, along with civilization, we get the concept of land ownership. The land is the means of production - mainly food. Civilization produces enough food with labor capacity left over to make temples, trade with other nations, manufacture, etc. Thus, at the very beginning of history, we have all the elements in place for a "capitalist" structure. "Ownership" of land is always concentrated in a noble class or even the single person of the king. These societies also emerge into the light of history at war with each other. Accordingly, the "ruling class" has an additional responsibility: to organize citizens to defend the land. It's obvious that there is a high premium on "organized" defense (or offense), along with terrible consequences if you are defeated in this situation. On the "upside", the rewards of success are significant and we see little empires being built with the spoils of war right at the beginning of history. The rich are getting richer and the poor are being enslaved (if they are lucky).

My point is that this "top-down" way of organizing society is ancient and a natural - almost mathematical - consequence of the need to "own" territory to support agriculture. In the Americas, we see civilization following a similar path. As the crops go in, temples go up, so do the armies and so does the power of the elite.

To be sure, this "natural" system sucks for all but the "nobility". In all these civilizations we see slavery and human sacrifice alongside the benefits arising from a stable food source.

Forgive me if I take so long to arrive at my point, which is this: Those who chafe under "capitalism" are challenging the concentration of ownership and power in the hands of the elite. They are also complaining that their work and their very lives are sacrificed to make the rich richer. Welcome to the human race.

With this background, I'd like to ask if the modern version of this system represents progress for the average member of society. In its modern form, the system can be called "capitalism", which is defined as:

"an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state."

I must register a minor refinement of this definition, since, in the actual modern capitalist systems, the state is indirectly controlled by the rich. They are, in effect, "one dollar one vote" societies. However, the definition lends built-in support for the "Libertarian" point of view that wants to explicitly subtract the "state" from the definition.

In practice, we find that "trade and industry" cannot be controlled entirely by private owners or the "state". To understand this, we need to introduce another concept, almost as old as history itself: the marketplace. This entity is implied by our definition, which mentions "trade". "Trade" is an advance on the old ideas of conquest and slavery. You can obtain what you want by mutual exchange rather than enslaving people to force them to work or killing them to take their land.

The problem with total "state" control of "trade" is that the "state" sits on both sides of the bargaining table, effectively destroying the concept of price and the marketplace itself. It is amusing to see Gorbachev, in his autobiography, waking up to the fact that the USSR had no concept of "cost". They just decided what was wanted, then micro-managed the entire society to produce it (this is called a "command economy"). The result was not pretty. We see this mistake being repeated over and over - most recently in Venezuela.

The problem with total control by "private owners" is that the majority of citizens don't like it and they have guns. Just as in the former case (state control), the system needs to be shoved down the throats of the citizens at the point of a gun. Pinochet's Chile is a good example, created explicitly by the "Chicago school" of "market fundamentalists".

So most modern national economies represent a compromise (I won't say "balance") between the two extremes. The fly in the ointment is that the essential component of the economy (the marketplace) is inherently unstable. There is no way to control wild swings in prices especially if the marketplace is dominated by speculation. A speculator buys not for any direct purpose but on the belief that what he buys will rise in cost and he will be able to sell at a profit. This belief actually causes the price to rise and the psychology works just as well in the opposite direction (crashing prices). With a lot of cash sloshing around in the economy and the rich having "savings" that they expect to "work for them", this instability is magnified and can cause regular booms and crashes. On a more subtle level, total state control is also "speculation" since prices are a figment of the imagination in some five-year plan, resulting in "trade" that ends in disaster.

You can't take human psychology out of the marketplace, but the market is real. Inserting a computer into the trading mechanism just makes things go wrong faster. It is not the computer who "decides" on a trade. It is the owner of the computer program who speculates that a certain mechanism will work out.

All this is rather "macro" from the point of view of the average citizen. To see how these systems could every survive beyond a few weeks, we need to dive down into the details.

For one thing the "state" steps in to keep the whole thing from running off the rails:

• It guarantees property rights, something that is more important than voting rights, which only pretend to grant the citizen some measure of control.
• Citizens whose protected ownership of capital can pool capital to create entities whose capital is also protected. Such enterprises are responsible for almost all of what we call "material progress". But such pools of capital are also responsible for the instability mentioned above. Any "investment" is "speculation".
• In spite of appearances, almost all of what the "State" spends is spent in the marketplace. Except for work done directly by employees of the State, all assets and services are purchased from the marketplace. Even employees must be hired from the competitive pool of labor created by the marketplace. In a modern economy, the "State" is the biggest single buyer in the marketplace, often accounting for as much as 50% of the GDP. We see that the alternative assumed in the definition of "capitalism" makes little sense, since, while the State may not "control" trade and industry, it is the gorilla in the marketplace that directly or indirectly controls what goods and services are created by the society. 
• Combining the above insights, the modern "capitalist" state is a combination of "one dollar one vote" representation and "one dollar one vote" economic control. 
• The participation of the "ordinary citizen" is restricted to ceremonial participation in elections and finding a job. 
• The citizen is also free to participate in marches and wave placards to express moral outrage at the injustice of the "system" as a whole. This can be seen as an ancient "emergent" phenomenon - a consequence of the "way things are". If you need to shoot or imprison too many people to keep things going, you are opting for the "Pinochet system". With modern technology, there is virtually no limit to how citizens' protest can be suppressed, as demonstrated by what might be called the "Chinese" system. The "Canadian" system is far preferable to either of these ways of suppressing the protest. My theory is that the "Canadian" system (liberal democracy) is preferable to the others. Canadian "anti-capitalists" need to concentrate on making the system work rather than futile "outrage".

Given this insight, it is difficult to see a clear alternative to "capitalism", but we can see ways to improve it. In my view, anything we do needs to take care to preserve the stability of the economic system, which has a tendency to blow up. Against the insight of the anti-capitalist school, the #1 task is to preserve the marketplace. To do this we need to preserve price stability, namely, protect the currency. This is unwelcome news to anti-capitalists who tend to assume that money is somehow imaginary and the "root of all evil". We also need to keep a close eye on "speculation", which is the root cause of market instability. Ug. Regulations!!

To preserve political stability we need the system to be perceived as "fair" - at least to the point where thousands are not picking up guns. The milder form of such mass displeasure is the support of ill-advised regulation (along with equally ill-advised opposition to all regulation). An example of a regulation that aims squarely at instability is a tax on financial transactions along with capital gains taxes, adding "friction" and pushing against outright speculation. An example of stupid regulation is income tax, which pisses off almost everyone (fueling political instability) and doing nothing to create economic stability. Income tax introduces "friction" in exactly the wrong place. We need currency to flow freely through the economy, like water through the tissues of a plant. But currency should flow freely in the marketplace for "real stuff" and "real services". Free-flow of currency in the financial industry (Finance, Insurance, and Real Estate) is pure speculation with no "upside" for the economy as a whole.

There are a lot of specific ideas that flow from this line of reasoning. I'd love to take them up, especially if my reader(s) have questions or comments.