Does capitalism work?

There seems to be considerable vagueness about the nature of capitalism, due a misunderstanding of the concept of "capital" itself. Capital is the physical manifestation of a surplus. A surplus is the product of division of labor and economies of scale, which accrued to humans first by settling in permanent villages where a surplus could be stored, and later by enlarging those villages so that people with special skills that enriched the community and increased the surplus could work at them full-time.

"Capital" is therefore not a particularly important concept in the economics of farming communities. The surplus tends to be limited to food stored against hard times, an inventory of tools and clothing, and the rare work of art or other luxury good. The population of a village functions much like a tribe or extended family, since that is what it usually is, so the equitable distribution of its meager surplus does not require formal study or administration.

The need to manage capital came with civilization--literally "the building of cities." Economies of scale resulted in prodigious surpluses. Division of labor resulted in full-time teachers, musicians, historians, and other specialists who needed to be paid for their intangible products. And the mingling of thousands of people who were not related or even acquainted resulted in the need for the keeping of records, the adjudication of disputes... and the formal management of that prodigious surplus.

Who decides whether teenagers who are not needed in food production should be trained as shoemakers, roofers, gourmet chefs, or singers? Who decides whether the excess supply of bricks accumulated last year should be used to build larger houses, a market, or a theater--or left in a pile for emergency rebuilding in case there's an earthquake? Who decides whether the excess arable land within the growing area of protection of the city's military force should be devoted to grapes for wine, avocados for the gourmets, linen for nice clothes, or alfalfa to be fed to a larger herd of livestock that will increase the meat in the city's diet?

This is where it all started, folks. Back in the Bronze Age or perhaps earlier in the very first cities of a few hundred people. Many thousands of years ago. It's nothing new. Once your civilization advances to the point that you have capital, it must be managed.

For a long time it was done by decree, by the heads of government. Under feudalism their authority was delegated to the aristocrats. Economics as a field of study was unknown, and few people had any natural sense about it. As a result, capital was not well managed, surpluses did not grow--often not even as fast as population--and poverty was widespread as what little wealth there was remained in the hands of the heads of government and their delegates in the aristocracy.

Occasionally a bit of an experiment with democracy was performed, and the control of the government over the flow of goods and services was relaxed. No one realized what was happening, but this was the creation of a relatively free market. Capital was not "managed" by anyone. People produced or performed what they thought they could produce or perform expertly and what they thought other people would want to buy, and the evolution of the keeping of accounting records into monetary systems allowed individual decisions between producers/performers and consumers to direct the evolution of the surplus with no central, planned "management."

Everything that has happened since then in the realm of economics, including the study of economics itself, is the result of those early experiences. To this day we have two basic schools of thought.

One school says that a great and wise person--or a group of great and wise persons we call "the government"--should manage the entire civilization's capital because otherwise chaos will reign, and/or the proletarians will make foolish, thoughtless, selfish decisions about their share of the capital and end up dissipating it. This can be an old-fashioned monarchy or any form of despotism, it can be formalized under a benevolent dictatorship as communism, or it can even coexist with democracy as socialism.

The other school says that no one is great enough and wise enough to manage an entire civilization's capital and even if they were, the mechanism of central control by a government will by its nature respond so slowly and imperfectly to the dimly understood forces of civilization that the result will be worse than letting the market go free.

So "capitalism" is essentially just the collective decision to not attempt to centrally manage a civilization's surplus, to allow it to be managed virtually by a free market.

As I said in a previous post, the failure of what we call "capitalism" was brought about by government meddling: Their passage of laws that enabled the creation by wealthy individuals of institutions called corporations. This reestablished the old social class of the aristocracy, and gave the new aristocrats the power to manage the civilization's surplus. Or I should say to manipulate it, so as to get more of it into their own treasuries.

The evils of capitalism are not illustrated by the "squandering" of capital on goods and services some of us find foolish, such as drugs, designer water, rap music, SUVs, gold toilets, or pedigreed hamsters. They are illustrated by the concentration of capital in the hands of the people who manipulate the system. The multi-million dollar salaries of CEOs of big companies whose work is no more intrinsically valuable than that of the CEOs of small companies. The stock manipulation. The coziness between the king and his feudal lords--oops I mean between the President and the officers of the corporations who contributed to his campaign--so that the government siphons money to them in wholesale quantities. The laws that allow municipal governments to take private homes by eminent domain and donate the land to developers of shopping malls.

This is the fault of the corporation as an artifact of the Industrial Era. It is not a flaw in capitalism.

And despite its flaws, I still say that capitalism works better in the long run. Socialism is the natural economic system of a tribe, of an extended family. Everybody knows everybody else and cares about them and won't cheat them. It works, more or less, in small, homogeneous societies like Sweden and Bulgaria, where people feel a strong sense of kinship. But even there it doesn't work well. In the long run, empirical observation suggests that socialist economies don't foster ambition and creativity, and therefore their surplus decreases.

