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Friday, May 3, 2013

Capitalism:So much more than markets (Rethinking Liberalism Part 12)

Capitalism is an economic system based on the private ownership of the means of production, with the goal of making a profit.

-- Wikipedia

by John MacBeath Watkins

Several political movements have been named by their opponents. "Liberal" used to be a term of disapproval before it became a term worn with pride, and then became a term of disapproval again. "Fascist" was a term invented by its liberal opponents, and enthusiastically adopted by its followers.

Capitalism is a term invented by Karl Marx in about 1850 to describe something new in the world, something he thought evil. As the Wikipedia definition demonstrates, the term is now retrospectively applied to all systems in which there is private ownership of the means of production, a situation that has probably existed as long as the institution of property has existed.

But Marx was not describing prehistoric societies where flint knappers owned their tools and hunters owned their spears. Through most of history, there had been peasants who owned their land, their draft animals, and their plows, and artisans who owned the tools of their trade. The situation Marx invented a new term to describe was one in which no longer did each weaver own his loom; ownership of the textile mill belonged to the capitalist, a  person who did not weave or spin, but whose profession was to own, and to manage or hire managers.

The capitalist was the creator and the creation of the industrial revolution. Prior to this, there had been a number of theories of how economics worked.

Thomas Hobbes believed that government made it possible for labor to create value.  The war of each against all, much like the 30-years war, made it impossible for agriculture, navigation, or commerce to take place, which is why we should form a social contract and value the sovereign who keeps us from violent death and ensures that those who plant can reap.

The Physiocrats thought that all value came from the soil, and government should interfere as little as possible. This appealed to planters whose wealth depended on crops such as cotton and sugar, and who wanted to be left alone to keep slaves doing the work.

The mercantilists thought the goal should be to bring as much wealth to their country as possible, which meant getting control of resources, providing the means to exploit those resources, such as roads and bridges for commerce, and steer the most profitable operations of business to their own country. They were natural empire builders, the sort who would conquer India and prohibit the Indians from building textile mills because it was better for England that industry should be in England.

Capitalism adopted parts of all these philosophies, but grew from the changes in technology.  Frederick Law Olmstead, who traveled in the South from 1852 through 1857 writing for the New York Daily Times, considered that slavery and the inefficiency it enabled had impoverished the South, its wealth restricted to the few owners of large plantations. From Journeys and Explorations in the Cotton Kingdom, an 1861 abridgement of that work:
'The citizens of the cotton States, as a whole, are poor. They work little, and that little, badly; they earn little, they sell little; they buy little, and they have little – very little – of the common comforts and consolations of civilized life. Their destitution is not material only; it is intellectual and it is moral... They were neither generous nor hospitable and their talk was not that of evenly courageous men.'
 In short, he viewed them as insufficiently capitalist. The slaves of the South were at that time worth more than all the factories and railroads in the entire nation, but even so, they were not efficiently employed, because their cost was less than the cost of hiring free men. Not that the cost was low; about half the wealth of the South was in the ownership of slaves.

Capitalism did well enough out of slavery, with 80% of the South's cotton going to British textile mills and coming back as fabric. But the semi-feudal society of the South did not reward labor well, so did not have sufficient demand to support its own industry.

As for the mercantilists, they saw conquest and the domination of other peoples as the key to gaining wealth. The West was won by people following those imperatives, using the nation's troops to conquer land for private ownership. The conquest of Indian land was not an enterprise for libertarians, it was a nation dominating by force people who commanded less force.

Frederick Jackson Turner declared the frontier closed in 1890. Perhaps it is no accident that in 1898, America tried to expand into a true empire by seizing most of the remaining colonies of Spain in the Spanish-American War.

The failure of America to become the sort of empire the proponents of the Spanish-American War had envisioned was really the end of the mercantilist dream. And the intellectual basis for an economic theory replacing mercantilism had been laid long before.

The theory of comparative advantage -- that is, the theory that if each nation produces what it makes best, and trades it to other countries, all will be better off -- was first examined in detail in David Ricardo's 1817 book, On the Principles of Political Economy and Taxation.

Ricardo suggested that such trade left both countries better off, in contrast to the mercantilists who advocated high tariffs to encourage domestic production of as many goods as possible. This was a very different view of how value is produced, and because it suggested that the production of value is not a zero-sum game, it was a major break from previous notions of how the world works.

The theory of comparative advantage has always been a hard sell, especially in hard times. But another intellectual revolution was to make capitalism work much better than the alternatives, and it grew out of the work Ricardo and a moral philosopher interested in the nature of value, Adam Smith, had done on the way markets work.

I'm talking about the marginal revolution, one of the least-known and most important revolutions in history. Economists in Austria, England, and America participated in perfecting the theory that the marginal utility of goods is key to understanding their value.

Adam Smith and David Ricardo had not understood value well enough to explain why diamonds are worth more than water. The one was a shiny stone, they other essential to life, yet the stone was worth more, which Smith regarded as the paradox of diamonds and water.

Marginalists could explain this. Many people had no diamonds, but all had sufficient water to maintain life, or they were dead. Since the dead demand no material object, the remainder of the population, who usually have more water than they need, do not hold additional water to be of high value. Most people the world over own no diamonds. When you have no diamonds, wanting to own one has some value. The notion of marginal utility could explain and quantify the effect of scarcity on prices.

Marx, remember, invented the word "capitalism," but he did not invent a really workable theory of value. About the time he would have read of the theory of marginal utility, he stopped writing. Personally, I think he realized that his theory of value, based on that of John Locke (Locke said labor creates property, Marx said labor creates value,) was crap compared to the theory of marginal utility, which left his theory with no place to go.

The marginal revolution gave liberal economists a powerful tool that allowed them to run an economy more successfully than those who did not adopt this notion. It laid the basis for the economic consensus that gave us steady growth with only modest downturns from the late 1930s until 2008. In the early 1930s, there was a sizable leftist movement, reflecting that many people didn't buy into capitalism as the best way of life. The steady success of a kind of capitalism where government moderated the excesses of the markets and made it possible for them to thrive undermined the socialist alternative, as did the less than brilliant performance of Fabian socialism and the wretched failure of the Communist economies.

The economic philosophies that asked government to moderate the effects of capitalism were first Keynesian economics, then monetarism. Keynes claimed that when the economy got into a liquidity trap -- that is, when the natural rate of interest is below zero -- fiscal stimulus is needed to get the economy running again. Moneterists claimed that monetary policy could do the job, making central banks the essential institution of capitalism.

But what has happened is that with the collapse of the socialist alternative, the left is defined by Keynesian and even monetarist ideas, while the right is defined by what amounts to pre-Depression economics. Although those on the right wish to portray this as an argument between socialists and capitalists, it is really an argument between different brands of capitalists.

When the only real alternative to capitalism is another brand of capitalism, you can say with some certainty that capitalism has won. Rhetorical efforts to label Keynesians as socialists remind me of the efforts of the Catholic Church to label the Goliard poets as "Bohemians."

The Goliard poets were rebelious clerics who wrote scandalous songs and poems often featuring "Father Golias," a figure who possessed all the flaws of the rulers of the Catholic Church. At the time they were suppressed (in 1289, the Church decreed that "no clerks shall be jongleurs, goliards or buffons"), the Gypsies, so called because of the untrue claim that they were from Egypt, were moving into France, where they were called Bohemians, because of the untrue claim that they were from the kingdom of Bohemia. They were foreign, poor, transient, and often stole things.

The Church began to refer to the Goliards as "Bohemians," in an effort to make them seem less socially acceptable. But the term bohemian has come to mean a rebel poet, which is pretty much what Goliard meant. The Church had managed to change the sign, but not the signified.

So those who now wish to associate a rather successful branch of capitalism with the term "socialism" should be wary that they may revive the legitimacy of the term "socialist."