Slavery is not an attribute of any particular economic system. (The National Socialists used Jews and captured Slavs as slaves.) However, as economies mature it has invariably been found to simply not be efficient. A cold-hearted calculation of the value of the output of a slave compared to his "salary" and his "costs of overhead" (which are considerable despite his miserable living conditions) finds that when you evolve into an advanced, mechanized agricultural economy, much less into an industrial one, the use of market labor is more profitable than the keeping of slaves. This is why slavery ended peacefully in every country in the Americas except Haiti and the USA. It just petered out due to attrition and then its demise was made official by the governments. The same thing would have happened in the Confederacy if we had allowed it to; they could not have kept that nostalgic medieval economic system running for one more generation.

Capitalism was not built on slavery and sharecropping because slavery and sharecropping are features of an agricultural economy. They could no more compete with today's agribusiness than a chain gang could compete with diesel equipment on a civil engineering project.

Communism may have appeared "natural" to the Russian leaders and to the younger people who grew up with it and knew no better. But it was an aberration that burned itself out. When an industrialized country in the 20th century still had hospitals with no reliable hot water supply, it was difficult to conceal the failure from the populace. Unfortunately by the time it collapsed there was almost no one left who remembered the old days--and the old days in Russia were really feudalism, not capitalism. This is why, as hard as it is, the transition is going much more smoothly in most of the satellite countries. Communism came to them later and when it imploded there were lots of wise people alive who still remembered how to run a modern country.

What you refer to derisively as "competition" is not supposed to be the competition of a war or a football game. It is the competition of ideas and ambition. Whoever has the cleverest idea for how to produce something, and/or who is most eager to try it and puts the most into it, and/or who is the fairest minded and most willing to sell for a fair price, will on the average end up with a more popular product or service. It's still that way in many trades. The guy who does the best job of tending gardens for the best price ends up with the most customers. The other guy is free to adopt his gardening style, but if he is too clumsy, stupid, lazy, or selfish to provide a similar service for a similar price, he needs to go into a different line of work and none of us is hardly going to weep over him being a "victim of competition."

The reason "competition" has become such a dirty word is the dirty way that corporations practice it. They can use their deep pockets to temporarily lower their prices so that small businesses can't compete with them. They can use their influence to get monopoly franchises, fair-trade laws, zoning, and other favors from the government. This is unfair competition and it occurs because corporations are unfair by their very nature.

Show me one "evil" of capitalism that is actually a feature of capitalism. Not corporations, not imperial government, and not the agricultural economy that preceeded industrial capitalism.

 

That's my point. They don't exist because of capitalism per se, they exist because of corporations. So the answer is to get rid of corporations. During the Industrial Era that would have been both difficult and unpopular, since industrial endeavors--especially the seminal ones like transcontinental railroads--require a lot of resources. It's logistically difficult to raise that much capital with partnerships and bank loans, so corporations seemed like a logical solution. They just outlived (and way outgrew) their usefulness. Enterprises in the Information Age are not so resource-intensive and they also can readily get started by appealing to niche markets--all of which is perfect for traditional capitalization methods. It's possible that we (or you younger folks anyway) will simply watch corporations wither and die off when their time has passed and they can't compete with individual entrepreneurs in places like Estonia.

Unfortunately governments will probably have a diabolical plot ready to invent some new atrocity that perpetuates the role of the aristocracy.

So does life. We really are not all the same. The people I met in the Eastern Bloc during the heyday of communism were equal in only one way: They were all equally fed up with the regimented life of everyone being treated the same. No one was allowed to fall behind, but no one was allowed to excel. And as we all know from the current state of America's public education system, that is a formula for disaster because the weak always drag down the strong.

Since you surely know this, I'm not certain what type of "equality" you're looking for. If you just have a social conscience and don't want people to be allowed to become desperately poor, you again have the government to thank for that problem, not capitalism. Americans had a reputation for being one of the most generous, charitable peoples on Earth... before the government took over the charity industry (along with several others) in the 1930s, turned it into a hideously expensive boondoggle with their usual bureaucratic ineptitude, and started confiscating our income to pay for it all. The last time I saw the statistics on government welfare, about ten years ago, it was this bad:

If the government would simply take all the money collected for welfare, divide it up, and give it directly to the poor, every poor family would have an annual income of $40,000.

Instead they use it to pay thirteen levels of administrators to administer each other.

Remember that poor people in America (except for the crazies that we let out on the street 30 years ago who can't fill out the forms and wait in line) have cars, TV sets, and microwave ovens, and the most common nutritional problem among them is obesity.