The paleoeconomic right wants to "end the fed." It's my belief that in so doing, they would be well on their way to ending modern capitalism, which since 1913 has relied on the central bank to moderate the excesses of the market and guarantee some stability in the economy. The problem is that a system that relies on large accumulations of capital needs a market in debt that can be relied upon. Alexander Hamilton understood this, which is why the Funding Act of 1790 funded the debt rather than paying it off -- he wanted to create a market for securities that could finance commerce. He proposed a Bank of the United States, which would accept deposits and make commercial loans. It was to take on the functions of the Bank of England, which had rescued the pound by acting as a lender of last resort in 1763.

Andrew Jackson, the Ron Paul of his day, denounced the Bank of the United States in 1828 and refused to renew its charter in 1836.

As Wikipedia notes, "The end of the bank saw a period of runaway inflation, until Jackson's executive order requiring all federal land payments be made in gold or silver, driving all banks to require payments in gold and silver, producing the depression of 1837, which lasted for four years."

This is the paradise to which Ron Paul wants us to return.

State banks took up the slack until 1863, when the Union, freed of Jacksonian southerners, chartered national banks. The panic of 1907 revealed that capital had become so important, and markets so unstable, that the Federal Reserve system was needed.

Jackson demonstrated that capitalism without capital fails, and the Panic of 1907 revealed that to have stable capital markets, we need a lender of last resort. So let's add that to the components of capitalism.

When Marx coined the term "capitalism," it was a flawed and sometimes brutal system. He correctly forecast that it would have to change. What he missed was that the beast could be tamed, with the advancing arts of economics and central banking, and policies of social insurance making it not only tolerable, but preferable to other systems. The danger now is that we will forget the lessons we learned in an earlier and more brutal time, and eliminate those elements of capitalism that make it function well enough not to call for its replacement.

When you take the tools from the weaver and concentrate them in the hands of the textile mill owner, you take control of working conditions away from those who make the fabric. Democracy has a pretty good history of fixing that problem, with the actions of capitalists restrained to a level that keeps revolutionary urges in check. It is inherent in the nature of capitalism that the ownership of the means of production is concentrated in few hands, often in the hands of a person who is a legal fiction, the corporation. This is at the core of capitalism, and it is the need for such large investments that makes the management of capital so important.

In 1811, William Blake published the following words:
And did the Countenance Divine,
Shine forth upon our clouded hills?
And was Jerusalem builded here,
Among these dark Satanic Mills?
Yet somehow, among paleoeconomic conservatives, those dark Satanic Mills have become a vision of paradise. I would say they were not even capitalism, only the precursor to our capitalist system.

Links for this series:

Rethinking liberal theory 1: Thomas Hobbes, blasphemer and patriot
Rethinking liberal theory 2: The outlaw John Locke, terrorist, liberal, and advocate of freedom
Rethinking liberal theory 3: A compact to protect property, or a conspiracy to create meaning?
Rethinking Liberal Theory 4: John Milton and the many shapes of truth
Rethinking Liberal Theory 5: Adam Smith, moral philosopher of the marketplace
Rethinking Liberal Theory 6: Mythmaking and manufacturing
Rethinking liberal theory 7: Hegel, the end of history, and the triumph of the liberal idea
Rethinking liberal theory 8: Liberalism and individualism: The invention of the Util and the way west
Rethinking liberal theory 9 Property and freedom: Why language is the basis for the social contract 
Rethinking Liberal theory 10: Physiocrats & mercantilists: The economic philosophies of the founding fathers
Rethinking Liberal Theory 11:Stateless income, global capital, and the death of empires
Rethinking Liberal Theory 12:Capitalism:So much more than market
Rethinking liberalism 13: What is money? 
Rethinking Liberalism 14: Tribalism and the emerging new world order
Rethinking liberalism 15: The poverty of neoconservative philosophy
Rethinking Liberalism 16: More on the poverty of neoconservative philosophy

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